PJM Call Takeaways: Multi-State Exit from PJM a Manageable Risk for Power Producers; a Positive for Vistra, NRG, Calpine, Talen
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Stephanie Grumet Policy Analysis
(202) 750-3527
sgrumet@capstonedc.com April 24, 2020
PJM Call Takeaways: Multi-State Exit from PJM a Manageable Risk for
Power Producers; a Positive for Vistra, NRG, Calpine, Talen
On April 23rd, Capstone held a conference call exclusively for clients with the Independent Market
Monitor (IMM) for PJM Interconnection, Dr. Joe Bowring. The discussion focused on the Federal
Energy Regulatory Commission’s (FERC) December 19th Order to impose bidding floors for state-
subsidized resources participating in PJM’s capacity auction, including new renewables needed for state
decarbonization goals. FERC’s action is provoking Illinois, Maryland and New Jersey to examine
leaving PJM’s capacity auction. To listen to the call, click here.
EXECUTIVE SUMMARY:
Based on our conversation, Capstone believes independent power producers (IPPs) with
exposure to PJM would only face modest impacts if states leave PJM’s capacity auction, as
clearing prices would likely take a smaller hit than expected. This is positive news for Vistra
(VST), NRG Energy (NRG), and the publicly traded debt of Calpine and Talen. We believe
capacity price impacts would be modest if New Jersey exits the market: closer to the
estimated 5% clearing price reduction from a Maryland departure than the estimated 40%
reduction from an Illinois departure. Even if several states leave PJM, the impact is unlikely
to amount to compound the impact of an individual state departure, as market forces would
optimize capacity resources across subzones, finding the least cost solution.
States rankled by FERC’s action to impose bidding floors for new renewables—particularly those
with offshore wind mandates and on existing subsidized nuclear fleets—are exploring leaving the
PJM auction entirely (see “Breaking up with PJM? List of States that May Exit PJM in Pursuit of
Decarbonization Policies Grows; a Threat to Vistra, NRG” February 13, 2020). Illinois, Maryland,
and New Jersey are in various stages of considering what an exit would entail. Illinois is the
farthest along, and Maryland has not formally initiated a study.
We believe the 2020 general election could tip the scales of state departures from PJM, as a
Democratic majority in FERC would likely revamp the bidding floor, or minimum offer price rule
(MOPR) Order, encouraging states to remain in the regional transmission organization (RTO). We
believe a Democratic-controlled FERC would modify the December MOPR Order based on the
strident remarks in Commissioner Richard Glick’s (D) dissent.
During our call with the IMM, we discussed a wide range of issues triggered by FERC’s Order,
described in detail below. In addition to the potential impacts of states exiting PJM’s capacity market,
we discussed FERC’s April 16th Rehearing Order, which reaffirmed that assets participating in retail
choice auctions are subject to the MOPR, a sleeper issue that could have broad consequences, given that
the number of generators participating in those programs and implementation details are still unknown.
We also discussed bidding floor levels for existing subsidized nuclear assets. Lastly, we touched on what
process would unfold if FERC declines PJM’s MOPR levels and explored the IMM’s view of carbon
pricing.
1Stephanie Grumet Policy Analysis
(202) 750-3527
sgrumet@capstonedc.com April 24, 2020
A DEEPER LOOK
Key takeaways from our discussion with Dr. Bowring are as follows:
• Impacts of New Jersey or Multiple States Removing Load: The IMM is still
finalizing its analysis of the RTO-wide clearing price impacts if New Jersey exists the capacity
auction. Based on our call, we believe the impact on price would be closer to the projected 5%
price reduction if Maryland leaves than the projected 44% price reduction if Illinois leaves.
This is because most of New Jersey’s capacity cleared the previous auction. The cumulative
impact if any two or all three of those states removing load from PJM’s capacity market is not
the sum of the single state projections. Rather, since the market would simultaneously
optimize capacity across subzones, the impact would likely be lower. The IMM expressed that
it is open to developing a multi-state exit analysis given the interest raised during our call.
• Impacts of Illinois Removing Load: The IMM estimated a potential 44% reduction in
RTO-wide clearing prices if the Illinois ComEd zone exits. One of the reasons that estimate
is so large has to do with the amount of nuclear capacity in Illinois that did not clear in the
last auction (2021-2022 capacity procured in 2019). Because significant amounts of nuclear
capacity did not clear that auction, the zone met its capacity requirements using resources
outside of the ComEd zone. Thus, if ComEd exits the market, there would be significant
capacity oversupply reducing overall prices.
• Impacts of Maryland Removing Load: The IMM estimated that Maryland exiting the
capacity market would cause an RTO-wide clearing price decrease of 4%-5%, an order of
magnitude less impactful than Illinois As discussed above, the Illinois ComEd zone relied
heavily on imports to meet capacity requirements since its nuclear capacity did not clear,
resulting in excess supply and lower prices. That dynamic did not occur in Maryland since
most of its capacity cleared in the last auction. Still, capacity prices were depressed by almost
20% just in the neighboring subzone north of Maryland bordering Delaware and New Jersey
(see “Monitor Estimates 5% Reduction in Capacity Prices if Maryland Exits PJM, Derisking
IPPs With PJM Exposure,” April 16, 2020).
• Timing for States Opting Out of PJM’s Capacity Market: PJM proposed to run its
first auction six and a half months after FERC approves its compliance filing. It will then
run subsequent auctions six and a half months apart. The compressed schedule leaves little
time for states to thoroughly consider opting out of PJM’s capacity market before multiple
auctions conclude. This may be mitigated somewhat for existing offshore wind projects
because they have been grandfathered in with exemptions. Offshore wind projects in the
queue might be in jeopardy of losing out on PJM capacity payments due to the MOPR.
However, impacts may not be felt by the industry until the third auction based on offshore
wind project timeframes, which may be pushed back due to supply chain issues associated
with the coronavirus pandemic.
2Stephanie Grumet Policy Analysis
(202) 750-3527
sgrumet@capstonedc.com April 24, 2020
• FERC’s April 16th MOPR Rehearing Order: On April 16th, FERC completed an Order,
accepting few and denying most petitions for rehearing of its December 19th MOPR ruling.
The Order directs PJM to submit another compliance filing within 45 days (by about June 1st)
to address rehearing issues. This means the next capacity market auction is more likely to take
place in early 2021 rather than late 2020. The rehearing Order vote was 3-1, following a now
familiar pattern of consolidated Republican support, with Commissioner Glick (D) as the lone
“no” vote which he issued with a literary and lengthy dissent.
• FERC reaffirmed most of its December 19th Order, with few exceptions.
Exceptions include granting the petition to clarify assets participating in the
Regional Greenhouse Gas Initiative (RGGI) are not subject to MOPR. Also,
voluntary purchases of renewable energy credits (RECs) that some companies
procure to lower their carbon footprint will not create MOPR requirements.
• FERC reaffirmed the public power model remains “a subsidy,” triggering a MOPR
for new acquisitions. Most surprisingly, state retail choice-based auctions were
reaffirmed to be considered as state subsidies, explored further below.
• Since FERC officially addressed petitions for rehearing and clarification, those
opposing the Order lawsuits have been filed. Several suits already filed challenge
the Order as 1) arbitrary and capricious, 2) in violation of the Federal Power Act,
and 3) in violation of the Administrative Procedures Act.
• Retail Choice Auctions Considered Subsidies: According to FERC’s filing, inclusion
of retail choice auction participants could impact over 7,000 MW of generation in New Jersey
alone. In Commissioner Glick’s dissent, he indicates that Washington DC, Delaware, Ohio,
and Maryland also have some form of retail choice auctions that could be impacted by the
MOPR. Commissioner Glick took strong exception to this policy in this dissent:
Take the example of state default service auctions. As PJM explained in its rehearing
request, state default service auctions are state-directed “mechanisms by which load-
serving entities in retail choice states acquire obligations to provide energy and
related services to retail customers.” In layman’s terms, that means that they are a
market-based mechanism for ensuring that all retail customers have access to reliable
and affordable electricity. As the New Jersey Board of Public Utilities—which
oversees one of these auctions—explained, these mechanisms are best viewed as
hedging constructs that help ensure that state-regulated retail suppliers have access to
reliable electricity without wild swings in price. In New Jersey’s case, the default
service auction is a voluntary mechanism that will rarely, if ever, produce a state-
regulated contract with an actual generator (as opposed to a power marketer—i.e., a
middle man) or support the retention or new entry of particular resources—details that
are apparently too complicated or too inconvenient for the Commission to wrestle
with. Today’s order finds that a state default service auction qualifies as a State
3Stephanie Grumet Policy Analysis
(202) 750-3527
sgrumet@capstonedc.com April 24, 2020
Subsidy because it is a state sponsored process that results in indirect payments to
various resources.
• Retail choice programs typically involve clean energy generators that are likely
already part of a renewable portfolio standard (RPS) program. Existing RPS
participants were already exempted from the MOPR in FERC’s December 19th
Order. It is not clear how PJM would be expected to implement such a provision or
what the broader implications will be. We believe this will be another irritant for
states that are already frustrated with the constraints of the MOPR Order.
• What if FERC Declines to Approve PJM’s MOPR Levels? FERC’s approval of
PJM’s proposed MOPR levels in its Compliance Filing is not guaranteed. The IMM does not
believe FERC would reject PJM’s MOPR level proposals unless it adopts MOPR floor levels
submitted into the docket by another intervenor. For example, the IMM submitted slightly
different methods for MOPR levels. Those levels are somewhat lower than PJM’s proposal. If
FERC does not approve PJM’s MOPR levels, it would likely grant PJM 30-days to refile
MOPR levels based on a methodology from the docket.
• Bidding Floor (MOPR) Levels: Bidding floors, or MOPR levels, mandated by FERC
cover any state-subsidized resources, two categories of which have garnered the most
attention: subsidized existing nuclear assets and new renewables (see “Fate of PJM Capacity
Market Hinges on Implementation of FERC’s Order, Potential State Exits, Expected Court
Challenges, 2020 Election,” January 10, 2020). FERC set the MOPR at the net Avoided Cost
Rate (ACR) for existing nuclear units receiving state subsidies, essentially going forward
costs. The method for calculating Net ACR was revised by FERC to exclude major
maintenance costs which can now be recovered through energy offers. As such, Net ACR
values proposed by PJM are close to zero for dual-unit nuclear plants indicating subsidized
plants in Illinois and New Jersey are likely to clear the auction. Single unit nuclear plants in
Ohio, owned by Energy Harbors—which formed from the FirstEnergy Solutions bankruptcy—
have a different Net ACR value based on higher operational costs. These units may also clear
with the MOPR but may choose to clear using unit-specific exemptions, as most believe actual
costs rolling out of the bankruptcy are lower than projected costs (see “PJM Proposes Bidding
Floors: Nuclear Plants, Long-Lived Renewables Likely to Receive Payments; States Have
Limited Time to Opt-Out,” March 19, 2020).
PJM allowed for 35-year project lifetimes for unit-specific exemption calculations for MOPRs
that apply to new assets, based on the Net Cost of New Entry (Net CONE). Longer project
lifetimes lower MOPR levels and should help many new renewables clear the auction to
receive capacity payments. That said, offshore wind MOPR levels are so high that even 35-
year project lifetimes are not enough to clear the MOPR. Thus, offshore wind projects would
be excluded from capacity revenues under this construct.
• FERC Carbon Pricing Petition: As Commissioner Glick (D) underscored in his dissent,
FERC’s MOPR ruling may cleave PJM’s capacity auction if states leave. The carbon pricing
4Stephanie Grumet Policy Analysis
(202) 750-3527
sgrumet@capstonedc.com April 24, 2020
petition recently submitted to FERC by a wide group of stakeholders—many of whom are on
opposing sides of the MOPR Order—could be the seeds of a strategy to stitch it back together.
Adding a carbon price could help eliminate out-of-market payments to renewables which was
the impetus of the MOPR Order and root cause of discord in PJM. A carbon price on
emissions would inevitably raise energy prices, having a negative impact on coal but a neutral
or slightly positive impact on gas and the market overall. Given the currently fraught state-
federal dynamic, the IMM’s petition on the issue suggests using the existing Regional
Greenhouse Gas Initiative to implement a carbon price would be more politic, expedient, and
administratively effective than attempting to weave a carbon price into the market construct
with a revised tariff. Current RGGI prices are around $5 per short ton of carbon dioxide.
Revenues from RGGI in participating states are used to fund decarbonization projects, but the
price signal is not enough to change generating behavior.
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