Power grid operator PJM will soon hold an auction to line up electricity supply for 2022 and 2023. In that auction it will most likely commit hundreds of millions of dollars for fossil-fueled power plants that it knows are not needed. The price for this will be added to electric bills across the 13-state PJM region. There are a lot of reasons behind this wasteful spending, but one of the most offensive is an infamous 2019 rule known as the MOPR.
The Minimum Offer Price Rule, or MOPR, protects legacy fossil-fueled power plants from competition from new resources being built as part of the transition to a modern grid. Under this anti-competitive rule, renewable and other power sources supported by state or local governments are required to offer into capacity markets at artificially high prices. In many cases this effectively forces them out of the market altogether. Imagine growing some heirloom tomatoes because you like them better, then being told you have to go to the supermarket and buy all your tomatoes there anyway, because otherwise it wouldn’t be fair to large farmers.
Thankfully, both PJM and the Federal Energy Regulatory Commission are moving to undo this absurd policy. Just today, PJM announced its intent to fully repeal the MOPR, and acknowledged the harm it causes by keeping unneeded power plants running.
We can have effective capacity markets and also allow states to pursue their clean energy goals, and PJM’s plan is a great start. But to keep markets and policy properly balanced, we need to move on to make PJM-administered capacity markets voluntary. PJM would still be responsible for guaranteeing resource adequacy, but under a voluntary residual market states could have the freedom to pursue how to reach those goals.
Get Rid of the MOPR and the Horse It Rode In On
Simply rolling back the MOPR is the right immediate move. If PJM’s proposal comes to fruition, it will end the harm and likely appease the unhappy states threatening to back out of PJM’s market. But this fix risks only lasting a few years. It leaves decision making about market rules with industry insiders, setting up future attempts to once again use PJM as a sort of shadow government opposed to clean energy. These attempts are already beginning: Fossil plant owner LS Power is proposing that both clean new supply and unneeded fossil fuel plants keep getting paid, and gas plant developer Calpine is trying to link MOPR reform to changes that raise prices and limit competition.
Constant rule changes sabotage progress on climate change. We no longer have the luxury of dawdling away years on legal battles while waiting to decarbonize our power sector and much of the economy. The steep cuts in greenhouse gases needed to avoid the worst of climate change require aggressive, immediate action. The MOPR problem, and the other issues that have turned PJM into a barrier to decarbonization need to be fixed once and for all. We urge PJM’s board to support rolling back the MOPR as the simplest short-term solution, but it must immediately follow up with a directive to move to a stable, sustainable market.
Mandatory Capacity Markets Are the Real Problem
PJM’s capacity construct is mandatory: Utilities in the region are required to arrange the power supply they need for reliable service through PJM. This is even though the Federal Power Act gives states control over generation in their territory, over utilities serving consumers, and over transactions between the two. Over the years, federal rules have gradually encroached on states’ authority to the point where PJM has near complete control over capacity arrangements between generators and utilities.
Perhaps someday legal minds will consider if this is an example of FERC “aiming at” powers reserved to the states. But PJM’s decision makers should realize now that keeping full control of resource adequacy puts them in inevitable conflict with states. State authority over the various electricity, environmental, and economic values cannot be reconciled with full PJM control over supply. State policy makers consider many things in designing their energy policy. Grid operators, on the other hand, concern themselves mostly with engineering and economics. Even with the purest intentions, these different perspectives will lead to different conclusions on the correct generation mix.
Worse, intentions aren’t always pure. Regional Transmission Organizations such as PJM have been memorably described as QUANGOs: “quasi-autonomous nongovernmental organizations.” They have many functions that are similar to those of a government agency, but make their own decisions, advised by groups of industry insiders and often without transparency. This makes them an irresistible playground for segments of the power industry to undermine state decisions that threaten their profits. Of equal significance is that FERC approves most RTO proposals. This is because FERC’s review of RTO rules is deferential and limited, preventing FERC from considering public health, environmental, economic, and other values..
In short, RTO control over resource adequacy not only provides a forum for threatened fossil-fuel interests to concoct schemes like the MOPR to slow the clean energy transition, it assures that those schemes will be evaluated by a limited regulator. And thus the MOPR: a rule originally aimed at preventing an obscure and unused way to manipulate markets gets weaponized against clean energy.
Time for a Voluntary Capacity Market
PJM and FERC should back away from the hubris of mandatory capacity markets. Instead, they should embrace state authority over both construction of power plants and reliable electric service. This can be accomplished through a voluntary residual market. Under this design, PJM would continue to establish and enforce resource adequacy standards and set the rules for capacity accreditation and performance. However, load-serving entities could procure capacity outside of the PJM auction, through state-approved mechanisms, and then procure the remainder through the PJM auction, if needed. State regulators would have authority to review the prudence of a load-serving entity’s decision to purchase either outside of PJM’s market or within it; states that prefer to have power suppliers continue purchasing through PJM’s market need not change their practices.
A voluntary market approach largely solves the problem MOPR was intended to address years ago: since buyers and sellers are both free to seek deals outside PJM’s centrally administrated market, competition is enhanced. Buyers that are free to shop elsewhere have little incentive to manipulate a market; suppliers with many potential customers have more options. It also dampens attempts to suppress state policy through capacity market rules, as state-supported resources can receive credit for their capacity value through direct arrangements with utilities.
Critically, by eliminating a flash point of jurisdictional conflict, this approach would create a politically durable solution.
Moving to a voluntary market need not be disruptive. Rules should be structured so that states that are happy with the status quo can do nothing and their utilities will continue to procure 100% of their capacity needs through PJM auctions. States with more ambitious clean energy policy goals have a simple path to their utilities seeing the full capacity value of their investments. In the longer term, this approach would provide a platform for development of some of the potential future multi-state clean energy procurement mechanisms currently under discussion, but would allow those to be developed thoughtfully, in their own time.
Capacity markets have been criticized as not well-suited for a high renewables future. Beyond the risk of regulatory capture, capacity markets are inflexible and tend to favor resources with low capital costs but high operating costs, nearly the exact opposite of most carbon-free supply. Excessive capacity payments shift risk from generation owners to consumers and blunt the real-time price signals needed to fund and guide investment in clean power. Nonetheless, given the recent crisis in Texas (which has no capacity market), policy makers are likely to preserve capacity markets. Voluntary residual markets allow capacity markets to continue to serve as a reliability backstop, while mitigating their anti-clean power market distortions and giving state policy makers greater flexibility to meet their clean energy mandates. The switch to a voluntary market is no-regrets decision that PJM’s board should make.
Reality-Based Planning Is a Must
The most offensive part of the MOPR might be that it forces consumers to buy capacity that both PJM and the rest of us know isn’t needed. In addition to necessary changes to market rules, PJM should reform its planning rules to ensure that this cannot happen in the future.
The MOPR may force clean power plants out of capacity markets, but that doesn’t change the fact that these clean resources exist. PJM’s planning processes should always be based on the best available and most accurate data. It is unquestionable that wind turbines, solar farms and batteries provide real reliability value, whether they are allowed to participate in PJM’s market or not. When PJM determines how much capacity must be purchased to meet reliability targets, this value must be included.
PJM’s planning staff is certainly able to consider the reliability value of resources not in the capacity market: they already do so for behind-the-meter solar and emergency assistance from neighboring regions. Developing rules to extend this treatment to any resource that can be reasonably expected to be in service but not in the capacity market should be a moderate effort at most, and one that can easily be done in parallel with the market reforms discussed above. This will provide additional assurance that PJM’s markets cannot be hijacked to subsidize unnecessary fossil fuel plants at customers’ expense.
Solutions Are Within PJM’s Reach
PJM’s Board of Managers has decided to resolve the MOPR crisis by acting directly, bypassing the ordinary stakeholder discussions and committee voting process. This move was controversial, but we understand the need for quick action and the difficulty in gaining stakeholder consensus, especially one where incumbent fossil interests have a very strong voice.
The Board should take advantage of this to act decisively and end the years of pointless conflict between the capacity market and the states. The Board should support staff’s proposal to eliminate the MOPR and take the opportunity to step back from the overreach of its mandatory capacity market by building a voluntary arrangement that supports state policy. If PJM sticks with old decisions that have created a barrier to clean energy, it risks becoming irrelevant in a rapidly decarbonizing world.