In a notice issued on September 29, 2021, FERC stated that it did not act on PJM Interconnection LLC’s (PJM’s) proposed reforms to the application of the Minimum Offer Price Rule (MOPR) because the Commissioners are divided two against two as to the lawfulness of the change (Notice). Because FERC did not act within 60 days of PJM’s filing under Section 205 of the Federal Power Act, PJM’s proposal became effective by operation of law. PJM’s revisions “focus” the applicability of the MOPR and will allow certain resources that receive state support to participate in PJM’s capacity auction without being subject to the MOPR, significantly narrowing the scope of the prior rule.
PJM’s Revisions to the Application of the MOPR
On July 30, 2021, PJM filed proposed revisions that would narrow the application of the MOPR, which is intended to protect against the potential exercise of buyer-side market power. The MOPR sets a floor price for bids into the capacity market to avoid market distortion by preventing resources from bidding artificially low prices to clear the capacity market.
As we previously reported in December 2019, FERC had directed PJM to extend the MOPR to both new and existing resources that receive or are eligible to receive certain out-of-market payments, i.e., “state subsidies.” FERC’s directive was intended to counteract the ability of subsidized resources to use subsidies to lower their capacity market offers and thereby drive down overall capacity market prices, while also preventing the retirement of noncompetitive resources. In response, PJM “expanded” its MOPR to impose a minimum capacity market offer price on resources, internal and external, that receive or are entitled to receive any state subsidies. Under that order, “state subsidies” included any direct or indirect payment, commission, rebate, consumer charge, subsidy, or other financial benefit that results from an action or process by a state, political subdivision, or electric cooperative that met one of three categories:
- Where the subsidy derives from or connects to procurement of generation capacity to be sold at wholesale
- Where the subsidy supports the construction, development, or operation of a new or existing capacity resource
- Broadly, where the subsidy takes any action that would allow a resource to clear a PJM capacity auction
The “focused” MOPR filed at the end of July significantly revises the application of the MOPR and effectively eliminates the MOPR’s application to state-subsidized resources, except in more limited circumstances. The “focused” MOPR applies price mitigation in two circumstances: (1) the “Exercise of Buyer-Side Market Power” or (2) in cases of “Conditioned State Support.”
The “Exercise of Buyer-Side Market Power” is defined as anti-competitive behavior of a capacity market seller with a load interest (or directed by an entity with a load interest) to uneconomically lower capacity auction offers to suppress the capacity auction clearing prices to benefit the capacity market seller’s (or the seller’s affiliate’s) portfolio of generation and load (or that of the directing entity with a load interest). The MOPR would apply to a capacity market seller if it is able to or has an incentive to exercise buyer-side market power by submitting uneconomic offers to suppress the clearing prices to benefit its portfolio. To identify such a seller, PJM will apply economic tests to determine if the resource’s submission of below-cost offers would reduce the clearing price for the area where the resource is located and would result in a net benefit to the seller’s portfolio, given the savings that result from the reduced charges to load. The vast majority of market participants in PJM do not have a load interest and therefore are unlikely to be affected by this provision.
“Conditioned State Support” is defined as a state financial benefit that is provided outside of PJM Markets and is conditioned on clearing any RPM Auction. The MOPR would apply to generation resources that PJM believes receive a state benefit if FERC approves a Section 205 filing by PJM in which PJM would claim and demonstrate that the state program or policy constitutes “Conditioned State Support.” If the Commission accepts the filing, any resource receiving support through that program would be subject to the MOPR and the new Attachment DD-3 in the PJM Tariff would be updated to list that policy or program as Conditioned State Support.
The new PJM tariff language provides the following examples of policies and programs that would not be considered Conditioned State Support:
- Renewable energy credits
- Zero emission credits
- Regional Greenhouse Gas Initiative
- Economic development programs and policies
- Tax incentives
- State retail default service auctions
- Policies or programs that provide incentives related to fuel supplies
- PURPA rates
Finally, any existing state policies and programs that may be viewed as providing Conditioned State Support are permitted as “Legacy Policies” to avoid a disruption to those programs and state objectives.
Implications to Market Participants
This new, narrower MOPR will exempt many resources, particularly renewable resources, that would otherwise have been subject to the MOPR. Those resources will be more likely to clear the PJM capacity market auctions and receive the resulting revenue. Conversely, those thermal resources that were already not subject to the MOPR will now have increased competition in the capacity auctions, which could decrease auction prices.
Given that PJM’s “focused” MOPR was highly contentious and widely protested, FERC’s Notice is likely to be met with rehearing requests and judicial appeals. The record is filled with protests raising arguments that the “focused” MOPR is unjust, unreasonable, and unduly preferential and discriminatory, will render the MOPR meaningless and inefficient, will not ensure that the RPM auction will produce just and reasonable prices, and will permit subsidized resources to drive down capacity prices.