The nation’s biggest electric capacity market needs fixing, critics say
The nation’s largest grid operator is warning that it might not have enough electric generation in the future to guarantee reliability.
And it comes as the Federal Energy Regulatory Commission convenes a forum on the multibillion-dollar capacity market PJM operates to ensure there’s enough power to meet demand even during grid emergencies, such as during Winter Storm Elliott last year. PJM coordinates the flow of electricity from gas, coal, nuclear, wind, solar and other types of generation through power lines in all or part of 13 states and the District of Columbia, an area that includes 65 million people.
“We believe the healthy reserve margins we enjoy now cannot be taken for granted into the future,” PJM’s Board of Managers wrote in a letter in February. “Energy policies and market forces have, and could further expedite, the retirement of existing generation resources faster than the new resources are able to come online.”
A changing electric generation mix, growing demand, severe weather, significant numbers of fossil fuel plant retirements and an interconnection backlog that has snagged thousands of megawatts of mostly renewable power projects, as well as complaints about how the capacity market is administered, are all putting pressure on PJM. The capacity market in particular has long been a punching bag for ratepayer watch dogs, renewable power developers, traditional power generators and other market actors since the current version came into existence in 2007.
“I think FERC is to some degree questioning ‘Do we need step back and take a broader look at how we do resource adequacy?’” said Tom Rutigliano, a senior advocate at the Natural Resources Defense Council’s Sustainable FERC Project who advocates fair treatment for renewable resources by grid operators and at FERC. Resource adequacy is simply being able to meet customers’ demand for energy at all hours.
“The capacity market just seems to be always breaking,” Rutigliano said.
FERC itself said in a statement that the “continuing disputes and frequent complaints about how PJM operates its capacity markets from an array of stakeholders throughout the region merit a general review outside the constraints of a particular proceeding.”
Most recently, FERC approved PJM’s request for capacity market rules changes that, if left to stand, would have seen bills for some customers on the Delmarva Peninsula (an area that includes parts of Delaware, Maryland and Virginia) spike by $24 a month for an average customer.
PJM called it a “unique set of circumstances” triggered by a large number of planned power plants not participating in the auction for the 2024/2025 year, “resulting in a supply and demand condition that did not reflect underlying fundamentals” and driving up the capacity cost for customers. Power suppliers howled at the changes, vowing to challenge the ruling. One commissioner, James Danly, disagreed with approving PJM’s request, saying it would undermine confidence in FERC-regulated markets and calling it a “misguided attempt to protect consumers.”
But Commissioner Mark Christie, a former Virginia utility regulator who supported PJM’s requested changes, said “the auction results are so blatantly unjust and unreasonable that voting to allow those results to stand is unacceptable to me.” And he said FERC needs to take more action.
“The elephant in the room must be addressed: whether PJM’s capacity market construct can still ensure sufficient power supplies to deliver reliability at just and reasonable rates,” Christie wrote.
‘What we’re paying for is not what we’re getting’
PJM’s capacity market, called the “Reliability Pricing Model,” is the largest of its kind in the United States, said Steve Lieberman, vice president of transmission and regulatory affairs at American Municipal Power, a nonprofit formed to represent municipally-owned electric systems.
It was set up to help generators “solve for the missing money,” Lieberman said, meaning there was concern that there were inadequate incentives for power generators to provide enough electricity to meet demand peaks, such as sweltering summers or frigid winters. In return for providing that money, PJM’s electric customers were supposedly buying certainty that there was adequate electric generation capacity to keep the lights on during emergencies, such as the 2015 polar vortex.
But Lieberman and others say customers aren’t getting their money’s worth.
“I think they’re paying too much for capacity that isn’t available when we need it,” he said. “I believe in markets. But I think what we’re paying for is not what we’re getting.”
This year’s auction, intended to secure generating capacity for a period beginning June 1, 2024 through May 31, 2025, procured more than 140,000 megawatts, the rough output equivalent of 140 large (1,000 megawatt) power plants at a total cost of $2.2 billion, which will be paid by electric ratepayers in the states over which PJMhas jurisdiction. But though that gives PJM a comfortable 20.4% reserve margin, it was the third auction in a row where the total capacity offered declined, a trend that could be a “potential concern for long-term resource adequacy,” PJM said.
The market is a “pay-for-performance” model that requires power plants classified as capacity resources to deliver on demand during emergencies.
PJM likens it to a mall that builds enough parking to accommodate peak shopping times, such as Black Friday. “The spaces are there when needed, but they may not be used all year round,” PJM says on its website.
The concept is simple, but the rules are incredibly complex, so much so that in 2017, Stefanie Brand, the longtime director of the New Jersey Division of ratepayer counsel said in testimony to a Congressional subcommittee that “the system is so opaque and confusing and constantly changing that the average consumer will never make sense of it.”
Even when the market does work as intended, she added, “favoring lower priced generation sources and bringing overall prices down, the unsuccessful bidders and generators faced with lower prices then seek changes and subsidies to undo those market results.”
‘Promising to perform and not deliver is very profitable’
Aside from the complexity and the wrangling by generators looking to get a better return, the resources procured to keep the lights on can sometimes fail spectacularly when they are needed most.
During Elliott, which hit a huge swathe of the United States over the Christmas weekend, PJM lost about 46,000 megawatts of generation, mostly natural gas and coal power plants, due to an array of failures, including equipment and fuel problems, triggered by the plummeting temperatures. PJM had gone into the winter confident it had plenty of power on hand (indeed, it has long been criticized for saddling customers with too much capacity). But during Elliott, it implored customers to conserve electricity. There were no rolling blackouts like in other regions, but it illustrated that PJM needs to do a better job of accrediting the resources it accepts into the capacity market, said Rutigliano, the NRDC expert.
“PJM’s capacity market has been very rich and over supplied. That’s allowed us to get away with a lot of slop in the market,” he said.
He noted that the penalties generators incur for failing to perform, weighed against the handsome capacity payments, aren’t enough to encourage them to perform the pricey weatherization that would enable them to keep operating during severe weather like Elliott.
“Promising to perform and not deliver is very profitable in PJM’s capacity market,” he said. In January, Rutigliano noted that PJM plants that failed to perform in December face penalties of about $100,000 per megawatt of power they didn’t deliver. “That sounds like a lot until you realize that many of them have earned $450,000 or more per MW in reliability payments since the last time they were called on,” he wrote.
Rutigliano was encouraged by the PJM board letter, which acknowledged the necessity of improving accreditation to “ensure that the reliability contribution of each resource is accurately determined and aligned with compensation.”
“From a market point of view, the most important thing is valuing things for what they are actually worth,” Rutigliano added.
Lieberman said PJM’s efforts to ensure generators that get capacity payments can operate when called upon — a system of penalties and bonuses called capacity performance — have largely been a failure, noting that the rules implemented after the 2015 polar vortex didn’t prevent a large chunk of the generating fleet from failing to deliver during Elliott in December.
He was wary of language in the board letter that says the board “believes that it is appropriate to evaluate whether changes are needed to the capacity performance construct and to ensure that market sellers are able to reflect the risk of taking on a capacity obligation in their capacity market offers.”
“If the argument PJM is going to make is ‘We need to throw more money at the problem,’ that’s ignoring the problem. The problem is the money isn’t being spent correctly,” he said, adding that either plants aren’t spending the money to adequately winterize or they’re too old to function reliably.
“We indeed price signals to incent people to come online and we need price signals that incent people to retire,” he said.
Renewables and reliability
Why aren’t renewables — with wind and solar now among the cheapest forms of electric generation and battery storage prices falling over the long term — riding to the rescue? Like everything in the power generation universe, it’s complicated.
For one, PJM’s massive backlog in approving projects that are seeking to connect to the grid, called the interconnection queue, has ensnared tens of thousands of megawatts of mostly renewable projects. Reforms approved by FERC are expected to smooth the process, but some undoubtedly withered on the vine waiting their turn, Rutigliano said.
“If you make everyone go through a five-year delay, that’s going to kill a lot of projects,” he said. “We’d be in a very different place if the queue was working better over the last five years.”
PJM, though, pushes back on that argument. In a media briefing last month on the capacity auction results, Stu Bresler, senior vice president of markets for the organization, said 40,000 megawatts of resources, many renewable, have made it through the queue and have interconnection agreements but have not come online.
“We know there are many issues facing developers today,” he said, citing supply chain problems, inflation and land acquisition challenges. Indeed, renewable development is increasingly being met with resistance across the country. “Certainly I think it’s safe to say it’s not just the queue reform that is holding up new resources,” Bresler said. “There are a lot of resources that can get started.”
In a report released last month, PJM noted that electric demand is projected to continue growing as a result of increasing electrification (such as in transportation and heating) as well as data center proliferation. At the same time, economics, as well as government and private sector preferences for carbon free generation, are prodding coal and gas plants into retirement. Those retirements, PJM noted, are “at risk of outpacing the construction of new resources, due to a combination of siting and supply chain.”
The queue is composed “primarily of intermittent and limited duration resources” (like battery storage) necessitating “multiple megawatts of these resources to replace 1 megawatt of thermal generation.”
To avoid that “timing mismatch,” PJM says a lot of new renewables will have to come online quickly.
Despite the fact that 290 gigawatts of renewables are currently in the interconnection queue, PJM says the historical rate of completion for those projects has been about 5%.
Renewables, because of their intermittent nature, are also valued differently for capacity purposes. As Mark Specht, a senior analyst with the Union of Concerned Scientists, noted in a blog post, it’s not enough to just replace energy from gas and coal plants with renewable power.
“You have to replace their reliability contributions as well,” Specht wrote. “Adding replacement renewable energy to the grid is easy, but it’s much more complicated to figure out the extent to which you can rely on renewable capacity to ensure grid reliability by preventing electricity shortfalls.”
However, because of their failures during severe weather, some pro-renewable groups argue that PJM is overvaluing gas and coal for capacity purposes and perhaps undervaluing renewables.
Advanced Energy United, a trade group, wrote in a report last year that traditional methods overstate the capacity value of coal and gas plants by 2.7% to 20% in winter and 4.6% to 10% in summer.
Fixing the market
In a report released March 9, PJM’s independent market monitor, Monitoring Analytics, said the organization’s markets “work, even if not perfectly,” though Winter Storm Elliott exposed “significant market design issues.”
“There is no reason that in a rational market design less than 24 hours of cold weather should result in a crisis and a level of administrative complexity that threatens to undermine the incentives to invest in existing and new supply resources at a time when those resources are needed,” the monitor said.
The report says renewables will not be able to replace the capacity output of retiring fossil fuel plants and that gas power plants are the main option to do so in the near term. That will require large amounts of gas pipeline capacity and to that end, PJM should ensure it has “real time, detailed and complete information on the gas supply arrangements of all generators.” Gas supply was a major issue during Elliott, and PJM should also consider rules requiring capacity resources to have firm fuel supplies and examine access to firm gas supplies for new generators, the report said.
The capacity market itself, according to the report, is plagued by longstanding issues “that continue to be ignored” and have resulted in customers being overcharged by a combined $1.45 billion for the 2021/2022 and 2022/2023 auctions. Those include the capacity performance design, which it also deemed a “failed experiment” that should be scrapped. There should also be “comparable treatment” of thermal and intermittent resources, the monitor said.
Among a range of fixes, the market monitor recommends that, rather than increase or decrease penalties, weaken performance requirements or provide more money to generators, PJM should “return to the basic purpose of a capacity market, including ensuring that capacity resources are paid only when available to provide energy.”
PJM’s board has launched a fast-track process to gather input on a potential Oct 1 filing with FERC to approve capacity market changes.
“The board welcomes the FERC forum and believes that, if anything, the commission’s interest in these larger issues provides further support for use of the [Critical Issue Fast Path] process so that potential solutions can begin to be vetted and then presented to the commission,” the board said.