What Hath FERC Wrought?

by Daniel Farber

July 12, 2018

At the end of June, in a vote divided along partisan lines, the Federal Energy Regulatory Commission (FERC) handed down a sweeping order that will impact electricity markets in a wide swath of the country – likely at the expense of renewable energy and nuclear power. Unfortunately, like Trump's power plant bailout, the result may be to delay the closing of coal-fired power plants. That's a serious problem. A new study by researchers at Resources for the Future shows that a two-year delay in plant closings would cause 353-815 deaths and release 22 million extra tons of carbon. A two-year delay would cause one death for every four or five coal mining jobs it saved for those two years.

The FERC order applies to PJM, which operates a vast part of the national grid encompassing much of the mid-Atlantic, upper South, and Midwest. My first thought was that the order was basically a different version of Trump's bailout plan for coal, but that's unclear to me on closer examination. For one thing, besides taking a swipe at renewables, the FERC order targets nuclear plants that receive state subsidies of the very kind that Trump wants to mandate. But it's clear that both Trump and the GOP majority on FERC look with disfavor on renewable energy.

The FERC order involved what are called capacity markets, which I've discussed at length in an earlier post. As I explain in the earlier post, they're complicated and hard to understand, which also frees policymakers like FERC from much oversight. But I'll do my best to explain how the markets work, what FERC wants to do, and why.

Capacity markets are distinguished from "energy markets," which utilities actually use to buy the power they need when they need it. Capacity markets are artificial constructs designed to ensure that there will be enough power to meet peak demand. The basic idea of capacity markets is that utilities say how much power they'll need, and FERC then compensates generators for being available to serve the total requirement. The amount of compensation is based on an auction. Generators state how much power they are willing to commit to at what price. The price is set by the marginal bidder – that is, the one that offers to supply the last kilowatts of power needed to top up the necessary capacity. That means that sources that bid in at lower prices – often including renewable sources because their generation costs are low – get paid more than they bid. The utilities then pony up their shares of the total price, which they then pass on to their consumers. This is a very complex system, of unknown effectiveness in incentivizing new power generation. States like California and Texas get by just fine without capacity markets. But for whatever reason, some regional grid operators like PJM prefer to use them.

FERC's concern is about how capacity markets interact with state policies supporting renewable (and in some places nuclear) energy. Many renewable sources in PJM and some nuclear reactors are also receiving revenue from selling renewable energy credits, which utilities in many states buy to satisfy state renewable energy mandates. The GOP majority on the Commission sees this revenue as double-dipping if the generators of renewable energy also get revenue from the capacity market.

The FERC ...

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