FERC capacity markets limit clean energy and cost billions; it’s time for Congress to act

The following is an article written by Scott Strauss, Jeffrey Schwarz and Peter Hopkins, each a partner at Spiegel & McDiarmid.

While the coronavirus makes the headlines, climate change is not blocked and continues to demand our attention.

Recently, the House of Representatives’ “Select Committee on the Climate Crisis” discussed how to achieve a national net zero emissions economy by 2050. The “decarbonization” of the electricity sector by 2040 is essential for reach this goal. And presidential candidate Joe Biden has called for an even faster decarbonization of the sector, by 2035.

Ridding the electricity sector of carbon will require investing billions in new infrastructure. But money alone will not run a clean production fleet. Broad cooperation between the federal government and the states is required. This is not happening now.

Instead, state clean energy programs are threatened by the actions of a federal regulator – the Federal Energy Regulatory Commission (FERC). Left unchecked, FERC’s efforts will keep older, more polluting fossil resources in use for longer, while undermining state programs to promote clean renewable energy. And consumers will pay billions in unnecessary fees.

The House report sees the problem and recommends legislation prohibiting FERC from discriminating or taking action to “mitigate” the effects of state clean energy policies. And the same FERC actions referred to in the report are also being challenged in federal court. It is essential to carry out the actions of FERC to trigger the development of a clean generation and fight against climate change.

FERC stands in the way

Here’s how FERC stood in the way and why a change is needed. Federal law preserves the state’s authority over power generation. States can obtain their own resources by taxing producers who emit greenhouse gases or by paying producers who do not. States can also build own production or require local power supplies to increasingly include own resources.

But the states and the federal government share responsibility for meeting the country’s electricity needs. Once the electricity is produced, it must be transported – often over long distances – and sold in wholesale to then be resold to homes and businesses. States regulate the first stage (production) and the last stage (local distribution). FERC regulates the interstate environment: the transportation and wholesale of electric power from generator to local utility.

In years past, there was relatively little wholesale sales because the same utility owned everything – the generators, transmission lines, and distribution networks. Over the past two decades, states across the country have pursued “restructuring” initiatives, forcing utilities to sell their power plants to independent companies that compete to sell wholesale electricity to utilities. local. To facilitate competition, FERC encouraged the formation of large regional wholesale electricity markets, which now cover most of the country. The result: a much larger role for FERC as a regulator of the wholesale market.

Resources arrive on the markets with their respective drawbacks and advantages, including state support for desired own resources. Wholesale electricity markets are supposed to take into account supplier costs and revenues and select the cheapest sources of electricity. But, as government programs have grown, FERC has responded by putting its thumb on the scales, treating state-backed production as a threat that will suppress wholesale prices and undermine competition.

Without outright blocking state programs, FERC has adopted rules that nullify the benefits that own resources receive from state programs.

A vital distinction

In regional electricity markets, bidders compete to provide customers with multiple products, including electric “capacity” – essentially an option to request power generation when needed. Each resource offers the lowest price at which it is willing to sell. The market operator stacks the bids in order of price and chooses the cheapest resources needed to meet the expected demand. The same award is received by all selected resources, but is defined only by a: the supply of the last (and most expensive) resource needed to meet demand.

In picking the winners, the FERC auction only considers cost – it doesn’t matter whether the electricity comes from a coal-fired power station or a wind farm. For state programs targeting climate change, however, this distinction is vital.

When states have adopted programs to compensate clean energy providers for their environmental benefits, FERC has responded by requiring those resources to bid on wholesale auctions at minimum prices that ignore the benefits they receive from them. States. So while a resource that needs to recoup $ 500 in revenue and receives $ 400 in state grants, would rationally bid for $ 100, FERC rules require the resource to ignore the $ 400 grant. and bid at $ 500. But no such rule applies to resources receiving federal subsidies or to the revenues some producers earn by selling by-products like steam or carbon dioxide.

Well-functioning markets allow consumers to buy the products they value most. But FERC’s minimum auction rules make it much more difficult to select own and state-supported resources in wholesale auctions.

In much of the country, these auctions are mandatory: consumers must pay for the resources selected at auction. So when FERC auction rules cause publicly funded resources to fail to “clean” auctions, consumers have to pay twice to meet the same service need: once for funded production. by the state and one for the other resource selected in the auction.

These unnecessary double charges are estimated to cost consumers billions of dollars each year for decades to come, and could lead some states to abandon their programs.

Far from promoting markets, the FERC rules nullify the advantages conferred on competitors whose own resources have obtained state approval precisely because they provide what citizen-customers want: cleaner supplies to fuel. their future. Worse, even if states continue to support the development of new renewable resources priced from wholesale auctions, fossil resources will continue to clean them up and collect auction revenues.

FERC protects fossil fuel generators from their competitive inability to provide clean electricity.

The country’s largest electricity market is the Pennsylvania-New Jersey-Maryland or “PJM” power pool, which serves 65 million customers in 13 states (from New Jersey to North Carolina to Illinois) and the District of Columbia. In December 2019, FERC expanded PJM’s minimum auction requirements to encompass a wider range of resources that receive state (but not federal) support.

The main targets of the extended rule are renewable generators, including large offshore wind projects, and existing zero-emission nuclear power plants. A combination of states, consumer advocates, public entities, producers and environmental organizations are challenging the FERC rule in federal court. Some PJM states have responded to the new FERC rule by announcing inquiries into whether they should exit federally regulated markets altogether.

If successful, the ongoing litigation could ease some of the unwarranted federal burdens on state clean energy programs at PJM and other places across the country where states are trying to promote clean energy and FERC is resisting. But a legislative fix would do more, as it would set the rules for the whole country and avoid the risk of litigation on a case-by-case basis.

Congress should act on the recommendation of the House report and remove FERC’s unwarranted limitations on how state-funded own resources participate in wholesale markets. Removing these barriers will go a long way in determining whether the House’s ambitious plan – or any similar proposal – will be able to deliver a low-carbon grid and clean energy savings.

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