On December 19, 2019, FERC issued a long-awaited order in which it directed PJM Interconnection, L.L.C. (“PJM”) to apply its Minimum Offer Price Rule (“MOPR”) to all state-subsidized capacity resources (“December 2019 Order”). FERC also adopted limited grandfathering and exemptions for certain resources.  The December 19 Order will have a significant impact on PJM’s capacity market. PJM requires resources subject to the MOPR to offer into the PJM capacity auctions at or above a PJM-determined offer floor. When this floor is above capacity auction clearing prices, the resource does not clear the market or receive any capacity market revenue. Capacity prices are also higher than they would be had the resource cleared the market.

The December 2019 Order was preceded by a June 29, 2018 order (“June 2018 Order”), the result of two proceedings initiated in response to increased out-of-market support for particular generating resources, including zero emission credits (“ZECs”) for nuclear facilities, offshore wind procurements, renewable energy credits (“RECs”) and more stringent renewable portfolio standards (“RPS”) (see July 11, 2018 edition of the WER). In the June 2018 Order, FERC found it was necessary to address the price suppression resulting from resources receiving out-of-market support, and established a paper hearing (“Paper Hearing”) to (i) address proposed applications of the MOPR to apply to both new and existing resources that receive out-of-market payments, regardless of resource type, with few to no exemptions; and (ii) establish a potential option to allow, on a resource-specific basis, resources receiving out-of-market support to opt out of the PJM capacity market for some period of time. FERC referred to this latter option as the Fixed Resource Requirement Alternative or “FRR Alternative.”

Parties filed testimony in the Paper Hearing in October and November 2018. PJM proposed the method by which it would expand applicability of the MOPR to units receiving RECs and ZECs and its proposed mechanism in response to the FRR Alternative, pursuant to which load serving entities could remove load and bilaterally-contracted capacity from PJM auctions. In July 2019, FERC issued an Order directing PJM not to conduct the 2019 annual capacity auction (to procure capacity for the 2022/23 Delivery Year) until after FERC issued an order establishing a replacement rate.

In the December 2019 Order, FERC’s two-Commissioner majority directed PJM to submit a replacement rate that applies the MOPR to all new and existing resources receiving State Subsidies, provides for limited grandfathering and provides limited exemptions from the MOPR. FERC provided the following broad definition of “State Subsidies”:

A direct or indirect payment, concession, rebate, subsidy, non-bypassable consumer charge, or other financial benefit that is (1) a result of any action, mandated process, or sponsored process of a state government, a political subdivision or agency of a state, or an electric cooperative formed pursuant to state law, and that (2) is derived from or connected to the procurement of (a) electricity or electric generation capacity sold at wholesale in interstate commerce, or (b) an attribute of the generation process for electricity or electric generation capacity sold at wholesale in interstate commerce, or (3) will support the construction, development, or operation of a new or existing capacity resource, or (4) could have the effect of allowing a resource to clear in any PJM capacity auction.

FERC provided limited grandfathering for four types of capacity resources: (i) renewable resources participating in RPS programs; (ii) self-supply resources; (iii) demand response; and (iv) energy efficiency resources, provided the resource satisfies one of four milestones, including that the resource has cleared an annual or incremental PJM capacity auction or has an executed interconnection agreement as of December 19, 2019, to name just two. FERC rejected a proposed voluntary REC exemption for RECs sold to major corporations outside of any RPS programs. All resources which have not satisfied the grandfathering conditions or are ineligible for grandfathering will be subject to the MOPR unless they qualify for an exemption.

FERC directed PJM to apply one effective exemption and one modification to the default offer floor. First, the “Competitive Exemption” will be available to both new and existing resources (other than new gas resources) which certify they do not and will not have any State Subsidies; Second, FERC will require PJM to review requests from a capacity supplier to review its resource’s unit-specific Net Cost of New Entry (“Net CONE”) to determine if the resource is eligible for a unit-specific offer floor if lower than the default offer floor. If a unit’s offer floor is low enough to clear a capacity auction, the unit will receive capacity revenues. This is not expected for many resources under current market conditions.

FERC has required PJM to make a compliance filing within 90 days to (i) conform its tariff and operating agreement to the requirements set forth in the December 2019 Order; (ii) provide more information on how PJM will determine the offer floors; and (iii) update FERC on plans to implement the new requirements for each of the next two annual capacity auctions (a/k/a Base Residual Auctions). Under the December 2019 Order, PJM must determine locational default offer floors for each resource classification – representing a PJM-determined reference unit Net CONE or Net Avoidable Cost Rate (a proxy for going forward costs).

The December 2019 Order will result in mitigation of many resources currently not subject to mitigation, including nuclear units receiving ZECs and new renewable resources receiving RECs. Some resources will not clear the capacity auctions and will lose or never obtain capacity revenues. Other resources will receive higher capacity prices as a result of less capacity clearing the auctions. Customers in some locations will pay more for capacity than they would have if resources had not been mitigated.

Commissioner Glick’s dissent makes clear he views the December 2019 Order as a war on state environmental and climate change programs. Commissioner Glick suggests that the definition of State Subsidies is so broad that units receiving higher energy prices as a result of the Regional Green House Gas Initiative will be mitigated along with many rate-based resources.

We expect significant activity on rehearing and clarification of the order over the next 30 days; significant protest activity at the compliance filing stage; and appeals following rehearing.

A copy of the December 2019 Order is available here.