Commercial, Industrial, Regulation, Sourcing Renewables - April 2, 2020 - By Caitlin Marquis, Advanced Energy Economy
UPDATE: Understanding the MOPR - What an Obscure FERC Rule Could Mean for Renewable Energy Buyers
The energy world is full of acronyms, and the hottest four-letter word of 2020 is, without contest, MOPR. MOPR stands for “Minimum Offer Price Rule,” and it has become a top concern of clean energy advocates, advanced energy developers, and states since December when the Federal Energy Regulatory Commission (FERC) issued a much-anticipated decision on the rule. Applying to PJM Interconnection, which operates the bulk power system in all or part of 13 mid-Atlantic states and the District of Columbia, the FERC order poses a threat to both state clean energy policies and voluntary purchases of renewable energy in the largest U.S. energy market, and potentially all the organized wholesale markets under FERC jurisdiction, where direct corporate purchases of renewable energy are expanding.
FERC’s December decision requires PJM to apply an administratively set minimum price to any state-sponsored resource that participates in PJM’s annual capacity auction, a tool used to lock in the resources needed to meet the region’s resource adequacy requirements three years into the future. Proponents of the MOPR argue that this price floor is necessary to counteract the market price impact of state policies such as renewable portfolio standards and zero emission standards, which provide revenue to certain resources, typically emission-free renewable and/or nuclear energy. Operators of coal- and natural gas-fired power plants charge that these state-based payments allow those resources to drive down prices in the capacity auction, to their detriment.
This argument ignores a few key facts. For starters, states have exclusive jurisdiction over their resource mix, so they are well within their rights to take actions that promote certain resources, including compensating them for their clean attributes and environmental performance. In addition, many of the state subsidies swept into the MOPR do not meaningfully impact capacity market offer prices. Finally, the “out-of-market” revenues mitigated by MOPR are compensating for services not valued within wholesale markets, including emission reductions. In addition to being legally and logically questionable, the MOPR also lacks justification from a reliability perspective given the current glut of capacity in PJM—something that MOPR would not only fail to address but actually exacerbate.
This all matters because the MOPR contemplated by FERC’s order is both sweeping and punishing. It would apply to all new “state-subsidized” resources under a broad definition of “subsidy,” and would set prices for many of these resources that are orders of magnitude higher than recent capacity market clearing prices. In short, FERC’s order would shut many of these resources out of the capacity market.
For customers, and particularly large renewable energy buyers, there are a few important implications of the MOPR decision. First and most fundamentally, the introduction of such a broad MOPR threatens to increase electricity bills by forcing customers to pay twice for capacity: once for resources needed to meet state policies, and again for the excess resources procured through the auction in lieu of state-sponsored resources that fail to clear due to MOPR. Second, the MOPR creates a challenge to the cost-effective achievement of state clean energy policies. Finally, and most specific to companies pursuing renewable energy, the MOPR threatens to impact even voluntary renewable energy purchases. While FERC’s order says that “voluntary, arm’s length bilateral transactions” need not be subject to MOPR, it’s not clear how PJM will exempt them, especially as FERC claims that “it is not possible, at this time, to distinguish resources receiving privately funded voluntary RECs from state-funded or state-mandated RECs.”
With the ultimate impact of FERC’s failure to provide a clear and complete exemption for voluntary renewable energy transactions uncertain, nearly 50 requests for clarification and/or rehearing were filed at FERC. Commenters including the Advanced Energy Buyers Group, Hershey’s, clean energy advocates (a joint filing by Advanced Energy Economy, the American Wind Energy Association, and others), and even PJM itself argued that voluntary transactions should be clearly exempt from MOPR. FERC is known to take months to respond to filings for rehearing, and legal challenges to the order cannot proceed until it does.
In the meantime, PJM faces a March 18 deadline to submit a proposal to comply with FERC’s order. On the issue of voluntary renewable energy transactions, we expect PJM to require such projects to seek a competitive exemption, which involves verifying that they will forego participation in state programs or policies that would otherwise subject them to MOPR. This approach is reasonable within the context of FERC’s unreasonable order, but it still introduces complexity and risk that would not otherwise exist. It may also increase prices of power purchase agreements (PPA) by closing off or restricting opportunities for developers to participate in state programs after a voluntary PPA expires. Furthermore, this approach still does not fix the fact that FERC has subjected to MOPR all voluntary RECs not obtained via long-term, bilateral transactions. Currently, many companies purchase such RECs on the open market as part of their sustainability programs.
While states are considering their options to cope with, or more likely push back on, this threat to their clean energy policies, companies with sustainability goals need to grapple with the MOPR as well. Corporations may need to work with states to find new policy and market solutions that would maintain the many benefits of competitive wholesale markets while achieving their common decarbonization goals.
UPDATE: On March 18, PJM submitted its compliance filing to FERC. As expected, PJM allows projects selling RECs to voluntary buyers to seek a competitive exemption. PJM’s filing does not resolve the problematic “asset life ban” required by FERC, which as written will penalize a project that uses the competitive exemption but later participates in a state program, after its voluntary PPA expires, by excluding it from the capacity market. PJM’s proposal also does not explicitly allow projects to seek a partial exemption for a portion of their output sold into the voluntary market and does not address the risk that projects selling unbundled voluntary RECs other than through long-term, bilateral transactions would be subject to MOPR.
Aside from the provisions that apply specifically to voluntary transactions, PJM’s filing does include some helpful clarifications. First, PJM has specified that regional programs such as the Regional Greenhouse Gas Initiative (RGGI) that provide indirect financial benefit to certain resources would not be considered a state subsidy subject to MOPR. This is a reasonable reading of FERC’s Order, but was not explicitly spelled out and had been the subject of some concern. PJM also made adjustments to the calculations of default offer price floors for many resource types, bringing these figures closer to actual costs, and provided clarity regarding the requirements for unit-specific offer floor calculations, which will allow individual projects to bid into the market at lower prices based on their demonstrated costs. These provisions reduce, but do not eliminate, the risk that cost-effective resources also receiving state subsidies will be shut out of the capacity market due to MOPR.
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Caitlin Marquis is a director at Advanced Energy Economy, where she manages the policy engagement of the Advanced Energy Buyers Group, a coalition of leading companies that are working to expand their use of advanced energy. Marquis leads the Buyers Group’s efforts on both regulatory and legislative engagement at the state, federal, and regional level.
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