On April 16, the Federal Energy Regulatory Commission (FERC) issued two orders in proceedings related to PJM Interconnection, L.L.C.’s (PJM) Minimum Offer Price Rule (MOPR). First, FERC denied requests for rehearing and granted limited clarification with respect to its June 29, 2018 order (2018 Paper Hearing Order) where it (i) found PJM’s then-existing tariff to be unjust and unreasonable because it failed to address the suppressive effect of resources receiving out-of-market payments on the capacity market, and (ii) implemented a paper hearing to establish a revised MOPR to apply to both new and existing resources receiving out-of-market payments, regardless of resource type (see July 11, 2018 edition of the WER).

Second, while FERC largely affirmed its December 19, 2019 order arising out of the paper hearing, in which it directed PJM to apply the MOPR to all state-subsidized capacity resources (December 2019 Replacement Rate Order) (see December 20, 2019 edition of the WER), it also clarified some aspects and very selectively granted rehearing. Notably, FERC: (i) clarified that Renewable Energy Credits (RECs) that are voluntarily purchased and not used in a state renewable portfolio standards (RPS) program are not “State Subsidies,” (ii) clarified that the Regional Greenhouse Gas Initiative (RGGI) is not considered a State Subsidy; and (iii) granted rehearing to expand the project milestones that allow resources receiving to qualify for several categorical exemptions (i.e., the Self-Supply, RPS, and Demand Response, Energy Efficiency, and Capacity Storage Exemptions), a form of grandfathering.

We discuss certain aspects of the April 16 order addressing requests for rehearing and clarification of the December 2019 Replacement Rate Order (Expanded MOPR Rehearing Order) below. We also discuss next steps and timing related to implementation of the revised MOPR rules and the commencement of the Base Residual Auction (BRA) to procure capacity for the 2022/23 Delivery Year, which originally was scheduled to be conducted in May 2019.

Background

The MOPR is intended to prevent the exercise of buyer-side market power and ensure that resources are offered on a competitive basis. Prior to the Paper Hearing Order, the MOPR applied to only new natural gas-fired combustion turbine and combined cycle resources.

In the Paper Hearing Order, however, FERC found that the MOPR rules were unjust and unreasonable because they failed to consider the impact of state subsidies on PJM’s wholesale markets. Finding that it could not adopt a replacement rate on the record before it, FERC directed PJM to propose an expanded MOPR to cover out-of-market support for all new and existing resources, regardless of resource type, with few to no exemptions. In July 2019, FERC issued an order directing PJM not to conduct the 2019 BRA (to procure capacity for the 2022/23 Delivery Year) until after FERC issued an order on the paper hearing, establishing a replacement rate. That auction has yet to occur.

In the December 2019 Replacement Rate Order, FERC directed PJM to submit a revised replacement rate applying the MOPR to all new and existing resources receiving state subsidies. FERC also provided limited grandfathering for four types of capacity resources and directed PJM to apply one effective exemption and one modification to the default offer floor. PJM submitted its compliance filing on March 18, 2020 (“March 2020 Compliance Filing”). FERC has extended the comment deadline for responses to PJM’s March 2020 Compliance Filing to May 15, 2020.

APRIL 2020 EXPANDED MOPR REHEARING ORDER

Voluntary RECs

FERC states in the Expanded MOPR Rehearing Order that “purely voluntary transactions for RECs are not considered State Subsidies.” FERC further indicates that resources applying for the Competitive Exemption may “certify that they will only sell their RECs through voluntary REC arrangements, meaning those which are not associated with state-mandated or state-sponsored procurement.”

As explained in the December 2019 Replacement Rate Order and PJM’s March 2020 Compliance Filing, the Competitive Exemption applies to capacity market sellers that promise, on an annual basis, to forego accepting all applicable State Subsidies for a given resource in a given Delivery Year. Although the FERC indicates that voluntary RECs are not State Subsidies, it also indicates that capacity market sellers should use the Competitive Exemption process to procure the affirmation that the right to RECs will not be used in connection with state-mandated or state-sponsored procurement programs. FERC also places an affirmative obligation on the capacity seller to ensure that the RECs will not be used in a manner that constitutes a State Subsidy, stating that “[s]uch new and existing resources … must likewise ensure that no broker or direct buyer will resell voluntary RECs to state compliance purchasers.”

Summary of Discussion on Voluntary RECs

In the December 2019 Replacement Rate Order, FERC rejected PJM’s proposed “Voluntary REC Exemption” for RECs that were voluntarily purchased and not used in an RPS program. FERC stated, “It is not possible, at this time, to distinguish resources receiving privately funded voluntary RECs from state-funded or state-mandated RECs because resources typically do not know at the time of the auction qualification process how the REC will be eventually used.” In the Expanded MOPR Rehearing Order, however, the FERC clarified as follows:

381. We grant clarification that purely voluntary transactions for RECs are not considered State Subsidies.⁸⁰⁷ New and existing resources, other than new gas-fired resources, that apply for the Competitive Exemption may, as part of that process, certify that they will only sell their RECs through voluntary REC arrangements, meaning those which are not associated with state-mandated or state-sponsored procurement. Such new and existing resources … must likewise ensure that no broker or direct buyer will resell voluntary RECs to state compliance purchasers.⁸⁰⁸

Emphasis added.

FERC also casts some doubt on whether voluntary RECs will remain eligible for the competitive exemption, providing caveats in two footnotes, as follows:

FN 807: This determination relates to the State Subsidy definition and we are not opining on the effect of voluntary RECs on capacity market outcomes.

FN 808: The treatment of voluntary RECs in this order is not a determination regarding whether the revenue from voluntary REC transactions results or could result in capacity market distortions; this proceeding, and the evidence presented herein, was limited to the effect of State Subsidies.

In his dissent, Commissioner Richard Glick characterized the footnotes above as “ominous,” and maintains that the order “makes clear that voluntary RECs are not out of the woods yet.” That is, he argues that all the order does is conclude that “voluntary RECs are not state subsidies,” but that the “conclusion is not a finding that voluntary RECs do not distort capacity market outcomes.”

Commissioner Glick is projecting that in a future case, it is possible that FERC would determine that voluntary RECs are causing price suppression in PJM’s capacity market and should be subject to mitigation. At least three factors would influence the outcome were someone to challenge voluntary RECs: (i) the impacts on capacity market prices associated with voluntary RECs; (ii) the composition of FERC after the election; and (iii) if FERC were to impose offer floors on units selling voluntary RECs, would it do so prospectively only and apply offer floors to only new entry thereafter or to already entered units’ future voluntary REC sales.

Notwithstanding Commissioner Glick’s cautionary statements, the order provides the route by which resources with voluntary RECs can avoid the MOPR: applying for the Competitive Exemption certifying that they will sell their RECs only through voluntary REC arrangements. FERC further clarifies that “[s]uch new and existing resources (other than new gas-fired resources) must likewise ensure that no broker or direct buyer will resell voluntary RECs to state compliance purchasers.”

PJM’s Proposed Treatment of Voluntary RECs in March 2020 Compliance Filing

In PJM’s March 2020 Compliance Filing, PJM contemplated that resources with voluntary RECs would qualify for the Competitive Exemption. Specifically, PJM proposed to allow capacity market sellers of capacity resources that generate RECs or equivalent credits to elect the Competitive Exemption if they certify and can demonstrate, upon request, that the credits will only be used and retired for voluntary obligations as opposed to state-mandated RPS requirements. PJM states that through this approach, “Capacity Market Sellers that can ensure that RECs that are eligible for state sponsored RPS programs will not be used for state mandated compliance purposes can avoid being subject to the modified MOPR.” PJM further made clear that “REC generating resources that elect the competitive exemption can only be used for voluntary obligations and are not eligible to be retired for mandatory state RPS requirements in the GATs system.”

Procedural Process for Electing Competitive Exemption

With respect to the procedural process for electing the competitive exemption, as proposed in PJM’s March 2020 Compliance Filing, any eligible capacity market seller will be required to certify that it will forego acceptance of all applicable State Subsidies for a given resource for the relevant delivery year. Such certification would be made no later than 30 days prior to the conduct of the relevant RPM Auction for each delivery year that the capacity market seller wishes to elect the Competitive Exemption. A capacity market seller may elect the Competitive Exemption each individual delivery year that it will elect to forego the State Subsidy.

RGGI

Several parties requested that FERC clarify that carbon pricing programs, like RGGI, are not considered State Subsidies. They argued that RGGI should not be considered a State Subsidy because it does not provide payments to generators but, rather, collects payments from generators and provides them to the states. Parties further explained that resources in participating states are required to purchase emissions allowances sufficient to cover their emissions above the cap through either regional auctions or secondary market transactions.

FERC clarified that “RGGI is not considered a State Subsidy because RGGI does not provide payments, concessions, rebates, or other financial benefits to resources.” FERC further clarified, however, that “while RGGI fees paid by resources are not a State Subsidy, RGGI revenues paid to certain resources would be considered a State Subsidy, assuming it meets the criteria in the definition.” FERC was referring to distributions of RGGI proceeds collected by states to renewable or storage resources that are, thus, subsidized. FERC declined to address arguments regarding carbon pricing programs generally.

Qualification for Self-Supply, RPS, and Demand Response, Energy Efficiency, and Capacity Storage Exemptions

In the December 2019 Replacement Rate Order, FERC directed PJM to adopt a temporary form of grandfathering for the following resource categories: Demand Response, Energy Efficiency, and Capacity Storage Resource Exemption, and Self-Supply if the resource satisfied one of three project milestones on or before December 19, 2019. The project milestones set forth in the December 2019 Replacement Rate Order, only one of which must be satisfied, are: (i) the resource has successfully cleared an annual or incremental capacity auction; (ii) the resource has an executed interconnection construction service agreement; or (iii) the resource has an unexecuted interconnection construction service agreement filed by PJM for the resource with the Commission.

FERC granted rehearing in the April 2020 Expanded MOPR Rehearing Order and amended the second and third criteria to include interconnection service agreements, interim interconnection service agreements, and Wholesale Market Participant Agreements, as well as interconnection construction service agreements. FERC explained that categorical exemptions were designed so as to not unduly disrupt established investment decisions, and that the categorical exemptions would apply to a limited category of resources that may not have cleared a capacity auction yet but are far enough along in the interconnection process to have demonstratively committed to build and/or interconnect. Accordingly, FERC expanded eligibility for the categorical exemptions to resources that: (i) have successfully cleared an annual or incremental capacity auction prior to the date of the December 2019 Order; (ii) have an executed interconnection service agreement, interim interconnection service agreement, interconnection construction service agreement, or Wholesale Market Participation Agreement on or before the date of the December 2019 Order; or (iii) have an unexecuted interconnection service agreement, interim interconnection service agreement, interconnection construction service agreement, or Wholesale Market Participation Agreement filed by PJM for the resource with the Commission on or before the date of the December 2019 Order.

NEXT STEPS AND TIMING

In its March 2020 Compliance Filing, PJM indicated that if FERC issued an order on the filing by mid-May, PJM would conduct the delayed 2019 BRA no later than December 2020. At this point, however, it seems possible that the auction will not be conducted until early next year.

In the March 2020 Compliance Filing, PJM indicated that it would not conduct the next BRA until FERC has acted on its compliance filing and approved the operative Tariff provisions that will govern that auction. PJM proposed a schedule whereby it will complete all pre-auction activities and open the BRA for the 2022-23 Delivery Year within six and a half months after the date of FERC’s acceptance of the March 2020 Compliance Filing. Comments on the March 2020 Compliance Filing are not due until May 15.

In the Expanded MOPR Rehearing Order, FERC directed PJM to submit a supplemental compliance filing no later than June 1, 2020 (Supplemental Compliance Filing). FERC will set a comment deadline for that filing as well. Even if FERC acts on both the March 2020 Compliance Filing and Supplemental Compliance Filing right away, under the schedule PJM proposed in the March 2020 Compliance Filing, it is not likely that the auction will be conducted before early January.

After the 2022/2023 BRA, PJM plans to hold successive BRAs every six months thereafter through the 2025/2026 BRA, in order to get back on track to its three-year forward auction schedule.