How FERC’s flawed definition of “subsidy” could reshape the energy future for 65 million Americans
By Imelda Foley
The Federal Energy Regulatory Commission issued an order last December that could force many clean energy resources to bid into the nation’s largest wholesale electricity market, PJM, at artificially high prices. State policy makers, consumer and environmental advocates and the clean energy industry alike spoke out in vigorous opposition. Now, that order is being challenged in the courts. In the meantime, PJM must implement its directives in a process that will shape the future energy system for 65 million Americans in a region that spans 13 mid-Atlantic states and the District of Columbia.
While FERC’s December order was already bad policy — replacing competitive bidding with administrative pricing — many aspects of their mid-April order clarifying that policy are illogical and unworkable. As well as threatening competitive markets, these orders undermine state clean energy choices and, if FERC ignores PJM’s latest proposal attempting to soften the impact of the orders, could increase customer costs by billions .
The problem with FERC’s definition of ‘subsidy’
FERC’s orders aim to reshape PJM’s capacity market, which pays generators that commit, in advance, to provide power during times of peak electricity demand. Also known as the Minimum Offer Price Rule, these orders set minimum allowed bid prices for capacity resources that FERC deems recipients of “state subsidies,” on the grounds that the bids of these resources lower final auction prices.
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This covers programs in many PJM states that have set aggressive clean energy targets. Renewable resources with minimal marginal costs (like wind and solar) have typically bid low, guaranteeing that they clear the auction. While FERC’s December order exempts some existing resources, the new price floors threaten to prevent new clean resources from clearing the market. Offshore wind and storage plants will almost certainly not clear.
FERC’s April order goes far beyond reversing the effects of state incentive programs, however. It expands the definition of “state subsidy” to cover certain types of normal commercial activity. If we take FERC’s vague and sweeping definition of “state subsidy” literally, it could require that MOPR price floors apply to all capacity market resources.
For example, in the April order, FERC declared that the auctions run by many states to procure power for utility customers confer a subsidy on the resources used to supply that service, even if (as is the case) those auctions are fully competitive and run without preference for any resource type.
This is not a minor matter; at least six PJM states hold these “default service” auctions, with several using them to acquire more than 60% of the power used by their retail customers.
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