New Jersey-based Public Service Enterprise Group Inc. may seek to remove its generating resources from the PJM Interconnection's regional power capacity market in response to a pivotal order issued by the Federal Energy Regulatory Commission, PSEG President and CEO Ralph Izzo said during the company's Feb. 26 earnings call.
Izzo said PSEG's response will depend on several factors, including the mechanism New Jersey would use to support resources that exit the 13-state PJM market, which spans the mid-Atlantic and parts of the Midwest.
In December 2019, FERC's Republican majority approved an order that subjects most new resources and some existing electric facilities in PJM that receive state subsidies to an administratively determined price floor in an effort to avoid price suppression.
Critics said the newly expanded minimum offer price rule would make new generation built under state renewable portfolio standards and existing nuclear plants receiving state zero-emission credits less competitive and unfairly advantage older fossil fuel-fired generation. Opponents of the order also said electric customers in states with subsidized resources could be forced to pay twice for capacity: once for the state-supported resource and again for additional capacity if the state-sponsored resource cannot clear PJM's market.
The order "puts PJM states that want to support clean energy resources on notice that they will need to seek an alternative to the capacity market auction in order to procure their preferred resources and avoid the risk of costly double payments to satisfy their capacity obligations," Izzo said during PSEG's fourth-quarter 2019 earnings call.
PSEG owns several nuclear plants that receive state zero-emission credits and participate in PJM's annual capacity market, which is designed to ensure needed capacity three years in advance. The company is also looking at building new offshore wind energy to meet New Jersey's ambitious climate and clean energy goals, projects that would be affected by the broader minimum offer price rule.
Subjecting such resources to FERC's new rule "results in a very remote possibility of [those facilities] clearing the capacity auction," Izzo said. Several states are therefore considering policies that would help affected utilities withdraw their capacity from PJM under a fixed resource requirement, or FRR, option.
"We will work cooperatively with the Board of Public Utilities in New Jersey and PJM to find the best path forward, whether that's to bid and clear the capacity auction under a business-as-usual scenario, or seek the FRR alternative in partnership with New Jersey to preserve its preferred zero-carbon resources," Izzo said.
Caveats
Although PSEG is displeased with FERC's order, deciding the company's next steps is complicated.
FERC rejected an earlier proposal to create a resource-specific FRR that would allow utilities to remove only certain assets from PJM, leaving energy companies with the choice of keeping all or none of their capacity in the market. If PSEG left PJM under the new construct, Izzo said the utility would have to do so under a zonal or statewide FRR, which is "sub-optimal, because now you're going to be solving a small problem with a rather large tool."
The design of the FRR is another factor. If states remove enough capacity and associated load from PJM, the region could be left with "a residual market that is grotesquely oversupplied and crushing capacity prices in that market," an outcome that "is the exact opposite of what FERC said they want them to do," Izzo said.
PJM must submit a compliance filing by March 18 responding to FERC's December 2019 order. The filing is expected to include updated price floors for all PJM nuclear units that will indicate whether PSEG's nuclear plants in the region can clear PJM's capacity auction for the 2022-2023 delivery year. Depending on how FERC responds to PJM's compliance filing, the delayed capacity auction for 2022-2023 could take place in the fourth quarter of 2020, Izzo said.
Despite the tight timelines, Izzo said he believes that New Jersey regulators have space to respond to the FERC order before ratepayers in the state could face double capacity payments.
"We believe and we're hearing from [Board of Public Utilities] staff that they may not need legislation to go forward with an FRR," Izzo said. "I do think that there will be adequate time for New Jersey to avoid paying double for capacity in 2024, [but] it won't be a walk in the park."