Did An Entire Region Of The U.S. Just Disincentivize Renewables? This Lawsuit Says Yes.

Jul 17, 2016 by

CREDIT: Shutterstock

During the 2014 polar vortex, wind generation saved consumers $1 billion, according to industry estimates.

During the polar vortex of 2014, power companies struggled. There wasn’t enough natural gas power in the pipeline (pun intended), and prices skyrocketed.

The shortage was expensive for homeowners — some saw their monthly bill go up five-fold from January to February — but for utilities, it was expensive, dangerous, and scary. No one wants to be on the hook for a bunch of families losing power in the middle of a -7°F night.

Following the prolonged cold snap, PJM, the entity that oversees utilities in the Mid-Atlantic and parts of Appalachia and the Midwest, put a plan into action: It would help the local utilities ensure that power was more reliable. To do this, PJM fast-tracked new rules for capacity resources — an industry phrase for guaranteed electricity supply. The Federal Energy Regulatory Commission (FERC) approved the new rules last May.

But now four environmental groups, including the Natural Resources Defense Council and the Sierra Club, have announced a lawsuit against FERC, saying the rules are going to cost consumers and are unduly burdensome to renewable energy.

Under the new rules, renewable energy providers, such as solar and wind companies, will have a hard time participating in PJM’s capacity market, where utilities pay to make sure that they have a certain amount of electricity guaranteed in future years. The new rules require the providers in the market to be able to provide consistent production year-round, whereas wind and solar perform better during different parts of the year.

“The new rules will funnel billions of dollars from electricity consumers to fossil and nuclear power plants while severely limiting clean energy participation in PJM’s capacity market,” writes Jennifer Chen, an attorney with NRDC’s Sustainable FERC project.

To explain that last part, it starts with the premise that building large-scale electricity generation is expensive. It doesn’t matter whether the plant is solar, wind, or coal. If it needs to produce a lot of electricity, it is going to cost money. Correspondingly, financing electricity projects is complicated and usually long-term. Investors and developers are looking for the most secure revenue stream possible over the longest period of time. Participating in capacity markets provides secure revenue — which renewable generators need in order to attract investors.

This is just one source of revenue for electricity generators — they also can make long-term power purchase agreements with utilities or participate in shorter-term electricity markets. But the capacity market remains an important and stable means of doing business in PJM territory.

Chen and her colleagues argue that making it difficult for renewables (and demand response) to participate in the capacity market will push the auction prices higher — prices that, again, will be passed on to consumers, while disincentivizing developers and investors from pursuing renewable energy projects in PJM.

“The way that PJM’s rules operate basically doesn’t acknowledge the contribution of anything but fossil fuel resources that operate year-round,” Casey Roberts, an attorney for the Sierra Club, told ThinkProgress. “What regulators need to bring about a smarter energy future is rules that are more flexible and recognize the different capabilities that different resources offer.”

The irony of the new PJM rules is that during the polar vortex, wind performed incredibly well, saving consumers $1 billion in electricity costs, according to research by the American Wind Energy Association.

awea-votex-graphic

CREDIT: AWEA

Under the new rules, a wind power provider would have to find another generator to team up with in order to bid on a full year of guaranteed supply. Keep in mind, the generators are paid simply to be on standby, promising their electricity when needed. All electricity providers are also compensated for the actual electricity that utilities purchase.

Under the new rules, generators that fail to live up to their promises will be penalized — but even the FERC chair didn’t think the penalty/reward structure was enough to ensure greater reliability.

In his dissent, Bay wrote that the structure is akin to “two carrots and a partial stick.”

“Even on its own terms, the proposal has a serious design flaw that undercuts the very aim that it seeks to achieve, which is to provide greater assurance of delivery of energy and reserves during emergencies,” Bay said. “Second, this flaw is an expensive one: the [new rules] may result in billions in additional costs for consumers without achieving its intended aim.”

So far, that has not happened. At the most recent auction, PJM pointed out, prices for guaranteed capacity were no higher than they had been previously. But, given the volatility of fossil fuel prices, it is hard to track exactly why the auction didn’t do what analysts expected.

And there is time to correct the rules. A spokesperson for PJM told ThinkProgress that the rules were not written in stone.

“PJM has never said, ‘OK, this rule is written and it is perfect, and it is going to stay in place now and forever,’” Ray Dotten said. “There is always room for change and improvements.”

And, he points out, they already know there are flaws with the way renewable energy and demand response providers are required to offer year-round services. (Demand response programs involve having users curb their consumption during peak hours, such as commercial buildings dimming lights during hot summer days. It is most often employed during the summer but was also used during the polar vortex.)

Noting that in the past two auctions, only one or two renewable energy providers have participated, “We’re exploring with our stakeholders ways to how to encourage that or make it easier,” Dotten said.

While the last two auctions did include the new penalty rates for failure to deliver, the year-round requirement is being phased in. The most recent auction required that 80 percent of the accepted bids be from year-round suppliers.

In the meantime, environmental groups will put the pressure on FERC to reconsider the rule. The lawsuit will be filed in the D.C. Circuit Court of Appeals.

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