In a June 29, 2018, order, Calpine Corp., et al. v. PJM Interconnection, L.L.C., 163 FERC ¶ 61, 236 (2018) ("June 29 Order"), the Federal Energy Regulatory Commission ("FERC") held that out-of-market payments provided or required by certain states for the purpose of supporting the entry or continued operation of preferred generation resources—such as those associated with renewable portfolio standard ("RPS") programs—depress capacity market prices in the PJM market. FERC established "paper hearing" procedures for parties to submit comments and supporting evidence concerning potential revisions to the PJM tariff governing capacity auctions to mitigate price suppression and to address how generation resources receiving state subsidies should participate (or not) in the PJM capacity market. 

The issues before FERC in the June 29 Order focused primarily on PJM's Minimum Offer Price Rule ("MOPR"), which sets a minimum offer price for capacity bids submitted by new, natural-gas fired generation as a means to protect against buyer-side market power. FERC concluded that generators receiving out-of-market payments depress capacity market prices by submitting artificially low offers in the PJM capacity auction. While FERC concluded that the MOPR should be expanded to apply to capacity offers submitted by a wider range of generation resources, including existing resources receiving subsidies (such as those available in many states for renewable resources), FERC rejected various parties' proposals and outlined two proposals of its own to be considered further. 

First, FERC proposed a broad MOPR that would apply to all new and existing resources receiving subsidies, with only very limited exemptions. Notably, FERC rejected PJM's proposal that would have exempted generation subject to state RPS requirements in PJM from the MOPR. Second, FERC outlined a proposal for individual generation resources receiving subsidies to opt out of the capacity market while continuing to participate in the energy and ancillary services markets. This option, termed "FRR Alternative," is based on the current FRR option, which allows utilities (but not individual resources) to choose to opt out of the capacity markets, together with related load.

Ultimately, the paper hearing procedures will provide for interested parties to weigh in on the merits of FERC's proposals, and FERC's decision will be informed by the record that will be developed in this proceeding. Based on the record established in the paper hearing, FERC may make material changes to the framework outlined in the June 29 Order. 

At this point, FERC's order raises far more questions than it answers. However, for generators receiving the types of subsidies identified in FERC's order, including renewable resources, it appears likely that they will either be subject to a MOPR or will opt out of the capacity market through the FRR Alternative, results that may increase the risk that the generator will not receive capacity market revenues. This revenue uncertainty may make it more difficult to develop projects that are eligible for state-sponsored payments. In addition, if FERC's concerns about price suppression are correct, and the expanded MOPR results in higher capacity prices, the cost to load of the subsidized resources may be higher because the cost of the subsidies will not be offset by lower capacity prices. Higher costs to consumers may undermine the state policies and programs that use subsidies to promote the development of renewable resources. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.