Listen to Customers, Not Rent-seekers
FirstEnergy presented its claims in a benevolent fashion, calling for action to avert an emergency facing “65 million people living and working within the PJM footprint.” However, PJM, PJM customers and PJM-specific experts adamantly disagree. Instead, this is a clear-cut case of badly executed rent-seeking behavior. But it does provide a great case study for markets in action.
To begin with, FirstEnergy’s claims do not start with the correct framing of market evaluation. The company argues that its baseload plants are not compensated for their fuel security and fuel diversity benefits. But markets compensate for reliability services, not operational modes like “baseload” generation, nor do they provide explicit compensation for fuel diversity or fuel security.
Markets provide incentives for participant behavior consistent with the reliable and efficient operation of the system. This allows suppliers the flexibility to decide how to provide reliable service in a low-cost, value-maximizing manner. Generators have found creative ways to ensure fuel security, motivated by having the ability to produce power during times of system stress in order to capture high prices. Fuel diversity is a proxy slogan for benefits already remunerated in the marketplace, such as risk management and reliable performance.
Both the data and the experts contend that the grid is in transition, not crisis. Performance metrics have generally indicated improvements in grid reliability in PJM and beyond. Going forward, the amount of resources in reserve looks very robust (excessive, in fact, from a cost-benefit and customer perspective).
While PJM is not in a reliability crisis, it will be in a political one if rent-seekers have their way. Turnover in the PJM fleet is clearly a market-driven transition, which policymakers can either embrace in support of innovation and lower customer costs, or arrest at their expense. Policymakers should set their sights on evaluating performance metrics and the incentive structure of these markets – such as those driving resource entry and exit – rather than trying to second-guess if markets picked politically preferred investments.
Evaluating PJM’s markets should begin with PJM’s independent market monitor, whose sole job is to audit the performance and rules in PJM’s system. The monitor’s comments in regulatory filings and in an interview with the R Street Institute indicate PJM markets work well overall and bring customers the benefits of competition, but face new challenges in the form of out-of-market interventions. The monitor emphasizes, “subsidies are contagious. Competition in the markets could be replaced by competition to receive subsidies… the subsidy model is fundamentally inconsistent with the PJM market design.” To be clear, subsidies, especially for mature technologies, result in higher charges to customers.
The monitor also notes that the source of the misplaced criticism is actually a sign of market success. Specifically, competition from new low-cost natural gas has made some formerly baseload units uneconomic. Markets have signaled over 20,000 megawatts of coal plant retirements since 2011 in PJM, as cost to customers have declined while reliability remains strong. Leading experts at the Brattle Group noted that PJM “passed this stress test with surprising robustness and no evident threat to reliability.”
In contrast, the monitor clarifies that “central planners do not succeed and have a poor track record of beating the market.” Still the monitor finds shortcomings in PJM’s markets and provides a list of recommendations to improve market rules. The monitor stresses these be addressed through continued improvements in market design.
PJM, as with any market, is imperfect. Unlike FirstEnergy’s claims, a credible argument against PJM’s market design would focus on the three-year “lock-in” period of capacity payments for new resources only, as this may cause premature retirement of existing generators who receive no such benefit. This creates an investment risk asymmetry that puts these existing resources at a relative disadvantage. This is an issue of economic efficiency, not reliability or resilience, and warrants market reform through the right regulatory channels, not emergency actions.
If anything, PJM’s market design favors so-called “baseload” resources through a capacity market with an annual product tied to strong performance incentives. This benefits resources that can operate 24/7/365 and misvalues the reliability of resources that are available for shorter durations or certain seasons only. A more efficient system is what Texas uses – sole reliance on real-time prices for delivered energy (not potential or capacity) that compensate for reliable performance when and where the grid needs it. Ironically, Texas has the best-performing electricity system and is the least baseload-friendly.
Many electricity issues have a range for reasonable debate. For example, calls to bailout nuclear plants to avoid short-term air pollution increases have varying degrees of merit. The R Street Institute thinks this is a poor idea because it harms customers and actually undermines the engine of long-term emissions cuts, but acknowledges potential near-term emissions benefits.
FirstEnergy’s grid emergency arguments, on the other hand, are a complete ruse. There’s simply no credible evidence to support their claims. The only emergency is the company’s finances –– made evident by their declaration of bankruptcy this weekend –– because they positioned themselves poorly for the age of inexpensive natural gas.
Grid initiatives concerning reliability and resilience should be customer-backed, not led by rent-seeking interests. The latter have called for a paternalistic intervention from the government on behalf of customer interests, despite sophisticated customer groups opposing them. In contrast, new technologies actually create a case for an electricity agenda that empowers customers and lessens the role for government. Policymakers should trust experts and customers as the dialogue on grid reliability and resilience evolves, and reject the hollow alarmism of rent-seekers.
Image credit: Nenad Ilic
