Federal Energy Regulatory Commission puts renewable energy resources in its crosshairs

July 2020 | EXPERT BRIEFING | SECTOR ANALYSIS

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Renewable energy resources have proliferated significantly over the last decade. Recent Federal Energy Regulatory Commission (FERC) orders addressing New York and mid-Atlantic organised wholesale electricity markets (the ‘New York Orders’ and ‘PJM Orders’, respectively) have increased the challenges to developing such resources. The FERC contends these orders address market inefficiencies caused by disparities between renewable resources and traditional generation resources (natural gas, nuclear and coal-fired resources). Opponents contend the orders underwrite traditional resources. Under either characterisation, the orders will diminish renewable energy resources’ participation in FERC-jurisdictional markets.

Background

US renewable energy resources have grown significantly in recent years. Renewable energy resources in the US provided 382 million megawatt-hours (MWh) of electricity in 2008 and 742 million MWh in 2018, of which nearly 90 percent came from wind and solar generation. Furthermore, the Energy Information Administration (EIA) estimates that 76 percent of new capacity additions in-service in 2020 will be solar and wind resources. Approximately half of all growth in US renewable electricity generation and capacity since 2000 has been driven by state renewable portfolio standard (RPS) programmes, which generally establish increasing renewable energy procurement levels.

However, the extensive deployment of renewable resources has diminished participation by traditional generation resources. The EIA reports that scheduled capacity retirements in 2020 will be primarily driven by coal (51 percent), natural gas (33 percent) and nuclear (14 percent), with further retirements of such resources expected to continue. The FERC has responded by adopting policies that arguably would benefit traditional generation resources by offsetting states’ rules supporting renewable resources.

For example, the New York Orders rejected proposals to exempt qualifying renewable resources from the New York Independent System Operator’s (NYISO) mandatory minimum capacity price floors. The NYISO market rules generally establish a minimum price floor applicable to all electricity resources selling into the NYISO’s capacity markets. The NYISO had proposed to exempt renewable resources meeting enumerated criteria from the minimum price floor, however the FERC ultimately deemed that proposal unjust and unreasonable. Accordingly, the NYISO must submit tariff revisions by 21 September 2020. Requests for rehearing of the applicable New York Orders are currently pending before the FERC.

Similarly, in December 2019, the FERC found that any new or existing resource participating in PJM Interconnection, L.L.C. (PJM) capacity markets entitled to receive a so-called ‘state subsidy’, and which does not otherwise qualify for an exemption, would be subject to PJM’s minimum offer price rule (MOPR). Like the NYISO’s minimum price floors, PJM’s MOPR reflects the minimum price at which a non-exempt resource must offer to sell capacity, regardless of that resource’s actual incremental costs. The FERC found that renewable resources participating in PJM’s wholesale capacity market and receiving state subsidies receive an unfair advantage over traditional resources not receiving such state subsidies, such as being able to offer electric capacity at a lower price than they otherwise could without a subsidy. A number of participants have petitioned the US Court of Appeals of the District of Columbia Circuit to review the FERC’s orders involving PJM’s MOPR. Additionally, several participants have sought rehearing of the applicable PJM order. All petitions for review and requests for rehearing are currently pending.

Analysis

The New York and PJM Orders will likely impact renewable resources and their owners participating in FERC-jurisdictional markets for years to come.

The New York and PJM Orders signal the FERC’s growing disfavour of renewable resources in organised capacity markets receiving ‘state subsidies’ to reach renewable energy goals. For example, the FERC’s rejection of the NYISO’s proposal to exempt certain renewable resources from capacity auction minimum price floors makes renewable resources’ entry and competition in the NYISO’s capacity auctions more difficult. Moreover, the FERC’s PJM orders suggest that the FERC views renewable resources receiving state subsidies as a direct threat to traditional generation resources that do not receive state subsidies.

The FERC may further inhibit renewable resources receiving state subsidies from setting prices in other FERC-regulated markets. The FERC’s actions to date have been solely with respect to two capacity markets, but those actions may foreshadow similar actions in other types of electricity markets, such as spot markets, or regions, which has been suggested by the FERC in the PJM proceedings and the FERC’s most recently appointed commissioner. Further spread of this philosophy could increase capacity and energy prices at wholesale and retail levels, decreasing renewables’ market share.

The FERC’s actions may discourage the entry of new renewable resources in FERC-jurisdictional markets. The dimensions of the ultimate impact depend upon a variety of factors, including the importance to a project of revenue from capacity (or other impacted) markets, the location of the relevant market, the delta between the floor price and the offers of renewables prior to being subjected to the floor price, whether a state remains in the organised wholesale market following the application therein of the FERC’s new philosophy, how the impacted market proposes to implement the new FERC philosophy and anticipatory reactions in other markets not yet subjected to the FERC’s new philosophy. Further complicating an economic assessment is whether the FERC’s philosophy or its implementation will be disrupted, delaying certainty in the regulatory rules of the road, and potentially requiring the re-running market auctions, or imposing changed rules on generators long after an initial investment decision was made. Capacity prices generally may increase due to the change in market rules. If renewable resources are unable to compete with traditional generation resources, renewable resource investors may be reluctant to provide capital for projects that meet state renewable goals, which could further stymie the growth of the renewable energy resources sector.

The FERC’s recent actions create a tension between, on the one hand, the FERC’s jurisdiction over wholesale sales of electricity in interstate commerce and, on the other, states’ rights to adopt and implement legislation, policies and rules regarding generation procurement, including renewable energy resource development. Many states provide renewable resources with renewable energy credits and other programmes designed to encourage renewable development in order to reach the state’s renewable generation goals. The FERC’s philosophy diminishes renewable resources’ ability to set market-clearing prices at their specific net incremental out of pocket costs, and maximise market share, so long as they receive state subsidies.

The FERC’s policies will undoubtedly result in administrative challenges and significant litigation over the next several years. For example, the NYISO’s and PJM’s internal processes and compliance with the FERC’s new policies fuel disputes over the details of fleshing out the FERC’s broader philosophy, affecting billions of investment dollars as generation assets’ owners jockey for administrative advantage in determining the costs of providing generation from multiple competing generation resources. Moreover, challenges to the validity of the results of future capacity auctions are predictable. The composition of FERC’s commissioners may change in the near-to-mid-term; unwinding the New York and PJM orders will disrupt markets, causing further administrative turmoil. Additionally, courts will ultimately review the FERC’s new philosophy involving renewable resources.

Conclusion

The NYISO and PJM Orders impact renewable resource owners, developers and investors, and are not expected to be fully resolved for at least the next several years. Thus, it is critical that such market participants understand these and other FERC policies’ impacts on cash flows from facilities, potentially under several different scenarios. Impacted participants will seek to shape and protect their interests at the FERC, as well as in organised wholesale market stakeholder and judicial proceedings. Market participants’ postures may be influenced by their individual generation fleets, anticipated timing of retirements of components thereof and other idiosyncratic factors. While renewable energy investors should be prepared to confront continuing unfavourable federal energy policies, there are tools available to such participants to help manage that risk.

Mark Sundback and Bill Rappolt are partners, and Andrew Mina is an associate, at Sheppard, Mullin, Richter & Hampton LLP. Mr Sundback can be contacted on +1 (202) 747 1946 or by email: msundback@sheppardmullin.com. Mr Rappolt can be contacted on +1 (202) 747 3317 or by email: wrappolt@sheppardmullin.com. Mr Mina can be contacted on +1 (202) 747 2327 or by email: amina@sheppardmullin.com.

Mark Sundback, Bill Rappolt and Andrew Mina

Sheppard, Mullin, Richter & Hampton LLP