PJM Interconnection’s failure to account for RMR power plants in capacity auctions may drive up costs by $15 billion in the next three auctions, says a complaint by the Sierra Club.
Introduction
The PJM Interconnection, which manages the electric grid for several U.S. states, is facing significant scrutiny for its capacity market practices, which could lead to billions in added costs for ratepayers. According to a complaint filed by the Sierra Club and other environmental and consumer advocacy groups, PJM’s failure to properly account for power plants with Reliability Must-Run (RMR) contracts in its capacity market could cost consumers as much as $15 billion over the next three capacity auctions.
This article explores the details of the complaint, the potential financial impact on consumers, and the broader implications for the energy market. It also looks at how PJM’s approach differs from other grid operators and what actions the Federal Energy Regulatory Commission (FERC) might take in response.
The Issue: RMR Contracts and PJM’s Capacity Market
At the heart of the complaint is the way PJM handles power plants with RMR contracts—agreements that allow certain plants to continue operating past their planned retirement dates to ensure grid reliability. The Sierra Club and other advocacy groups argue that PJM fails to account for the capacity value of these plants in its capacity market, which leads to consumers effectively paying twice for their capacity value: once through the RMR contracts and again through the capacity market.
This approach, according to the complaint, results in inflated capacity prices that don’t reflect the actual balance of supply and demand on the grid. The Sierra Club and its co-filers contend that this practice is “unjust and unreasonable,” as it forces consumers to pay more than necessary for electricity, while also distorting market signals.
“Failing to account for resource adequacy provided by RMR units produces capacity market price signals that are disconnected from the actual supply and demand balance on the grid,” the groups said. This misalignment leads to inefficient decisions from market participants and artificially elevated prices.
The Financial Impact: $15 Billion in Higher Costs
The financial consequences of PJM’s capacity market approach could be staggering. The Sierra Club and other groups estimate that PJM’s failure to include RMR units in capacity auctions or account for their capacity value could drive up costs by $15 billion over the next three auctions. This price hike is due to the inflated capacity market prices that result from PJM’s incomplete capacity calculations.
A report prepared for the Maryland Office of the People’s Counsel revealed that the exclusion of two Talen power plants from the most recent capacity auction raised consumer costs by approximately $5 billion. PJM’s independent market monitor supported these findings, estimating that the exclusion of the plants led to a $4.2 billion increase in capacity costs.
PJM’s Defense and Regulatory Response
PJM, the grid operator responsible for the region, is currently reviewing the complaint, according to spokesperson Jeff Shields. The PJM Board of Managers, in a statement issued on September 19, defended its decision not to require power plants with RMR contracts to participate in capacity auctions. The board argued that forcing these plants to bid into the capacity market could fail to incentivize the development of new power plants, especially in regions like Maryland that may require additional generation capacity.
However, the groups behind the complaint—Sierra Club, Natural Resources Defense Council, Public Citizen, Sustainable FERC Project, and Union of Concerned Scientists—disagree with this justification. They argue that market fundamentals like demand growth, capacity accreditation changes, and power plant retirements should drive capacity prices, not deliberate omissions of capacity from RMR units.
The complaint calls on the Federal Energy Regulatory Commission (FERC) to intervene and require PJM to either include RMR units in future capacity auctions or adjust its market rules to account for their capacity value. The groups are also asking FERC to mandate refunds from upcoming auctions if changes are implemented after the auctions have taken place.
Comparison with Other Grid Operators
PJM’s approach to RMR contracts differs from other grid operators in the U.S., such as ISO New England, the New York Independent System Operator (NYISO), and the California Independent System Operator (CAISO). These operators require power plants with RMR contracts to participate in capacity auctions or equivalent markets, ensuring that their capacity is fully accounted for in market pricing.
The complaint points out this discrepancy, arguing that PJM’s practices create an unfair market environment compared to other regions. By not requiring RMR units to participate, PJM artificially inflates capacity prices and disrupts market efficiency.
Future Implications for Capacity Auctions
The upcoming capacity auctions, scheduled for December 2024, June 2025, and December 2025, are expected to reflect the same market flaws unless PJM makes changes. According to the Sierra Club, the pace of PJM’s capacity auctions and the slow speed of its interconnection process make it unlikely that new generation will be online in time to prevent further price spikes.
The Organization of PJM States Inc. (OPSI), which represents state utility commissions in the region, has also expressed concerns about the grid operator’s capacity market. In a letter to the PJM Board, OPSI urged the grid operator to address these issues before the next auction. OPSI recommended that PJM delay the auction if necessary to ensure that RMR units are properly accounted for in the capacity market.
“If these units will be available for dispatch during the relevant Delivery Year, the reliability value of these units should be duly reflected when settling the capacity market,” OPSI said.
Conclusion
PJM Interconnection’s handling of RMR contracts has sparked a heated debate over how capacity markets should account for power plants that continue operating beyond their planned retirement dates. The Sierra Club and other groups argue that PJM’s failure to include these plants in capacity auctions is driving up costs unnecessarily, with potential price hikes totaling $15 billion over the next three auctions.
As FERC reviews the complaint, the future of PJM’s capacity market rules remains uncertain. However, with capacity auctions on the horizon and mounting pressure from state utility commissions and environmental groups, PJM may need to revisit its approach to ensure that consumers aren’t overpaying for electricity in an already volatile market.
The outcome of this case could have significant implications for the energy industry, not only in the PJM region but across the U.S. as other grid operators monitor the situation closely.
