Think about all the obstacles to lowering carbon emissions and a little-known part of the electricity pricing system called the capacity market probably won’t come to mind. But if you care about carbon-free energy, new capacity auction rules in a 13-state market called PJM are important to understand.
But what even is a capacity market, and why is it suddenly such a threat to carbon-free energy?
Capacity Markets Have One Job: Keep Our Electric System the Right Size
Let’s start with a simple definition.
The “capacity market” is a mechanism that pays energy companies to make sure electricity is available whenever it’s needed. It basically has just one job: make sure our electric system has the right number of generators, to efficiently provide enough, no matter how many people need power at any one time.
Revenues from the capacity market fund the construction and maintenance of equipment that makes electricity, whether or not that equipment is running every minute of the day. In fact, some of that equipment only runs during periods when it’s especially necessary, like hot summer afternoons. And during those brief peak periods, that equipment doesn’t earn enough money from energy sales to justify its existence.
Hence the capacity market provides extra revenue and is meant to assure that the electricity system has enough resources available for peak times.
The capacity market and the energy market (where generators sell their electricity to the companies that deliver it to consumers) are the two biggest parts of the “deregulated” electricity system that has replaced traditional monopoly utilities in most of the United States. The goal of this system is to provide reliable service at low cost.
But Now States Want to Ensure That Electricity Is Carbon-Free Too
Here’s where the problem arises: many states want more than simply low-cost, reliable electricity. They also want it to be carbon-free.
But the markets, operating under federal rules, don’t recognize “carbon-free” as something that consumers should pay for.
Some states set up various incentives like renewable energy credits—to build new carbon-free energy sources—or zero-emission credits—to maintain their current ones, like nuclear plants.
However, electricity producers that did not receive these incentives in the PJM regional market (mainly fossil fuel generators) complained to the Federal Energy Regulatory (FERC), which responded by handicapping carbon-free energy sources with a new provision it calls a “minimum offer price rule.”
The New Rule Hinders Many States That Are Pushing for Carbon-Free Energy
The new rule could eliminate capacity market revenues for sources that receive clean energy credits under state programs. This could squeeze out carbon-free energy sources because the minimum price they can offer in the market would have to rise; thus they would not be chosen in the auction, would lose revenue, and not be able to continue operating, putting carbon reduction goals in jeopardy.
Because of this, New Jersey is considering leaving the capacity market entirely so it can develop 7,500 megawatts of offshore wind by 2035 and maintain its three nuclear reactors. The legislature in Illinois may consider the same, to preserve reactors and expand wind and solar.
In addition, groups that historically have not traditionally favored nuclear have come out against FERC’s actions as well. The Natural Resources Defense Council and the Sierra Club said in a recent filing that these electricity market rules were “thwarting efforts by states to achieve their preferred resource mix in an affordable manner” and called them “egregious.”
Capacity Markets Should Not Thwart Carbon-Free Energy
State policies across the nation and commitments from energy companies have made it clear: the future of energy will be carbon-free. Clean energy sources like nuclear, wind and solar are critical to reducing carbon emissions and protecting the climate. State policymakers should not let market rules get in the way of this effort.
States may need to redraw electricity market rules to ensure that reliability and protecting the climate are not pitted against one another, but rather brought together to build the electricity system that will realize both of these vital goals.
