capacity markets

Energy Subsidies within PJM: A Review of Key Issues in Light of Capacity Repricing and MOPR-Ex Proposals

In its proposed tariffs to remove potential distortions caused by subsidies in capacity markets, PJM includes a number of limitations and exclusions that appear to result in unequal evaluation of subsidies across different fuel cycles. This will likely impede PJM’s core objective of ensuring competitive, nondiscriminatory auctions in the wholesale capacity market.

PJM Interconnection is a regional transmission operator (RTO) serving more than 60 million customers in 13 states and the District of Columbia.  The service region is centered in the mid-Atlantic region of the United States. Incumbent base load generators within PJM have complained that subsidies to renewable resources have been cutting their ability to win capacity market auctions, stripping them of revenue, and harming them competitively. They have been proposing adjustment factors that would improve their competitive position by adjusting bid prices to exclude the subsidy.

These proposals have been contentious, and PJM established the Capacity Construct/Senior Policy Task Force to work through them. From my perspective, two features of conventional generators are problematic for their case. The first is that while renewables play a growing role in energy markets, they are still quite small in capacity markets. Competitive pressures, such as from new gas plants, have been much more significant.

The second is that government subsidies to energy -- at all levels of government -- have been around for a very long time.  Indeed, many of these very same conventional energy resources have also received significant subsidies for their entire operating lives. For some, subsidies helped them to reduce plant construction costs. Others have reduced their cost of input fuels, a significant cost factor in fossil plants. Still others have shifted the long-term costs of fuel extraction or refining, accident risks, or managing toxic wastes from the power plant to taxpayers or plant neighbors.  Risk shifting is particularly important with regards to coal and nuclear.

To demonstrate the complexity of the situation, working with the Natural Resources Defense Council, I assembled an initial listing of state-level subsidies to conventional energy within PJM states. Data compiled by the OECD in Paris, and by Good Jobs First, an NGO, were extremely helpful inputs.

Although the timeline was short and it was impossible to capture everything, the listing is nonetheless long. The figures are sometimes quite big as well.  The unfunded cost to remediate abandoned coal mine sites within PJM states, for example, exceeds $8 billion and the region comprises nearly 80% of the national total.

The list is available here or on the PJM website (file in Excel).  If you know of big ones we are missing, please email me.

For more on the general issues before PJM, Jennifer Chen of NRDC has a blog post and statement before FERC that summarizes it well.  A recent paper by Amory Lovins at the Rocky Mountain Institute challenges some of the claims by coal and nuclear plants that they deserve special subsidies because of their provision of baseload dispatchable power. 

The PJM task force has proposed a structure to identify relevant subsidies to power markets in the region.  Since the most important subsidies to particular forms of energy can vary tremendously, unless one captures all categories the results can be highly skewed.  Part of the work for NRDC was to evaluate potential areas where PJM might miss important policies.  The results were summarized in the table below.

Mechanisms of Value Transfer to the Energy Sector
Intervention category Description How Characterized in PJM State Action Listing?
Direct transfer of funds  
Direct spending Direct budgetary outlays for an energy-related purpose. 8. Grant Programs, though PJM category not necessarily capturing spending on energy-relevant activities by the state, rather than through grants to a private party.
Research and development Partial or full government funding for energy-related research and development. 8. Grant programs
Tax revenue forgone* Special tax levies or exemptions for energy-related activities, including production or consumption; includes acceleration of tax deductions relative to standard treatment. 9. Tax incentives captures most of this, although the current workgroup description focuses on tax exemptions and tax credits. There is another whole class of support through more rapid deductions (generating a time-value benefit) and organizational structures (such as Master Limited Partnerships) that are not being picked up. In addition, the inventories at present are not capturing the pass-through of federal subsidies into the state tax code (e.g., percentage depletion allowances, or preferential tax rates on earnings from Nuclear Decommissioning Trusts). States can and sometimes do deviate from federal rules and require adjustments to the federal Adjusted Gross Income values flowing from federal returns, so when this is not done and federal subsidies flow through for incremental benefits at the state level, a subsidy does exist.
Other government revenue forgone  
Access* Policies governing the terms of access to domestic onshore and offshore resources (e.g., leasing auctions, royalties, production sharing arrangements). Not captured. Most relevant in PJM states with significant levels of fossil fuel extraction.
Information Provision of market-related information that would otherwise have to be purchased by private market participants. Not captured. Examples would include geological surveys for mineral location or siesmic risks to energy infrastructure; or data and statistics collection of relevance to producers.
Transfer of risk to government  
Lending and credit Below-market provision of loans or loan guarantees for energy-related activities. 7. Loan programs, though PJM definition also includes lending of physical property on favorable terms. PJM also seems to cast net very narrowly by requiring programs to target a specific resource. In practice, powerful industries within a state will capture large portion of more general loan programs as well.

Advanced Cost Recovery or CWIP schemes act as interest-free loans from customers to utilities, and would fit well within this category. Particularly if CWIP rules differ by source, or result in large subsidies to generation assets that are selling into the broader PJM market (advanced cost recovery is most valuable for the highest risk projects).
Government ownership* Government ownership of all or a significant part of an energy enterprise or a supporting service organization. Often includes high risk or expensive portions of fuel cycle (oil security or stockpiling, ice breakers for Arctic fields). 10. State takeover, though this is defined quite narrowly, and misses large areas of government involvement, such as municipal utilities or state responsibility for ensuring private market safety (e.g., mine inspections).
Risk Government-provided insurance or indemnification at below-market prices. Not captured (would be captured by added category NEW2: Risk or reclamation).
Induced transfers    
Cross-subsidy* Policies that reduce costs to particular types of customers or regions by increasing charges to other customers or regions.  
Purchase requirements* Required purchase of particular energy commodities, such as domestic coal, regardless of whether other choices are more economically attractive.  
Regulation* Government regulatory efforts that substantially alter the rights and responsibilities of various parties in energy markets or that exempt certain parties from those changes. Distortions can arise from weak regulations, weak enforcement of strong regulations, or over-regulation (i.e. the costs of compliance greatly exceed the social benefits). Partially captured in category 11 (Rate-based Cost Recovery for Certain Resources) -- though PJM definition limits relevant rate basing to DSM and efficiency resources. What about high cost/high risk generation (coal with CCS, nuclear, offshore wind)? What about excess allowable return rates in regulated markets, an issue of contention for years particulary as interest rates fell?
Added category NEW1: Preferential regulation, would capture other aspects of this issue.
Costs of externalities Costs of negative externalities associated with energy production or consumption that are not accounted for in prices. Examples include greenhouse gas emissions and pollutant and heat discharges to water systems. PJM captures this in item 2 (Emissions tax) and item 3 (cap-and-trade), though there may still be residual negative externalities not being well captured even after these carbon constraints are incorporated.
* Can act either as a subsidy or as a tax depending on program specifics and one’s position in the marketplace.
The categorization in this sheet is the work of Doug Koplow.  For additional detail see: Doug Koplow, written comments submitted to the Subcommittee on Energy of the Committee on Energy and Commerce, U.S. House of Representatives for a hearing on Federal Energy-Related Tax Policy and its Effects on Markets, Prices, and Consumers, March 29, 2017.