PJM’s Capacity Market: What Is MOPR?

If you’re an energy buyer for a facility located in PJM, you’ve likely heard the term “MOPR” a time or two. In this edition of Customer Insights we’ll explain the meaning of MOPR and how PJM’s pending capacity market could impact your business.

First, let’s begin with a brief history.

In June 2018, the Federal Energy Regulatory Commission (FERC) found PJM’s capacity market rules to be unreasonable and unfair, and that PJM was artificially suppressing capacity prices. This was because certain generating resources participating in PJM’s capacity market were receiving state subsidies and could consequently offer a price below their actual costs, since they can recover those costs through the state subsidies they’re receiving. Because of this ability to manipulate market prices, FERC ordered PJM to revisit their capacity market rules. In December 2019, FERC ordered PJM to expand its Minimum Offer Price Rule (MOPR) to alleviate this artificial price suppression scenario.

What is MOPR?

The Minimum Offer Price Rule, or MOPR, is a specific minimum dollar amount that a resource can offer into the capacity market. MOPR is intended to prevent resources from exercising market power by offering into the market at artificially low prices and ensure that new resources
are competitively offered into PJM’s capacity markets. Historically, MOPR has only applied to a limited number of resources, such as natural gas-fired Combustion Turbine and Combined Cycle. However, PJM has been ordered to expand MOPR to apply to broader resource types including renewable sources such as wind, solar and battery energy storage.

A resource’s MOPR value is either the Net Cost of New Entry (CONE) or Net Avoidable Cost Rate (ACR). This is based on whether the resource receives a state subsidy and whether it’s a new or existing resource. Let’s define these terms.

• Net CONE – As new resources come online, each have substantial capital investment costs plus operational and maintenance expenses incurred during the first year of operation. Cost of New Entry (CONE) is referred to as their net revenue after operational costs. Net CONE is defined as a resource’s CONE netted against the expected revenue from PJM’s Energy and Ancillary Services market.

• Net ACR – Avoidable Cost Rate (ACR) reflects a resource’s annual costs. These are the costs that existing resources could otherwise avoid should they choose to retire. Net ACR is defined as a resource’s ACR netted against the expected revenue from PJM’s Energy and Ancillary Services market.

• New resources – A new resource is one that has not cleared a capacity auction prior to FERC’s order.

• Existing resources – An existing resource is one that has cleared a capacity auction prior to FERC’s order or one who has an interconnection construction service agreement executed or filed prior to the order.

How does FERC define state subsidy?

As mentioned above, a resource’s MOPR value is dependent on whether they receive a state subsidy. FERC’s December 2019 Order defines subsidy as “a direct or indirect payment, concession, rebate, subsidy, nonbypassable consumer charge or other financial benefit”.

FERC further defines state subsidy as being a result of the following:

• “A result of any action, mandated process or sponsored process of a state government, a political subdivision or agency of a state, or an electric cooperative formed pursuant to state law, and that”;
• “Is derived from or connected to the procurement of (a) electricity or electric generation capacity sold at wholesale in interstate commerce, or (b) an attribute of the generation process for electricity or electric generation capacity sold at wholesale in interstate commerce, or”;
• “Will support the construction, development or operation of a new or existing capacity resource, or”;
• “Could have the effect of allowing a resource to clear in any PJM capacity auction.”
  Source: ferc.gov

The flowchart below shows the decision process to determine if a resource is subject to MOPR and whether the MOPR value is the Net CONE or Net ACR. For example, in the flowchart below, a solar resource that receives a state subsidy, is owned by a self-supply entity, does not qualify for Renewable Portfolio Standards (RPS) or storage exemption and has not cleared a prior auction is subject to MOPR at Net CONE.

How does MOPR affect PJM Emergency Demand Response?

The main impact that MOPR will have relative to PJM’s Emergency Demand Response (DR) program is the value of the program. PJM procures capacity by looking at each capacity offer, starting with the lowest offer price. Offers are incrementally cleared from the lowest offer price. The last incremental offer fulfills PJM’s capacity requirement then sets the market clearing price.

PJM’s Emergency DR is a program in which end-use customers commit to reduce load during grid emergencies, such as unexpected weather conditions or if a generator goes down and demand is not being met. When PJM calls an “event,” customers who previously agreed to participate have a mandatory commitment to reduce their usage to a predetermined value and will receive payment for doing so. The value of the Emergency DR program is based on PJM’s Capacity Market Auctions and varies by year and zone. Within AEP zone for the 2021/2022 Delivery Year (DY), the value is approximately $51,000/MW.

Prior to FERC’s orders, most resources had no MOPR, meaning they could offer into the capacity market at any price. Generating resources offering at a price at or near zero dollars ($0) are “price takers”, forcing PJM to clear capacity at a lower price. However, now certain resources will have MOPR applied, forcing offers at or above their MOPR value, above zero dollars ($0), resulting in an increase of the total capacity market clearing price. The value of PJM’s Emergency DR program will consequently increase with this change. The magnitude of this increase, however, will depend on the Net CONE values that FERC approves, which they have not yet done.

The table below contains the Net CONE values for different resource types that PJM submitted to FERC as of August 14, 2020. These Net CONE values are the MOPR values that would apply to new, state subsidized resources. Official Net CONE values approved by FERC have yet to be released.

Previously, a subsidized combined cycle resource could offer at any price, even zero dollars ($0), and it will clear. Based on PJM’s method of procuring capacity, it will keep market clearing prices down since PJM can fulfill its capacity requirement at a lower cost. However, FERC doesn’t think this is fair since zero dollars ($0) doesn’t accurately reflect the resource’s financial position. Plus, the resource can make up lost capacity revenue from the subsidies it’s receiving.

With MOPR, the same subsidized combined cycle resource must offer at or above $112. If PJM can’t fulfill its capacity requirement with lower cost resources, it will be forced to clear this combined cycle resource at or above the offer price of $112, thus increasing the overall market clearing price. For certain subsidized resources, like offshore wind and nuclear, Net CONE values are extremely high and may force these resources out of the market since they must offer into the capacity market at such high prices.

What’s next?

Until PJM and FERC come to an agreement and FERC approves PJM’s MOPR values, PJM’s capacity auctions will continue to be on hold. The Base Residual Auction (BRA) for the 2022/2023 DY was originally scheduled for May 2019 is still indefinitely postponed. PJM has stated that they intend to run the BRA for the 2022/2023 DY six and a half months following FERC’s approval. Subsequent auctions for the 2023/2024 through 2025/2026 DYs will be held in rolling six-month intervals. The BRA and third Incremental Auctions (IA) will always occur for each DY. The first and second IAs will be canceled if they fall within ten months of the BRA.

We’re here to help

Given the uncertainty with PJM’s capacity market and where prices may fall once FERC gives the green light for auctions to open, many industrial and commercial customers have opted to pass-through capacity as part of a strategic plan to avoid risk premiums and potential pass-through events once capacity prices are known.

AEP Energy can procure capacity for periods beyond May 31, 2022 through bi-lateral agreements in the market. The rates fixed by AEP Energy will not be adjusted simply based on BRA prices coming in above our expectations. Customers should ensure this is the case with any capacity rates they are looking to fix. Customers should be aware, though, that to the extent fundamental changes in the market rules render a supplier’s capacity hedges ineffective, then there is a possibility of a “change in law” capacity-related rate adjustment.

Our AEP Energy experts keep up-to-date with PJM to bring you information regarding recent capacity prices and factors affecting your energy costs. Give your AEP Energy sale representative a call today.

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