Dominion’s exit from regional capacity market raises some eyebrows — and questions

Citing a controversial federal order that made it difficult for renewables to compete against traditional fossil fuel power plants in regional electricity markets, Dominion Energy this spring withdrew all its Virginia resources from the regional capacity market run by PJM, which coordinates the electric grid in all or part of 13 states and Washington, D.C. 

Withdrawal “provides a lower cost option for our customers as we add more renewable resources to the system to serve them,” said Dominion spokesperson Rayhan Daudani. 

The decision, which wasn’t made public until April and was first reported by RTO Insider on May 6, caught many energy industry insiders off guard. 

“Nobody knew until three weeks ago about it, which was a bit of a head-scratcher,” said Casey Roberts, a senior attorney with the Sierra Club’s Environmental Law Program. 

The capacity market that has been run by PJM since 2006 is designed to ensure that electric generation in a region can meet demand in the long term. 

During an annual auction, owners of capacity (which usually refers to power generators, whether reliant on fossil fuels or renewables) offer to make that capacity available three years in the future at a specific price. PJM then tallies up those offers from lowest to highest, accepting the cheapest bid and then successively higher ones until it has ensured enough generation is committed three years ahead. The highest of the accepted offers becomes the “clearing price” that all accepted, lower offers are paid. Any bids above that price are rejected and are described as not clearing the auction, meaning their owners get no payment. 

The payment incentivizes power producers to invest the significant funds it takes to build resources. And the market design is intended to drive down overall prices, because the highest bids that fall above the clearing price are thrown out, meaning the owners of that capacity get nothing. 

In December 2019, however, the system was thrown into turmoil by a Federal Energy Regulatory Commission directive known as the “minimum offer price rule,” or MOPR — pronounced the way you’d describe someone who mopes around. 

In a nutshell, MOPR sets a lower limit on prices in the capacity market. Originally designed to keep players who both buy and sell capacity in the market from artificially driving down prices, MOPR had historically been applied to natural gas resources within PJM’s capacity market. But in 2019, FERC extended that price floor to any resource that received a “state subsidy,” a term regulators interpreted broadly to include virtually all new power sources that were incentivized by state policy. 

“If the resource is touched by a state policy, then we’re going to say it’s subject to MOPR,” said Roberts. 

By late 2019, of course, almost all resources being incentivized by states within PJM — which covers all or part of 13 Mid-Atlantic and Midwestern states and Washington, D.C. — were renewables. Under the new rule, few would be able to clear the capacity market, making them uneconomic.

The order provoked intense backlash from utilities and states, with the latter particularly concerned about its effect on planned offshore wind and state clean energy goals. 

MOPR “can both threaten the economic viability of clean energy development and also unnecessarily raise the capacity charge paid by every electricity ratepayer across PJM,” a group of 45 state legislators from Maryland, Indiana, New Jersey, North Carolina, Pennsylvania and West Virginia wrote FERC this April. 

Cost was also a worry. With an increasing number of states mandating the development of renewables, the inability of those resources to clear the capacity auction made it likely that consumers would be stuck paying for not only the renewables, but also for the fossil fuel capacity that would be committed in the auction that the renewables might otherwise have offset.

Dominion fretted about the problem as well. Capacity owners like vertically integrated utilities would be “essentially forced to pay twice as much for capacity, resulting in significant capacity costs that will ultimately be passed on to their consumers,” it wrote in comments to FERC this April. 

There was one loophole. Investor-owned utilities like Dominion, electric cooperatives and public power companies could use a tool called the “fixed resource requirement,” or FRR, to opt out of the capacity market for five years. They would have to demonstrate to PJM that they could provide enough capacity on their own to meet federal reliability standards, and they would lose out on capacity payments and the transparency of the markets, but they would have more flexibility in planning what resources they would need. 

States quickly looked to the fixed resource requirement as a way out. Maryland, Illinois and New Jersey publicly floated the idea of leaving the capacity market. In 2020, the New Jersey Senate passed a bill requiring the Board of Public Utilities to study the possibility, while Illinois’ legislature is also deliberating laws that would allow an exit. Analysts warned the rule could lead to a collapse in capacity market prices. 

Dominion also began weighing its own exit. In March 2020, according to SPGlobal, Dominion vice president of business development Emil Avram told participants in a forum convened by the American Council on Renewable Energy that “really the only alternative” vertically integrated utilities have “is to elect a fixed resource requirement.”  

In October, the utility’s stance seemed to have solidified. During hearings before the State Corporation Commission, Dominion’s director of strategic planning, Glenn Kelly, told regulators that when it came to the fixed resource requirement, “it’s not a question of if, it’s a question of when.” 

Uncertain impacts

Despite those statements, the announcement that Dominion had chosen the fixed resource requirement last month caused a buzz. 

In the intervening time, FERC’s leadership had undergone a shakeup with the election of President Joseph Biden. Under the guidance of new chair Richard Glick, who once called MOPR “just plain garbage,” the commission indicated it would be willing to move away from the order. Maryland had pressed pause on a potential exit.

PJM rules say that any capacity market participant electing the FRR option has to notify the regional organization’s Office of the Interconnection “no less than four months” before the capacity auction, which began this week on Tuesday. 

Asked when Dominion had notified PJM, PJM spokesperson Jeff Shields said the organization “does not comment about specific market participants” but that all of those that had elected the FRR “met the four-month advance notice requirement.” 

“There had been rumors that it might happen,” said Jeff Dennis, general counsel and managing director for clean energy business advocacy group Advanced Energy Economy. “I would say I was caught off guard that there wasn’t more sort of public notice.” 

Virginia state law does not require regulatory or legislative approval of utilities’ capacity market decisions, and American Electric Power, the parent company of Appalachian Power, has operated under the fixed resource requirement since the capacity market began operating. 

“It is a management decision by the company that did not require SCC approval,” said commission spokesperson Ken Schrad in an email. “I can confirm that staff was aware of the company’s decision.” 

With no public notice requirement, Dominion’s deliberations remained quiet. In October, the Sierra Club during hearings on Dominion’s long-range plan urged the SCC to require the utility “to conduct a full cost-benefit analysis of the FRR alternative” and to open a special docket to analyze the issue.

“A comprehensive qualitative analysis is needed to fully evaluate both the costs and risks associated with the MOPR and whether the FRR alternative would reduce costs for ratepayers,” witness Jason Frost testified.

While Dominion did undertake cost-benefit analyses, they were done internally, and the company perceived the information to be market-sensitive. 

Roberts, of the Sierra Club, on Thursday said that the fixed resource requirement “works much better, to be frank, for a vertically integrated utility like Dominion” and could give the utility “more ability to plan and a better ability to forecast what its costs will be.”

Still, she backed up the environmental group’s earlier recommendation for regulatory review.

“We do feel that it’s important for state regulators to play a proactive role in overseeing utility decisions on whether to do FRR or not, because it can have impacts on ratepayers,” she said. “We do think the SCC should have had a more active role here.” 

Dennis said many industry players were puzzling out the implications of the decision, not only with regard to the capacity market at large — where it is expected to drive down prices — but with respect to the continued deployment of renewables in Virginia. After Democrats took control of all three branches of state government in 2020, the General Assembly passed the Virginia Clean Economy Act committing the state’s electric utilities to decarbonize their grids by 2050. 

“There’s a lot of unknowns about how it will affect future development,” he said. “And frankly, there’s a lot of unknowns about how Dominion plans to use it.” 

Among the concerns he noted was the potential development of more fossil fuel resources to meet FRR obligations and impacts to independent power producers as a result of lowered capacity market prices and the loss of market transparency. One such producer, LS Power, which operates the natural gas Doswell Energy Center in Hanover County, has filed a complaint with FERC about the decision. The company argues the election should be invalidated because Dominion has not filed capacity plans for all five years that it is obligated to operate under the fixed resource requirement.

Given the uncertainties, “this is why we’ve been saying in Virginia that we need a transparent process around this to understand the implications,” Dennis said. 

Charlotte Gomer, a spokesperson for Attorney General Mark Herring, said the office’s Division of Consumer Counsel “will plan to monitor the impacts of the company’s decision in appropriate proceedings before the SCC.”

“Virginia utilities have an obligation in their activities within PJM to act in the best interest of their customers, and the Office’s Division of Consumer Counsel understands Dominion’s decision to opt out of the PJM capacity market and elect the fixed resource requirement was premised on that objective,” she wrote in an email.