$12 Billion Can Get You the Wrong Kind of Attention

Settle in to hear how a utility got in trouble.

PJM, one of the largest utility companies in the US, has been put in a hard spot by circumstances only partly of its own design. Numerous delays to new energy supplies, generally faulty planning, and then sudden changes to both supply and demand created $12 billion in new costs for the coming year-a cost that will be passed on to the 65 million people that rely on them for electricity. The sticker-shock of this rate increase is sure to gain attention, no matter how obscure a regulated monopoly might be.

This utility, PJM Interconnection, is a regional transmission organization ("RTO") governed by a limited liability corporation, or "LLC," made up by and for the utilities and power plant owners in 13 Mid-Atlantic and Ohio Valley states. UCS is currently fighting what could be a series of annual $10 billion added costs for electricity with new strategies and allies, because the obstacles blocking supplies are not going to be solved by throwing more cash on existing power plant owners.

Licensed and accountable

PJM has real responsibilities (shared by any RTO approved by the Federal Energy Regulatory Commission, or "FERC"), including transmission planning and processing requests from new energy suppliers in an interconnection queue. (This required queue process determines the costs for a new generator to attach and deliver electricity to the grid. Everywhere, this is a serious bottleneck. Here's a great blog from my colleague describing one region's interconnection queue.) Reliability is part of these duties, but that's more complicated. Trying to pay for reliability with a market is where this story gets interesting.

To bring public scrutiny to this monopoly and cost increases, UCS co-authored a legal complaint to FERC in the weeks following the announced jump in costs. Our complaint challenged unjust and unreasonable rules in PJM's capacity market that have already caused $4 billion to $5 billion dollars in excessive costs for consumers in PJM's most recent capacity auction-and that may cause $12 billion to $15 billion more in three upcoming capacity auctions unless the Commission requires reforms. Let me explain.

What are we paying for?

PJM has a market-like process for qualifying and paying power plants for meeting electricity demand in a future year. This process is constantly getting tweaked and is sometimes challenged in bigger ways in response to complaints like ours to FERC. In the past year, a set of rule changes for this "capacity market," combined with one power plant owner deciding to close two old plants in Baltimore harbor, created conditions for the 2024 auction to result in record-high prices. The supply available in the auction was intentionally limited by many factors in PJM's control, resulting in the auction paying 99.99% of the capacity offered. Because everything offered was bought, and the clearing price is set by the most expensive resource selected, this limited supply resulted in a price almost 10 times higher than past years. This is the immediate cause of the $12 billion in added costs announced in late July.

UCS and other public interest organizations filed our complaint in September focused on one PJM practice that reduced the supply from power plants available for the auction. We took on the policy that allows plants that are paid by PJM to remain open for reliability but are not counted in this reliability auction process. (That is just like paying to repair your old car, keeping it ready to drive, and then buying a new car anyway.) Excluding these preserved plants essentially forces consumers to continue paying the old plants, while also paying extra-high prices for the immediate shortage caused by not counting them. In a region with many old plants headed for retirement, this one fix could save residents and businesses billions of dollars each year.

Our action was followed by consumer advocates from four states in the PJM region filing an additional complaint at FERC in mid-November, arguing that several policies created this artificial supply shortage. They described PJM as granting too many existing plant owners exemptions from offering supply in the auction, and as too slow in the processing of new supplies in the interconnection queue.

Since filing the UCS co-sponsored complaint, PJM has conceded that there are indeed problems with the auctions it runs and agreed to delay the next one. PJM is now preparing some changes on the issues raised, including the treatment of reliability payments for delaying plant closures. Besides these complaints, the PJM Board has had to answer letters pressing for change from governors, congressional representatives, and state regulators. The one agency providing directions to PJM that PJM has been reluctant to address is FERC, their regulator.

FERC has long sought to increase competition amongst power plants, in part to protect consumers from inflated rates, and PJM has long promised to facilitate this. However, the arrangement is stressed now as PJM tries to pay enough money to enough suppliers to ensure reliability in a time of new demands and new competition. Solar and solar-plus-storage are the major new competitors as the cheapest electricity source in history, but the PJM processing of the connection requests from potential new suppliers has been delayed 4 years or longer. FERC made rule changes in 2018 to enable competition from storage and solar-plus-storage with Orders 841 and 845. Those rules should have modernized the grid, but were unevenly adopted and implemented. In particular, PJM has resisted keeping up with energy storage after once having been a leader in recognizing storage value on the grid.

Recent conflict with regulators

FERC began new efforts in 2021 to remove obstacles for interconnection and grid planning. UCS and many advocates and industry players welcomed new scrutiny of bad practices. Throughout this oversight process, PJM objected several times and now they're on the brink of failure to comply with these reforms that would increase competition and allow more supplies.

PJM continues to resist a key change for energy storage that UCS has pushed and other regions have adopted. PJM insists that it must plan for new batteries or other energy storage to buy power when prices are high and supplies are scarce, increasing strain on the system instead of relieving it. This "buy high, sell low" assumption frames batteries as a problem rather than a solution for meeting peak demands. In practical terms, this flawed philosophy forces battery projects to pay for expensive transmission, which defeats the purpose and the value of building batteries where supplies are hard to get, like Baltimore harbor.

Where is this headed?

PJM is not standing still. The organization and its members know there are problems with its supply forecast. In announcing the delay of the next auction, PJM has begun to meet some of UCS' and consumer advocates' concerns. PJM has not conceded much, but in stakeholder meetings, it is describing actions that will move a couple of reforms forward. (PJM says it plans to make changes so one retiring Baltimore harbor plant could be counted for a little while, and other supplies could be called on, and maybe storage has a place with solar and wind, all with caveats and limits. We'll see soon what they propose.)

The way PJM explains it, there's not much hope for energy storage or renewables, so they're offering fossil generation a four-year short-cut in the interconnection queue. Well, maybe PJM wasn't that clear, but that is what they propose. However, the science shows how off base this assumption is-which is exactly why I've been advocating for years to bring PJM into the modern world and align their policies with science in service of their tens of millions of ratepayers.

As I've said before about PJM, "a mess this big takes time." PJM says it has several reforms to bring now to FERC and more to follow. Let's make good use of this opportunity and actually deliver a more modern grid, a more reliable one, and a more affordable one. The ready-to-build clean energy and storage that have waited in the queue should be our first choice.

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