How will proposed PJM market changes handle state nuclear subsidies?
A new paper on potential impacts from PJM’s market reforms shows prices ranging from $70 to $482/MW-day in the capacity market.
Nuclear power plants are facing tough competition across the United States. Pressured by low natural gas prices and limited electricity demand growth, nuclear plants are being squeezed out of Regional Transmission Operator (RTO) markets like PJM Interconnection (PJM)—and into early retirement.
Illinois and New Jersey have developed subsidy programs to keep nuclear plants online for their clean-energy and jobs benefits, and other states are contemplating similar initiatives. But these subsidies have begun to complicate the capacity markets run by PJM, which compensate electricity generating plants by providing out-of-market payments that other generating plants would consider unfair. Our white paper, "The Potential Impacts of PJM Market Reforms.”, discusses the potential impacts on market prices under the proposed reforms to mitigate the impact of these subsidies.
Exhibit 1 - Overview of PJM’s nuclear facilities and subsidy programs
|
State |
Plant names |
State nuclear program/subsidy status |
|
Illinois |
Braidwood |
IL approved the Zero Emissions Standard program in December 2016, creating Zero Emissions Credits (ZECs) which can be provided by nuclear generators. Currently, Exelon’s Quad Cities is the only PJM generator receiving ZEC payments. However, Exelon has announced that the Byron and Dresden generators are also facing financial difficulties. With potential discussions about Illinois implementing a 100% clean energy target by 2030, several or all nuclear units in IL could potentially receive subsidies or out-of- market payments. |
|
Maryland |
Calvert Cliffs |
There is currently no nuclear subsidy program under discussion in Maryland |
|
Michigan |
Donald Cook |
MI does not have a nuclear subsidy program, but the Donald Cook nuclear generator is a regulated asset owned and as such is not dependent on market revenues from PJM. |
|
New Jersey |
Hope Creek |
NJ approved legislation in May 2018, creating Zero Emissions Credits (ZECs) which can be provided by nuclear generators. On April 18th, the New Jersey Board of Public Utilities approved ZECs for both the Hope Creek and Salem nuclear generators. Following the approval of these ZECs, PSEG has withdrawn their previously-filed deactivation requests for the Hope Creek and Salem generators. |
|
Ohio |
Davis Besse |
OH legislative leaders have introduced a bill that would provide subsidies to nuclear power plants in OH by creating an Ohio Clean Air Program that rewards clean air resources which minimize emissions from electricity generation. This bill has passed the OH house but is still awaiting approval by the senate. |
|
Pennsylvania |
Beaver Valley |
PA is currently discussing a nuclear subsidy program in their state legislature. The proposed bill would create an additional tier in Pennsylvania’s Alternative Energy Credit (AEC) program, which will allow nuclear generators to participate. If this program is approved, it will provide additional payments to nuclear generators in Pennsylvania. This could potentially be sufficient to keep the Beaver Valley and Three Mile Island generators online; both have announced plans to retire. |
|
Virginia |
North Anna |
VA does not have a nuclear subsidy program, but the North Anna and Surry nuclear generators are regulated assets and as such are not dependent on market revenues from PJM. |
On June 29, 2018, the Federal Energy Regulatory Commission (FERC) ruled that the PJM capacity market construct does not adequately protect against the potential price impacts of subsidized resources. In the same order, FERC rejected the initial market changes proposed by PJM. On October 2, 2018, PJM submitted their latest proposed changes–the Resource Carve- Out (RCO) and Extended Resource Carve-Out (Extended RCO) proposals.
Breaking down PJM’s proposed changes and impacts
We have run several scenarios, based on the 2021/2022 capacity auction parameters and resources for the two PJM proposals and found that the range for prices under them would be $70-$482/MW-day.
Proposal descriptions:
- Resource Carve-Out: Carved-out resources are bid as price-takers (i.e. bid at zero cost) when determining both the market-clearing quantity and price. This is very similar to the status quo in terms of capacity price determinations with the only difference being that capacity revenues for subsidized resources are credited back to the load to ensure that load does not have to pay twice for subsidized resources.
- Extended Resource Carve-Out: The market-clearing quantity is the same as in the RCO proposal, using a supply curve with carved-out resources bid as price-takers. For the market-clearing price, the carved-out resources are removed completely from the supply curve, while the demand curve is unchanged. This market price approach essentially ignores the existence of carved-out resources.
Exhibit 2 - Capacity prices under different scenarios
2021/2022 RTO prices ($/UCAP MW-day)
| Subsidy Case | Status Quo Price | RCO Price | Extended ERO Price |
| Base Case | 140 | 140 | 150 |
| Base Case + NJ | 125 | 125 | 150 |
| Base Case + NJ + PA + OH | 100 | 100 | 210 |
| Base Case + NJ + PA + OH + IL | 70 | 70 | 482* |
| *At price ceiling of 1.5 times the Net CONE | |||
- Base Case – only Quad Cities is subsidized, and no new subsidies are applied.
- Base Case + NJ – the New Jersey nuclear units are also subsidized.
- Base Case + NJ + PA + OH – the Pennsylvania and Ohio nuclear units are also subsidized.
- Base Case + NJ + PA + OH + IL – the remaining Illinois nuclear units are also subsidized.
What does this mean for PJM, capacity markets, and nuclear generation?
Efforts to support nuclear energy and meet emissions goals through state measures have reached a turning point within PJM, considering FERCs mandate for market reform. Acceptance and performance of these or other market reforms within PJM—the first to tackle the impact of state subsidies—will have a lasting effect on the economics of future energy generation development for the rest of the nation.
These potential changes would drive new trends in regional price separation, the continued economic competitiveness of nuclear generation, and the growth of natural gas combined-cycle and additional sources of generation in the PJM market. Other regional market participants in either Independent Service Operator-New England or Midcontinent Independent System Operator will be watching to see how they should plan for market or state reforms in response to these developments.
To understand the specific implications these proposals would have on the regional and generation dynamics of PJM—and to see ICF’s methodology—download our white paper: The Potential Impacts of PJM Market Reforms.
