The Biggest U.S. Electrical Grid Braces for Green Energy

David R Baker and Naureen Malik
Tue., August 10, 2021


(Bloomberg Markets) -- The decision that could open the floodgates to renewable power across much of the eastern U.S. came in early July after months of closed-door haggling within an organization many Americans don’t know exists.

PJM Interconnection LLC runs the country’s biggest electricity grid, a vast web of wires spanning parts of 13 states from the Jersey Shore to the Mississippi River and covering much of coal country. Its low profile is a measure of its success. PJM prides itself on keeping the lights on at a time when blackouts have plagued power grids in California and Texas, sometimes with deadly results.

That reliability comes at a cost. Critics say PJM’s capacity auctions, which require utilities to secure power three years in advance as a type of blackout insurance, have propped up inefficient fossil fuel energy suppliers and led to billions of dollars in excess costs for customers. The switch to clean energy transforming other U.S. grids has barely touched PJM—it gets only 6% of its power from renewable sources such as wind and solar, compared with more than 40% in California and more than 25% in Texas. That disparity is likely to get more attention after climate scientists warned this week that the planet is likely to warm by 1.5 degrees Celsius in the next two decades, with more severe heating to follow if the world doesn’t take drastic measures to cut fossil fuel use.

Hundreds of electric utilities, power plant operators, and energy traders who belong to PJM and vote on its decisions have been fighting over renewable power for years. Some, serving states with ambitious climate change goals, want to push forward on solar, wind, and batteries. Others want to keep their old gas- and coal-burning power plants alive as long as possible.

But the July decision, aided by the Biden administration’s regulatory support, looks set to give the climate advocates a boost. The result could be a massive buildout of offshore wind on the Atlantic Coast, from Virginia north. That would not only revamp PJM’s entire system, but it could also dethrone natural gas as the country’s No. 1 power plant fuel by 2028, according to Morgan Stanley analyst Stephen Byrd. About 27,000 megawatts of offshore wind—roughly the capacity of 27 nuclear reactors—are being planned, and 33% of that is in PJM territory, he says. Renewables’ share of U.S. power production will go from 10% this year to 27% by 2030.

“More states want to take control of their destiny and achieve a certain mix of power plants, with the whole goal of decarbonizing,” Byrd says. “They are going to do that, plow through regardless of the market rules, and it’s clear they have that legal right to do that.”

PJM’S PRIMARY MISSION is straightforward enough: keep electricity flowing, without fail, to 65 million people—one-fifth of the U.S. population. The ways it does so can be incredibly complex, and not all of them are open to public view.

Day and night, PJM orchestrates the flow of electrons over 85,100 miles of high-voltage cables connecting the Illinois prairie, the Rust Belt cities of Ohio, Appalachia’s coal and shale gas country, Washington, D.C., the New Jersey suburbs, and the northern edge of North Carolina. Some 1,400 generators supply the energy, all of it tracked on walls of video screens in a control room at PJM’s Valley Forge, Pa., headquarters. Each state can help supply the others. Contrast that with Texas, which has largely blocked off its grid from its neighbors. The Lone Star State paid the price for its isolation in February, when a deep freeze plunged millions of customers into the dark and cold for nearly a week, causing at least $20 billion in economic damage and leaving more than 200 people dead.

Managing the grid isn’t the only way PJM keeps the lights on. The organization also runs markets in which its 1,000-plus members buy and sell electricity. In 2007, PJM created a capacity market for utilities to buy contracts that ensure the delivery of power even during peak demand and supply disruptions. Texas has nothing like it. But consumer advocates say PJM’s obsession with always having more than enough juice jacks up homeowners’ monthly bills. One estimate, from Wilson Energy Economics, pegs the overspending at as much as $4.4 billion a year. (A PJM spokesperson disputes that figure, saying it fails to account for savings that result from the extra capacity and adds that PJM is working with stakeholders to address their concerns about procurement.)

FOR PJM, THE MARKETS CAME FIRST. The organization was born as a cross-border experiment at a time when electricity grids were still spreading across the nation. In 1927 three utilities—one in New Jersey and two in Pennsylvania—formed a joint power pool in which each company could buy electricity from the others’ plants. The world’s first such venture, it meant that those plants able to supply power at the lowest price would be tapped first, cutting costs for all three utilities. The experiment proved a success and began to expand. Baltimore’s utility signed up in 1956, and with it, the arrangement became the Pennsylvania-New Jersey-Maryland Interconnection: PJM.

Curiously, for most of its existence, PJM was operated by a department of just one of its member utilities. It wasn’t until 1997 that it became fully independent, the same year it opened its first bid-based energy market and the Federal Energy Regulatory Commission approved it as the nation’s first independent system operator, or ISO. In 2002, after a series of new regulations intended to encourage increased competition in power markets, FERC would dub PJM the country’s first regional transmission organization, or RTO.

Think of the RTOs and ISOs (there are seven, total) as the nation’s Grid Keepers: They oversee everything from trans mission of electricity to the markets and auctions that set prices, and even the regional advanced planning for estimated power use (and distribution) in the years ahead. They decide who’s in and who’s out when it comes to supplying our electricity. No new plant, whether powered by sunshine or coal, can plug into the grid without the grid operator’s permission.

PJM has since grown into an odd hybrid. It’s technically a private corporation, but it functions as a membership organization. Its more than 500 voting members can set policy through votes on internal committees, but it also has a staff and governing board that make their own decisions. Member companies often have wildly divergent interests, and their debates—sometimes held in private—can get heated. One participant described it as having not just one 800-pound gorilla in the room, but a dozen, each used to getting its way.

“Every now and again, you’ll get some really passionate advocacy in those settings,” says Asim Haque, PJM’s vice president for state policy and member services. “They can yell at each other and then go eat lunch together. I’ve seen that happen multiple times.”

PJM’s geographic expanse has long been one of its biggest strengths. But now states with conflicting agendas are jockeying for position. Kentucky, Ohio, and West Virginia—coal country states—are often at odds with Maryland, New Jersey, and other places that see offshore wind farms as big new job generators.

“Unfortunately with PJM, what they have probably done is sunk to the lowest common denominator, to only having to meet the needs of the least aggressive state in their footprint” in terms of adding renewables, says Jon Wellinghoff, FERC’s chairman under President Barack Obama.

That tension finally came to a head in 2018 over the capacity market’s “minimum offer price rule,” known by the dismal acronym of MOPR. The rule set a price floor on power plants that receive state support, to prevent them from gaining an unfair advantage against unsubsidized plants in the capacity auction bidding.

First implemented more than a decade ago, MOPR was designed to prevent large energy companies from artificially depressing prices in the market, and it specifically targeted new natural-gas-fired power plants being built across the mid-Atlantic at the time. In 2016 several power plant operators petitioned FERC to expand MOPR to counter the potential advantage gained by nuclear plants that were receiving subsidies from Ohio and Illinois. In 2018, PJM pitched its own MOPR overhaul to FERC to include the increasing number of state-subsidized plants—particularly nuclear plants. But that proposal specifically exempted renewable power plants that were being built to meet state climate goals. A few months later, in June 2018, FERC ordered PJM to extend the MOPR price floors to renewable power such as wind and solar.

Clean power advocates said the move was an attempt by Trump appointees to block new renewable projects from the capacity market. Incensed, officials in Illinois, Maryland, and New Jersey threatened to pull out of that market. Some members grumbled that PJM was propping up coal plants and picking a pointless fight with the states. The fight proved so contentious that, after FERC granted approval to the revised MOPR rule in 2019, PJM’s annual capacity auction was delayed for two years as members quarreled over it. Virginia’s utility, Dominion Energy, did actually exit PJM’s capacity market before the delayed auction was finally held in May.

“Instead of using the last five years to try to find a way to use the markets to assist the states—and really the planet—in making a dent in carbon pollution, we’ve been working on ways to make clean energy more expensive,” Kathleen Barrón, executive vice president for government affairs and public policy at power plant company Exelon Corp., said at a March meeting with FERC about the rule.

The backroom fight included not just Exelon, with its large fleet of nuclear plants, but American Electric Power, Calpine, FirstEnergy, NRG Energy, Public Service Enterprise Group, Vistra, and other power giants—which were all looking to protect their own plants and plans.

Neil Chatterjee, who served as FERC chairman under President Trump, defends the rule as an important means of maintaining PJM’s prized reliability. He says California—whose grid now veers close to blackouts when the sun sets on its solar power plants during heat waves—shows what can happen when a state government pushes the switch to renewables too quickly. “What is happening in California in particular you could very easily see happening in PJM if politicians make decisions about PJM’s future resources,” Chatterjee says.

And, in fact, the one auction held under the expanded MOPR wasn’t so bad for renewable power after all. Overall auction prices plunged. Nuclear plants suffered as expected, with some operators saying they might have to close reactors. Renewable power generators fared better than predicted, and the low prices did little to help coal. Chatterjee says the results disprove “some of the ‘sky is falling’ rhetoric” from MOPR opponents. “I find it very difficult to justify a wholesale market change in the immediate aftermath of an auction that quite frankly didn’t reflect those concerns,” he says.

But Richard Glick, the new FERC chairman, says the impact of MOPR on new renewable power generators, especially offshore wind, would become evident in future auctions if it isn’t changed. Fixing the rule now “matters a lot,” he says. States won’t be able to achieve their climate goals “if FERC keeps on adopting barriers to markets in terms of achieving greenhouse gas emissions reductions.”

ONE VOICE GENERALLY not in those internal PJM debates? State governments. They do have some say within PJM’s decision- making system, but it’s largely advisory. Each state has a consumer advocate who can cast a vote, but they’re easily drowned out by the hundreds of companies. An association of state utility regulators, the Organization of PJM States, acts as a liaison to the various capitals, but it has no formal power.

That grates on lawmakers like Lorig Charkoudian, a member of Maryland’s state legislature who serves on the public utilities subcommittee. She promised her voters action on clean power. But PJM answers to only one government agency—FERC—and not to her or her colleagues. “What they keep saying is, ‘We’re neutral on state policies,’ and technically, that’s accurate,” Charkoudian says. “But it’s obviously undermining our policies.”

Public Service Enterprise Group Inc., one of PJM’s three founding members, is trying to build a 1,100MW wind farm 15 miles off the coast of New Jersey’s southern tip. Under MOPR, that farm and others planned nearby wouldn’t be able to compete in the capacity market, says PSEG Chief Executive Officer Ralph Izzo. They’d lose an important source of income. Plus, the state’s utilities would still have to buy capacity contracts from other power plants to meet PJM’s reserve requirements, even though they wouldn’t actually need those contracts, because they’d be getting their power from the wind farms.

“It’s structured to ignore offshore wind, as if it’s not there,” says Izzo, who doesn’t like being at odds with an organization his own company helped create. “New Jersey will end up paying twice for that capacity.”

President Joe Biden’s election—and his administration’s commitment to a carbon-free grid by 2035—altered the conversation. Leadership of FERC passed to Glick, who didn’t agree with MOPR in the first place. “The fact is, we have to figure out if the commissioners believe the current approach is just and reasonable, and if not, we have to change it,” Glick says. “My opinion is that it’s probably not.”

It became clear that regulators would change PJM’s rule if PJM didn’t do it first. So in a series of votes in June and July, PJM’s members and board gutted the rule.

If approved by FERC, the decision could end up driving many coal plants out of business and pave the way for row after row of offshore wind turbines along the mid-Atlantic shore, creating a whole new industry for coastal states.

There are still hurdles. PJM’s process for vetting new power plants that want to connect to the grid was designed for a time when it would receive maybe 250 connection requests in a year, almost all for plants burning natural gas, says Ken Seiler, PJM’s vice president for planning. Now the number has jumped to almost 1,000 projects per year, 93% of them renewable, he says. Many don’t have financing yet and may never get built. The company is looking for ways to streamline the process, perhaps analyzing projects in batches.

“You don’t quadruple a queue and expect to turn out the same results as quickly,” Seiler says. “I would argue yes, it takes more time, but we usually get the answers right.”

And another fight is already brewing within PJM over who will get to build the transmission lines serving all these new clean power facilities, where they’ll get built, and how they’ll be paid for. Many states that rely on PJM’s grid have grand plans for carbon-free power, and they’ll need PJM’s cooperation, like it or not. “Your average person who cares deeply about these issues doesn’t know that there’s this almost shadow government—this shadowy body that has all this authority,” says Maryland’s Charkoudian.

Some state officials say that under new CEO Manu Asthana, who took over last year, the company is making more of an effort to work with states. PJM has formed a partnership with the New Jersey Board of Public Utilities to plan and approve transmission lines linking some of those wind farms to the grid. It’s also created an office of state policy solutions, under Haque.

“They obviously have a different philosophy than the previous administration,” says Joseph Fiordaliso, president of New Jersey’s Board of Public Utilities. “It’s much more conducive to team play.”

Baker and Malik cover power and renewable energy for Bloomberg News in San Francisco and New York, respectively.

(Corrects 13th paragraph to say the meetings are sometimes held in private.)

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