Minimum offer price rules (MOPRs) in electricity markets expanded in the mid-2010s, but this trend recently has been reversing. RFF scholars discuss lessons learned from MOPR that could improve electricity markets moving forward.
Policymakers combating climate change often look to support clean energy technology that can decarbonize the electricity sector. However, complicated energy markets determine which electricity generators are profitable, and regulatory obstacles can lead to unintended consequences. Minimum offer price rules (MOPRs) in electricity capacity markets present a prime example.
When first adopted in 2006–2008, MOPRs were relatively insignificant regulations aimed narrowly at the concern that “net buyers”—utility companies that buy more capacity than they sell—might leverage their role as sellers to suppress prices in the capacity market. This strategy would lead to greater savings in purchases than the reduced revenues from selling capacity at lower prices. To prevent price suppression, MOPRs set floors on net buyers’ price offers in capacity markets.
In the mid-2010s, however, the Federal Energy Regulatory Commission (FERC) aggressively expanded MOPRs to prevent state-subsidized renewable and nuclear resources from offering their capacity in markets at prices below the full, unsubsidized cost. FERC’s MOPR expansion culminated in a series of orders in 2018 and 2019 to impose offer floors on new state-subsidized resources in the three northeastern regional transmission organizations (RTOs)—the New York Independent System Operator (NYISO); ISO New England; and the Pennsylvania, New Jersey, and Maryland (PJM) Interconnection, which covers parts of 13 states and the District of Columbia. FERC Commissioner Richard Glick wrote a series of blistering dissents to the MOPR orders, arguing that the commission’s directives would impose unnecessary costs on electricity consumers and that the order contravened the allocation of federal and state authority under the Federal Power Act.
FERC’s expansion of MOPRs also raised hackles among stakeholders and observers. Environmental organizations, clean energy advocates, and many analysts and scholars critiqued the expanded MOPRs, echoing Glick’s concerns and highlighting how expanded MOPRs would adversely affect clean energy resources and reduce the effectiveness of many state subsidies put in place to support clean energy.
The election of President Joe Biden abruptly halted the MOPR expansion. Commissioner Glick became Chairman Glick and pushed for reversing prior FERC orders that expanded the MOPRs. In July 2021, PJM proposed to narrow its MOPR to focus on net buyers that would profit from price suppression. In September 2021, an evenly divided FERC deadlocked on the proposal, which then defaulted to taking effect based on FERC procedures. In January 2022, NYISO proposed to exempt most clean energy resources from its MOPR. ISO New England proposed in March 2022 to eliminate its MOPR in 2025—a move that disappointed clean energy advocates, who urged more rapid action. FERC approved both the NYISO proposal and the ISO New England proposal in May 2022.
The MOPRs are thus now in full retreat. The occasion calls for considering the lessons we can learn from the MOPR controversy for future debates over electricity markets. We propose three observations, which we describe in detail below.
(1) Energy Federalism Can Be Constructive or Destructive
States have adopted a range of climate-related energy policies to achieve ambitious decarbonization goals, including emissions programs like the Regional Greenhouse Gas Initiative and programs that require certain levels of renewable energy purchases, such as renewable portfolio standards and procurement programs. States are likely to continue driving climate policy in the foreseeable future, especially with the federal government constrained by a lack of legislation and by judicial skepticism of federal regulatory authority.
The heterogeneity of energy policy between the federal and state governments and across states presents challenges of both vertical (federal-state) and horizontal (state-state) federalism. The MOPRs present a particularly counterproductive example of vertical energy federalism, with FERC adopting a policy that counteracts state subsidies of renewable energy generation, thus setting federal policy against state policies. Regardless of how Congress intended to demarcate the boundaries of federal and state jurisdiction in the Federal Power Act, it seems unlikely that Congress intended the federal government to use federal regulatory authority to undermine legitimate state policies.
Moving forward, the energy policy landscape is likely to continue to be a diverse collection of local, state, and federal laws. Policy diversity can be beneficial, allowing governments to experiment with their approaches and tailor their policies to their own goals and circumstances. Federalism also creates an opportunity for states to adopt policies that address local concerns while allowing the federal government to focus on policies with a national scope. But federalism fails when state and federal policies are actively working against each other, as was arguably the case with the MOPR at the federal level and renewable energy policies at the state level. Indeed, conflicting policies around MOPRs have led some states to consider dropping out of RTO-run capacity markets and forgoing their benefits, to avoid undermining state climate policies. Federal and state governments should regard the MOPR controversy as a cautionary tale and pursue diverse policies without sacrificing comity among governments.
(2) We Can Improve Electricity Markets by Letting Economic Principles Guide the Design of Market Policies
Electricity markets are complex institutions that can be difficult to understand, even for those in the industry. But the details of market rules matter, as the MOPR controversy illustrates. MOPRs started out as policies that aimed to curb market power, but the rules somehow became a tool for counteracting state subsidies for power generation.
The effects of the MOPRs have been hotly debated, with some clean energy advocates projecting severe adverse impacts and other experts contending that the effects on clean energy would be minimal. Ideally, economic principles could guide the development of policy, providing a framework for designing and maintaining markets that advance overall welfare. But many energy policies, including the MOPRs, are only loosely aligned with economic principles and are simply pragmatic attempts to tinker with outcomes. This more superficial approach deprives the policy process of objective metrics and criteria by which to evaluate options. Tethering markets more closely to economic principles would provide a better vantage point from which to make policy.
Credit: GraphiDA / Unsplash
As the MOPR controversy fades, new issues are rising to take their place. Many RTOs are in the process of addressing a set of capacity market rules regarding effective load-carrying capability, which is a way of measuring a generator’s contribution to the reliability of the electric grid. There is widespread agreement that effective load-carrying capability is a helpful method for evaluating capacity, but how to implement it is controversial. Even more so than MOPRs, effective load-carrying capability involves complex issues that are difficult to understand, with many consequential judgment calls. More than ever, energy policy will need objective analysis to understand the effects of different options and to evaluate how well those options comport with economic principles.
(3) Policies Need to Encompass the Changing Role of Regional Transmission Organizations (RTOs)
The MOPR debate exemplifies the evolving and expanded roles of RTOs in electricity policy. Originally envisioned as system operators with a primarily technical and operational role, RTOs have become de facto regulatory bodies that make policies with important consequences for broader climate policy. RTOs generally are membership organizations that are dominated by power generators and distribution utilities. Although FERC ultimately must approve rules proposed by RTOs for wholesale markets, the agency tends to give RTO proposals great deference, presumably in part because FERC is loath to upset the careful compromises that have been reached through negotiations among RTO stakeholders. As wholesale market rules have proliferated, RTOs have become more complex, and FERC’s oversight role has become increasingly difficult.
Critics contend that the stakeholder-based governance structure of RTOs impedes their effectiveness in creating competitive market conditions and favors incumbent utilities over the broader public interest. The MOPRs provide only mixed support for these critiques. Unlike most areas within the domain of RTOs, FERC took much of the lead in expanding MOPRs. In 2018, for example, FERC rejected a PJM proposal that would have accommodated state renewable subsidies and instead required PJM to expand its MOPR. Nevertheless, the central involvement of RTOs in the MOPR process raises concerns about whether their governance structures remain appropriate in light of their expanded policymaking role.
Overall, the demise of the MOPRs does not signify the end of sticky questions in electricity markets. Many economic and policy issues will continue to arise as new technology and market designs disrupt the established generation mix and mobilize stakeholders. We must keep these lessons in mind going forward.
