Perry’s Regulatory Curve Ball to Bail Out Baseload

Today, Secretary Perry of the U.S. Department of Energy (DOE) launched a regulatory curve-ball aimed at protecting economically-failing coal and nuclear plants operating in competitive electricity markets.

DOE published a notice of proposed rulemaking (entitled “Grid Resiliency Pricing Rule”) on its website, requiring FERC to hastily finalize rules to increase compensation for power plants that have a 90-day supply of fuel on-site (i.e. coal and nuclear) under the guise that national and economic security are imperiled when these units retire.

What is prompting this action? Low-cost natural gas is making gas-fired power plants cheaper and more competitive to operate, causing less cost-competitive coal and nuclear to retire.  Plus, renewable energy technologies are also getting cheaper, and state-based policy programs are helping drive renewable energy growth.

Enter DOE’s directive to FERC to put new payments in place for plants that store 90-days of fuel onsite – something gas plants don’t usually do –  in order to ensure the grid is resilience and fuel diversity is maintained. Other eligibility requirements include units must be in a RTO/ISO territory, are not subject to cost of service regulation, are in compliance with environmental rules, and are able to provide energy and ancillary services.

DOE used its authority under Section 403 of the Department of Energy Organization Act of 1977 that allows the agency to propose rules under FERC’s jurisdiction. In turn, FERC is required to consider and take final action in an expeditious manner on any proposal put forth by DOE. (Check out some interesting history on this act and Section 403 authority)

DOE’s actions may look terrific to those interested in President Trump’s campaign promises to save coal (and nuclear), but are troubling for many reasons.

Manufactured Crisis to Support Political Goals.  This is truly a solution in search of a problem. The solution is protect coal and nuclear baseload. The problem, that’s fuzzy.  DOE’s own reliability report made it clear that there are no reliability concerns as the system becomes more gas and renewables-dependent, and that competitive markets are working as intended. The report did talk about the need to enhance market compensation for system resiliency, but neither the DOE report nor the proposed rule substantively demonstrated an urgency to take action (other than coal and nuclear plants are losing money). 

For example, the DOE proposal raises concerns about losing fuel diversity on the grid, yet the U.S. has never been more fuel diverse (we’ve historically been over-dependent on coal).

DOE repeatedly points to the 2014 Polar Vortex event in PJM – where cold temperatures drove power plant outages as natural gas supply was diverted to heating customers and coal plants had winterization issues – as a harbinger of the future. Yet, DOE completely ignores the work done by PJM (capacity performance requirement) and FERC (Order 809 on gas-electric coordination) aimed at preventing such a reoccurrence.

Pursuing Ambiguity. The proposal states, “The resiliency of the nation’s electricity grid is threatened by the premature retirement of power plants that can withstand major fuel supply disruptions caused by natural or man-made disasters.” But, what is resilience anyway?  Resilience is a term yet to be defined from a regulatory perspective, or in DOE’s proposal. For those interested, here is a pretty good discussion of the potential difference between resilience and reliability, likening resilience to the ability to recover after a disruptive event. 

Apparently, the only disruptive event DOE seems interested in is loss of fuel supply from gas pipeline disruption. DOE fails to aknowledge coal and nuclear have disruptions too. For example, after hurricane Harvey, NRG had to run some Texas coal plants on natural gas after coal piles flooded. And, FPL shut down some of their nuclear plants in advance of Hurricane Irma.

Moreover, this rule does nothing to address resiliency to disruption at a critical substations or transmission lines, and fails to acknowledge that the majority of power outages occur at the transmission and distribution system level, not because of generator outages.   

Ending Competitive Markets. DOE’s directive to FERC seems to re-introduce a cost-of-service regime into competitive markets by establishing a “reliability and resiliency rate” to be incorporated into RTO/ISO tariffs for the purchase of electric power from an eligible “reliability and resiliency resource”. The rate would allow for recovery of costs (e.g. fuel, capital, debt) plus a return on equity for these resource dispatched during grid operations – essentially a guaranteed rate of return. If DOE intends on integrating this type of rate-regulated compensation into the markets, it will basically end competitive markets as we know them.

Increased Power Prices. Prices will go up for electricity consumers, everywhere. DOE did not give cost estimates associated with implementation of the rule (only cost estimates for paperwork requirements). However, the rule references a report from IHS Markit (sponsored by NEI, EEI, and the U.S. Chamber) that says keeping a diverse portfolio of resources will be less expensive than if all coal and nuclear were to disappear…a ridiculous and irrelevant assumption.

Expedited Schedule. This market-breaking, wallet-busting initiative is to be completed on an expedited schedule.  FERC is to take final action (i.e. issue a final rule) within 60 days of DOE’s proposal being published in the Federal Register (this means no public comments on proposed language).  Alternatively, DOE says FERC can publish an interim final rule to be effective immediately, subsequently take public comment, and revise later.  

At the end of the day, this herculean effort will be too mighty for FERC to lift on this kind of schedule.  Among other things, FERC will have to make a demonstration that the current market rules are unjust and unreasonable, in order to substantiate these huge changes.  This will be a tough.  And many, many organizations will be lining up in court to fight.

Christina Simeone

Kleinman Center Senior Fellow

Christina Simeone is a senior fellow at the Kleinman Center for Energy Policy and a doctoral student in advanced energy systems at the Colorado School of Mines and the National Renewable Energy Laboratory, a joint program.