DOE Reliability Study: Everything’s Okay, For Now

Back in April, DOE Secretary Perry issued a memo calling for a reliability study of U.S. power systems, expressing concerns that competitive markets, renewables, and regulations were forcing retirement of baseload (i.e. coal and nuclear) power plants critical to reliability.

In an April blog, I detailed reasons why the memo was disturbing, especially because it ignored natural gas as a factor in driving coal and nuclear retirements.

Yesterday, DOE published the much anticipated study, and upon cursory review it looks like they’ve had a reality check. Perhaps because an early version of the report was leaked (though it did not have policy recommendations).  And the top finding of the new report: advantaged economics of natural gas generation is the primary factor driving retirement of coal and nuclear plants. However, a cover letter from Secretary Perry, mysteriously fails to mention gas and focuses on the role of subsidies and regulations as culprits.

The study is fairly balanced, though certainly has areas of bias towards baseload resources and a few overly political bits. It reads as if everything’s okay for now, but changes are needed quickly to maintain the “reliability and resiliency” of the power system.

So here is a brief summary of the report’s findings (which were messaged very differently in the leaked version):

Are Competitive Markets Working and Still Relevant? Competitive markets have achieved reliability at low cost, as intended, even in the face of multiple stresses. As the grid moves towards greater renewable energy penetration (i.e. zero margin cost resources) power prices will decrease. This will result in economic challenges for generation resources, and resource flexibility (i.e. ramping, storage, demand response, etc.) will become more important. In addition, markets may not currently be providing all the benefits (e.g. jobs, environmental, economic development, security) desired by policymakers and the public.

Is There Adequate Compensation for Reliability and Resiliency? Reliability has been maintained, even as the system has retired significant baseload resources and added intermittent renewables. In the future, more work may be needed to maintain reliability as the system integrates more renewables and to assure natural gas fuel supply. More work is also needed to improve grid resiliency to severe weather events, as well as to low probability, high impact events. The study notes greater use of natural gas resources (that has reduced costs in competitive markets) has increased exposure to gas price risk, noting policymakers need to be aware of tradeoffs as:

“…within power systems, it may be the case that a more reliable and resilient system is more costly than the least-cost system that a centrally-organized wholesale market is intended to deliver.” (p.12)

Are Regulatory Burdens and Subsidies Forcing Premature Baseload Plant Retirements? The advantaged economics of baseload natural gas is the primary reasons driving baseload retirements. Low demand growth, growth of renewables from federal and state subsidy policies, and regulatory compliance costs have also contributed to baseload retirements. (Recall page 9 of the leaked report concluded that “Many baseload plant retirements are not premature.”)

The policy recommendations from the study where fairly moderate, with some of the most politically-oriented items tact on at the end.

• FERC should expedite efforts to improve energy price formation, such as proposals laid out by PJM.  (Note, this will lead to increased energy market prices and will benefit nuclear more than coal). Interestingly, while this was the top-listed recommendation from the report, there was not a detailed discussion of the underlying problem or proposed solutions, just links to PJM and MISO proposals.
• FERC should study and recommend ways to value essential reliability services, for example, by developing fuel and technology neutral mechanisms (regulatory or market-based) to compensate essential reliability services.
• Increase the focus on system resilience, for example: transmission planners should conduct more disaster-preparedness exercises, expanding resilience to NERC’s mission, and have grid operators define resilience criteria.
• Promote R&D for 21^st century grid reliability and resilience tools, for example, expand cooperation with Canada and Mexico on reliability via NERC, increase renewable integration through grid modernization technologies.
• Support electricity workforce development and transition assistance for workers whose specialties may no longer be in demand.
• Reduce burdens on electricity infrastructure. Specifically, loosen regulatory requirements on hydropower, pumped storage, nuclear power, and coal generation.
• Energy dominance. A reference to Executive Order 13783, which aims to rescind certain climate and energy policies and review environmental regulations to minimize barriers to energy production.
• Expeditiously approve gas exports and pipelines to improve electric-gas coordination. (I wholeheartedly agree there are many opportunities to improve electricity and gas system coordination, but I’m struggling to understand how speeding LNG export capacity achieves this).

A whole section (p. 128) is devoted to areas of further research, including evaluating ongoing capacity market reforms, state application of plant-specific cost-of-service regulation to at risk plants in competitive markets, regularly updating EIA’s subsidy analysis, and more.

It is worthy to note, most of the recommendations are not under DOE’s jurisdiction.  However, the FERC items could be spearheaded by the Trump Administration’s recent appointees (the interim FERC chair has recently made public statements supporting coal and nuclear).

All in all, this report turned out much better than expected.

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.