DOE Grid Study Points Finger at Natural Gas

In a long-awaited study of electricity markets and grid reliability, the Department of Energy has called out natural gas as the No. 1 reason for retirements of coal and nuclear plants, breaking from the Trump administration’s prior talking point blaming regulations and renewables for the nation’s shrinking coal and nuclear fleets.

The report attributes four factors to the increase in coal and nuclear retirements: low-cost natural gas; low growth in electricity demand; an increase in variable renewable energy (VRE); and regulatory compliance.

“The biggest contributor to coal and nuclear plant retirements has been the advantaged economics of natural gas-fired generation,” the report says, noting that natural gas surpassed coal as the largest source of electricity generation in the U.S.

The study goes on to conclude that: “The increased use of natural gas in the electric sector has resulted in sustained low wholesale market prices that reduce the profitability of other generation resources important to the grid. The fact that new, high-efficiency natural gas plants can be built relatively quickly, compared to coal and nuclear power, also helped to grow gas-fired generation.”

VRE doesn’t get off scot-free in the report. “Since 2007, the contribution to total generation from wind and solar has grown quickly, accelerated by government policies and mandates,” the report says, noting in particular state renewable portfolio standards (RPS) as the largest contributor, followed by federal tax credits and government research, which has helped lower the price for wind and solar technologies. “Because these resources have lower variable operating costs than traditional baseload generators, they are dispatched first and displace baseload resources when they are available,” the report says.

In a cover letter accompanying the study, Secretary of Energy Rick Perry took a harsher tone than the report on subsidies for renewables. “It is apparent that in today’s competitive markets certain regulations and subsidies are having a large impact on the functioning of markets, and thereby challenging our power generation mix. It is important for policy makers to consider their intended and unintended effects. Federal and State policy makers must continue to work together in close consultation to address these important issues that have a deep impact on grid reliability and resilience,” he wrote.

Perry’s cover letter statement was, however, much less harsh than his statement on regulation and renewables in an April 14 memo in which he ordered the study, where he noted “regulatory burdens introduced by previous administrations that were designed to decrease coal-fired power generation. Such policies have destroyed jobs and economic growth, and they threaten to undercut the performance of the grid well into the future.”

Impact of Regulations Noted

Obama-era regulations, which the Trump administration has blamed for the struggles of the coal industry, have had “varying degrees of effects” on the cost of baseload generation, the report finds. “For example, the largest number of coal plant retirements occurred in 2015—the deadline for coal and oil plants to add pollution control equipment for Mercury and Air Toxics Standard (MATS) compliance. In the same year, the Environmental Protection Agency (EPA) finalized its Clean Power Plan, which, if fully implemented, would place additional pressure on coal-fired generation,” the report says.

The nuclear industry is also struggling with regulatory burden, according to the report, which notes, in particular, the Cooling Water Intake Rule. “Three nuclear plants that announced closure (Oyster Creek, Diablo Canyon, and Indian Point) have cited disputes with their respective states, who implement the rule, as among the reasons for plant retirement,” the report says.

“Ultimately, the continued closure of traditional baseload power plants calls for a comprehensive strategy for long-term reliability and resilience. States and regions are accepting increased risks that could affect the future reliability and resilience of electricity delivery for consumers in their regions,” the report says.

Reliability v. Resilience

While the baseload data in the report is perhaps the most controversial, it is by no means the sole topic of the study. The report suggests that while it is important that markets continue to “recognize and compensate” reliability, more work is needed to address resilience of the grid. “Significant progress is already being made to understand what is needed to maintain power system reliability under changing market conditions, but more work is needed to understand what can be done to maintain resilience in a variety of conditions as the grid changes over the coming years,” according to the report.

An increase in severe weather events has put the system to the test, the report says, and “have demonstrated the need to improve system resilience. The range of potential disruptive events is broad, and the system needs to be designed to handle high-impact, low probability events,” the report says.

To address resilience issues, it is vital that markets undergo planning, practice, and coordination, and have a “mix of resources and fuels available when a major disturbance occurs.”

Perry also asked his staff to determine if wholesale markets “adequately compensate” for factors such as onsite fuel supply. The report answers that while fuel assurance is a growing consideration, this is no new issue for generators. “Most generation technologies have experienced fuel deliverability challenges in the past. While coal facilities typically store enough fuel onsite to last for 30 days or more, extreme cold can lead to frozen fuel stockpiles and disruption in train deliveries,” the report finds.

Evolution of Wholesale Markets

Perry also ordered that his staff examine the “evolution of wholesale electricity markets, including the extent to which Federal policy interventions and the changing nature of the electricity fuel mix are challenging the original policy assumptions that shaped the creation of those markets.”

The report finds that while wholesale electricity markets are operating as designed, they have been faced with several challenges, such as “pressures from flat demand growth, Federal and state policy interventions, and the massive economic shift in the relative economics of natural gas compared to other fuels.”

Further study is needed to ensure that the markets continue to do what they were designed to do, which the report explains is to “ensure reliability and minimize the short-term costs of wholesale electricity.”

It remains unknown if current market designs can adequately address future challenges, such as in an increase in VRE on the grid, which the report states will lower wholesale energy prices. “This would put additional economic pressure on revenues for traditional baseload (as well as non-baseload) resources, requiring careful consideration of continued market evolutions,” the report says.

In further detail, the report notes that generation from VRE can change significantly over the course of a day, and in some places there is over-generation from VRE during the day. “Taken together, these trends have placed a premium on flexible output rather than the steady output of traditional baseload power plants. This flexibility is generally provided by generation resources. However, nongeneration sources of flexibility—such as flexible demand, increased transmission, and energy storage technologies—are being explored as ways to enhance system flexibility,” the report notes.

 

Response to the report has been mixed, and given the controversial nature of the study, its conclusions are sure to be both praised and challenged for some time.

 

Abby L. Harvey is a POWER reporter.