[UPDATED] DOE to FERC: Force Competitive Markets to Value Coal and Nuclear Resiliency, Reliability Attributes

A rule proposed by the U.S. Department of Energy (DOE) on September 29 directs the Federal Energy Regulatory Commission (FERC) to mandate that competitive power markets develop and implement market rules to “accurately price” what it calls “fuel-secure” generation.

The DOE’s “Grid Resiliency Pricing Rule” directs FERC—an independent regulatory government agency that is officially organized as part of the DOE—to exercise its authority under sections 205 and 206 of the Federal Power Act and require that independent system operators (ISOs) and regional transmission organizations (RTOs) “establish just and reasonable rates for wholesale electricity sales”  for power plants that show “reliability and resiliency attributes.”

The agency directed FERC to take action on the rule within 60 days, or impose an interim final rule immediately—with a provision for “later modifications” after public comment. The rule also requires that ISOs and RTOs submit a compliance filing within 15 days after the DOE finalizes the rule.

“Fuel Secure,” a Euphemism for Baseload Generation?

The rule does not directly call on organized market operators to “accurately” price coal and nuclear “baseload” power resources, a term the DOE used prolifically in its highly controversial August 23 grid study. In that 187-page grid study, the agency made the distinction between conventional generation and “baseload” generation, defining the latter using terminology from the North American Electric Reliability Corp as “generation that falls at the bottom of the economic dispatch stack, meaning [those power plants] are the most economical to run.” (For more see sidebar here: “The Baseload Dispute Explained”.)

Instead, in its proposed rule issued on September 29, the DOE used the term “fuel-secure” generation—at least 18 times—to describe power plants that can “withstand major fuel supply disruptions caused by natural or man-made disasters and, in those critical times, continue to provide electric energy, capacity, and essential grid reliability services.”

These “fuel-secure resources” are “indispensable for the reliability and resiliency of our electric grid—and therefore indispensable for our economic and national security,” it says. “It is time for [FERC] to issue rules to protect the American people from energy outages expected to result from the loss of this fuel-secure generation capacity.”

To bolster its claims that “market changes are resulting in a significant loss of fuel-secure generation,” the proposed rule points to recent closures of coal and nuclear plants mentioned in the DOE’s January 2017 Quadrennial Energy Review.

It also pointed to findings outlined in its August grid study to highlight concerns that a large number of “fuel-secure” plants have retired or are scheduled to retire.

More than 80% of the 18 GW of retiring capacity in 2015 was made up of coal-fired power plants, it noted, and another 12.7 GW is expected to retire through 2020. Between 2002 and 2016, 4.6 GW of nuclear generating capacity was slated for retirement, representing 4.7% of the U.S. total (see POWER’s infographic, “A String of Retirements” for more). This year alone, eight reactors representing 7.1 GW of nuclear capacity have announced retirement plans. The rule notes, however, that this does not include seven reactors that were bailed out by state measures.

The DOE’s August grid study essentially says that market forces—namely, cheap natural gas, falling costs of renewables, and stagnating demand growth—have driven these mass baseload retirements over the past 15 years. However, and perhaps more significantly, it also suggests that the economics of traditional baseload generators—particularly coal and nuclear power plants—have also been negatively affected by state and federal regulations, mandates, and subsidies. Renewables, which have benefited from state policies, have lower variable operating costs than traditional baseload generators and are dispatched first, displacing baseload resources when they are available, it notes.

The proposed rule also suggests that without enough “fuel-secure” resources online, the bulk power system could see a “catastrophic” loss of generation capacity if affected by an event like the 2014 Polar Vortex.

Swift Reactions

The August grid study generated mixed reactions from primary industry stakeholders. The DOE’s September proposed rule elicited a similar response.

PJM Interconnection—the entity that operates the nation’s largest power grid and on September 29 marked it’s 90th anniversary—said it was still reviewing the rule but emphasized that it works to ensure the grid is reliable and its wholesale power prices are competitive.

“In September 1927, [Philadelphia Electric Co.], [Pennsylvania Power and Light], and [Public Service Electric and Gas] collaborated to bring to life an ingenious idea—a power pool,” said PJM CEO and President Andrew L. Ott in a press release marking the event. Ott said PJM’s regional coordination today saves people about $3 billion annually. “This is a historic day for PJM. Today, we honor our employees, our history, our members and most importantly the tremendous responsibility we share with members to keep the lights on for 65 million people in 13 states and the District of Columbia,” he said.

Amy Farrell, senior vice president for the American Wind Energy Association’s Government and Public Affairs division expressed concerns that the proposal would “upend competitive markets” that save consumers billions of dollars a year. “The best way to guarantee a resilient and reliable electric grid is through market-based compensation for performance, not guaranteed payments for some, based on a government-prescribed definition. We look forward to participating in the process as FERC begins to consider the proposed rule,” she said.

Trade groups the American Coalition for Clean Coal Electricity (ACCCE) and the Nuclear Energy Institute (NEI) predictably hailed the DOE’s rule.

“We commend Secretary [Rick] Perry for initiating a rulemaking by FERC that will finally value the on-site fuel security provided by the coal fleet,” said ACCCE President and CEO Paul Bailey. “The coal fleet has large stockpiles of coal that help to ensure grid resilience and reliability.”

NEI President and CEO Maria Korsnick called the rule a “remarkable action,” adding: “In the wake of the incredible disruptions caused by extreme weather events in recent years including multiple hurricanes and polar vortices, the urgency to act in support of the resiliency of the electric grid has never been clearer.”

But NRG Energy, the nation’s largest independent power producer, and a firm that has fiercely contested state measures to prop up uneconomic nuclear plants in Illinois and New York told POWER on October 2 that the DOE proposal threatens established power markets.

“While NRG is pleased that the [DOE] recognizes that there is a problem with price formation in wholesale markets, the solution is not to re-regulate large swaths of the competitive market, but to ensure that fuel-neutral and competitive policies value all forms of generation and fuel types,” said NRG spokesman David Gaier.

Matt Roberts, vice president of the Energy Storage Association (ESA) told POWER on October 2 that while the organization was “initially encouraged” that the grid study focused correctly on valuing resilience attributes in a technology-neutral manner, it was troubled by the proposed rule.

“It’s not too late for DOE to consider the ultimate goals of what they’re trying to accomplish – improving grid reliability, resilience, and flexibility for consumers. DOE should expand this rulemaking to consider resilience more broadly and focus on price formation. This will lead to more competition, which in turn will drive down costs, while creating more resilience for all,” he said.

The Sierra Club, the environmental group behind Beyond Coal—a powerful and merciless campaign to shut down coal-fired power plants—noted that the DOE’s direction to FERC—an independent agency—was a brazen one. The group described it as a “move that’s intended to placate corporate polluters that can’t compete with cleaner, cheaper energy sources like solar, wind, and energy efficiency.”

Beyond Coal Director Mary Anne Hitt also noted that the Federal Power Act “states that FERC cannot favor one energy source over others in its rulemakings, and Perry’s ask—without evidence or common sense—seeks to prop up dangerous coal and nuclear plants that can no longer compete in the wholesale market.”

The Sierra Club (and likely other environmental and clean energy groups) is “prepared to take to court any illegal rule that props up dirty fossil fuel plants or weakens clean energy’s market access,” Hitt said.

 

—Sonal Patel is a POWER associate editor (@sonalcpatel, @POWERmagazine)

Updated Oct. 2: Adds comments from NRG, ESA