The Nickel Report

On August 23, the Department of Energy (DOE) released a study entitled “Staff Report to the Secretary on Energy Markets and Reliability.” This is the so-called “DOE grid study” that Secretary of Energy Rick Perry ordered his chief of staff Brian McCormack to produce in an April 14 memorandum, noting that “Over the last few years...grid experts have expressed concerns about the erosion of critical baseload resources.”

These concerns have been simmering for several years. As the US Environmental Protection Agency was developing the rule that became the Mercury and Air Toxics Standard, the Federal Energy Regulatory Commission (FERC)—prompted by then-Senate Energy and Natural Resources Committee Ranking Republican Lisa Murkowski—held a multi-day meeting to evaluate potential electric reliability impacts from anticipated closings of coal-fired power plants prompted by the rule.

Owners of generation of various types have urged that wholesale electricity markets are not providing sufficient compensation to keep baseload plants operating. Several states have adopted, or are considering, subsidy programs to keep nuclear plants economically viable.

Perry asked his staff to evaluate several issues:

• 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;
• Whether wholesale energy and capacity markets are adequately compensating attributes such as on-site fuel supply and other factors that strengthen grid resilience and, if not, the extent to which this could affect grid reliability and resilience in the future; and
• The extent to which continued regulatory burdens, as well as mandates and tax and subsidy policies, are responsible for forcing the premature retirement of baseload power plants.[1]

The study did not define “resilience.” However, various definitions exist within the electricity industry and within the government. For example, Presidential Policy Directive-21 defines resilience as “the ability to prepare for and adapt to changing conditions and withstand and recover rapidly from disruptions. Resilience includes the ability to withstand and recover from deliberate attacks, accidents, or naturally occurring threats or incidents.”[2] PJM defines resilience as “preparing for, operating through and recovering from a high-impact, low-frequency event. Resilience is remaining reliable even during these events.”[3]

The study made a number of findings in relation to each of these issues. First, it found that “[bulk power system] reliability is adequate today...” [4] But it also “identified several critical issues central to protecting the long-term reliability of the electric grid,” including the following:

• “To date, wholesale markets have withstood a number of stresses.” However, “low average wholesale energy prices, while beneficial for buyers of wholesale electricity, represent a critical juncture for many existing baseload generation resources and their role in preserving reliability and resilience.[5]
• “Market designs may be inadequate given potential future challenges,” and “need further study and reform to address future services essential to grid reliability.”[6]
• There are a variety of benefits of power generation, including jobs, low emissions, resilience, and energy and national security, and most “are not recognized or compensated by wholesale electricity markets.”[7]
• While “[bulk power system] reliability is adequate despite the retirement of a portion of baseload capacity and unique regional hurdles posed by the changing resource mix,” the North American Electric Reliability Corporation (NERC), in a letter to Secretary Perry, “pressed the importance of reliability issues that require attention, including maintaining [essential reliability services] as conventional generation retires and ensuring flexibility and sufficient transmission to supplement and offset [variable renewable electricity].”[8]
• “Fuel assurance is a growing consideration for the electricity system.” While various fuel types can experience fuel assurance issues, “[t]he NERC letter to DOE emphasized ensuring natural gas fuel supply and mitigating delivery vulnerabilities.” Constraints have arisen in the past with gas supply, and the study noted difficulty in siting pipelines in some areas. Fuel assurance is an important aspect of maintaining system resilience.[9]

The study recommends that FERC take action to address “price formation” issues that it found have contributed to the loss of or financial stress for baseload resources. “FERC should expedite its efforts with states, RTO/ISOs, and other stakeholders to improve energy price formation in centrally-organized wholesale electricity markets. After several years of fact finding and technical conferences, the record now supports energy price formation reform....” It also recommended that “NERC should consider adding resilience components to its mission statement and develop a program to work with its member utilities to broaden their use of emerging ways to better incorporate resilience.”[10]

We anticipate that FERC will soon begin action on the report’s recommendations, most likely by initiating a new rulemaking proceeding focused on improving price formation. The Commission’s new leadership seemed inclined to do so even in advance of the study’s release. In a recent interview, FERC Chairman Neil Chatterjee said he is “committed to the resilience and reliability of our electric system. These are essential to national security. And to that end, I believe baseload power should be recognized as an essential part of the fuel mix. I believe that generation, including our existing coal and nuclear fleet, need to be properly compensated to recognize the value they provide to the system.” After the report was issued, Chairman Chatterjee issued a brief statement noting that FERC was already considering price formation improvements. It seems likely that Kevin McIntryre, who is expected to become chairman in the next few months if approved by the Senate, will share this view.

In addition, the House Energy & Commerce Committee held hearings in July, and expects to hold more, on the effectiveness of wholesale markets and the interaction between state and federal electricity jurisdiction.

Notes:

[1] April 14 memorandum.

[2] Presidential Policy Directive-21, “Critical Infrastructure Security and Resilience” (Feb. 12, 2013).

[3] PJM Interconnection, PJM’s Evolving Resource Mix and System Reliability (Mar. 30, 2017).

[4] Staff Report on Electricity Markets and Reliability, p. 63.

[5] Staff report, p. 10.

[6] Id.

[7] Id, p. 11.

[8] Id.

[9] Id, p. 12.

[10] Id, p. 126.