On April 14, 2017, Energy Secretary Rick Perry requested the Department undertake a study to examine electricity markets and reliability in order to determine whether “wholesale energy and capacity markets are adequately compensating” attributes that strengthen grid resilience, as well as overall grid reliability. The much-anticipated 187-page study—published late Wednesday night—provides an in-depth analysis of the market hurdles facing conventional baseload generation, such as coal, nuclear and hydropower. The study concludes that low natural gas prices are the principal factor behind most baseload power plant retirements, though low demand growth and increasing renewables penetration are also factors.
The study goes on to make policy recommendations, many of which are directed at FERC, to evaluate and develop price reformation and market rules which compensate power generators for reliability and resilience attributes. The report will no doubt kick off a much more intense debate nationally about the relative role of coal, nuclear, hydropower, natural gas and renewables. The recommendations will cause FERC to take on its market roles in a much more comprehensive way, which will have direct effects on the market shares of each source of generation.
The study provides an in-depth, and generally balanced, assessment of the many of the major issues facing the grid today, including:
In terms of reliability, the study specifically notes that the grid is not currently suffering from reliability issues, but that could change as penetration of natural gas and renewables increase while baseload resources continue to retire.
RELIABILITY AND RESILIENCE
Throughout its findings, the DOE focuses on the concepts of reliability and resilience—loosely defined as the grid’s ability to reduce the magnitude and/or duration of disruptive events. This emphasis is key, because it moves beyond short-term economic valuation and three-year capacity markets to give weight to the much broader concept of resilience, which may include a whole swath of public policy goals. As former FERC Commissioner Tony Clark summarized, “public policy goals [include…] incenting in-state jobs, promoting ‘green’ energy or other politically favored resources, preserving carbon-free resources, and retaining substantial tax revenues to state and local government.”
This DOE study is the first government study to set out in plain language that markets were not designed to take into account these types of public-policy incentives, but also recognizing the importance of these incentives are paramount. Therefore, a shift to focus on reliability and resilience may provide a comprehensive way for regulators and legislators to include them. Resilience may include anything from energy supply security to mitigating prices spikes, and this switch in focus by the DOE broadens the scope of how power markets are fundamentally regulated.
The study sets out a variety of recommendations, but the most important point to the need for FERC to weigh in and, subject to their legal authority—move to correct some of the market distortions that are reducing the reliability and resiliency of the current system.
Additionally, the report includes recommendations for additional R&D and a reduction in permitting requirements to speed development of advanced generation technologies in nuclear, hydropower, and coal generation.
CONCLUSION AND NEXT STEPS
Overall, the study seems to favor reliable baseload generation such as coal, nuclear, and hydropower, but it is unclear how far the DOE is willing to go in terms of its own reform mechanisms that will make a difference. Rather, the DOE is shifting to a focus on reliability and resilience and then sending the discussion to FERC in order for the Commission to further define specific price reformation and market rules under its broad Federal Power Act jurisdiction. While the DOE is limited in its ability to preempt state policies, the discussion of FERC’s preemption authority is ongoing in both legislatures and courts—an issue which will only increase in importance going forward.
This shift to FERC as the driver of market rules changes comes just as four new FERC Commissioners have been nominated by the Administration—with two just being sworn in last week. While the Commission is currently facing significant backlog, there are indications that FERC could take up the DOE study recommendations sooner rather than later. In particular, last week acting Chairman Neil Chatterjee appeared to foreshadow the conclusions of the DOE report when he mentioned that coal and nuclear “need to be properly compensated to recognize the value they provide to the system.” All this reinforces the necessity for clients to follow the issue closely.
Overall, it would be a mistake to view the study as providing a comprehensive answer to market hurdles faced by certain power providers. Rather, the study provides ammunition for a variety of constituencies to advocate for their interests before FERC. The DOE study sets the stage for broad market reform and it will be critical for clients to take active advocacy roles before the Commission to protect their interests.
The DOE will also take public comment on the study, but did not specify a deadline.