Security or Subsidy: The Department of Energy’s Controversial Proposed Rules on Grid Resiliency

February 9, 2018

In October, United States Secretary of Energy Rick Perry proposed that the Federal Energy Regulatory Commission (FERC) adjust its rates for wholesale electricity sales in order to provide additional compensation to “fuel-secure” electricity generators who keep a 90-day fuel supply on site.[1] In essence, this proposed rule would operate to boost payouts to nuclear plants and some coal plants, as those are the only kinds of facilities with the capability of maintaining this requisite 90-day stockpile of fuel.[2]  The stated purpose of this regulation is to “maintain the reliability and resiliency of [the] Nation’s bulk power system” by guaranteeing energy availability in the event of “supply disruptions caused by emergencies, extreme weather, or natural or man-made disasters.”[3] While energy security is undoubtedly an important priority, a diverse array of critics have condemned this proposed plan as a disguised bail-out to politically favored producers who are currently unable to profitably operate in a competitive market.[4]

Since Secretary Perry’s senate confirmation, the Department of Energy has actively sought to shape these rules. On April 14, 2017, six weeks after taking office, Secretary Perry directed the Department to conduct a study of the reliability of the country’s electric grid to analyze the changes that have been occurring in the generation market.[5] Specifically, the department was tasked with investigating:

  • 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.[6]

Almost immediately, commentators began to speculate on the purpose of the study. For some this was a “seemingly dull” and “wonky” inquiry fitting for an official new to the job.[7]  For critics, it is an opening salvo into what they anticipated would be an effort to blame renewables for the struggles faced by coal- and nuclear-powered plants.[8] Many of those in this camp instead attributed the downward trends faced by coal and nuclear generators to the decreasing cost and expanding availability of natural gas. For example, Tom Kiernan, chief executive of the American Wind Energy Association stated at the time that “[m]ost independent studies show that low natural gas prices are overwhelmingly responsible for the market challenges facing coal nuclear plants.”[9] Similarly, Abigail Ross Hopper, the Solar Energy Industries Association president, added that “[all power sources] benefit from federal and state incentives, so it’s highly unlikely that coal and nuclear are becoming uncompetitive due to incentives for renewable energy.”[10]

Given this contentious backdrop, the results of the study were highly anticipated. In July, Bloomberg leaked an initial draft from the Department of Energy that seemed to lend credence to the theories promulgated by those in the renewable sphere.[11] Specifically, the draft reported, “Costly environmental regulations and subsidized renewable generation have exacerbated base-load power plant retirements. However, those factors played minor roles compared to the long-standing drop in electricity demand relative to previous expectation and years of low electric prices driven by high natural gas availability.”[12] But the Department was quick to curb speculation over this draft, noting that the study was “constantly evolving.”[13]

This statement proved prescient when the final version was released in August because the report took a more moderated tone. While similarly finding that “the biggest contributor to coal and nuclear plant retirements has been the advantaged economics of natural gas-fired generation,” the study also found that both “variable renewable energy has negatively impacted the economics of baseload plants” and that “investments required for regulatory compliance have also negatively impacted baseload plant economics.”[14] Given this multifaceted finding, the authors of the study recommended not only general price formation reform, but also that “FERC should study and make recommendations regarding efforts to require valuation of new and existing [essential reliability services] by creating fuel-neutral markets and/or regulatory mechanisms that compensate grid participants for services that are necessary to support reliable grid operation.[15]

Reactions to this study and its policy recommendations broke along lines predictable for the various industry stakeholders. Maria Korsnick, president of the Nuclear Energy Institute, commended the study, saying, “The U.S. Department of Energy’s electric grid study reaffirms our view that nuclear energy is a key and necessary contributor to a clean, reliable and resilient electric grid. Today electricity markets do not properly credit nuclear energy for the numerous benefits it delivers, forcing plants to close years before the end of their useful lives and compromising grid reliability and resiliency in the process.”[16] Likewise, the National Mining association praised the Department and its study for similar reasons.[17] Conversely, feedback from renewable energy and environmental groups was much more hostile. “This report is not worth the paper it’s printed on . . . the Trump Admiration is burning tax payer dollars on a report on ‘baseload’ power – an antiquated code word for coal and nuclear – to conjure up false attacks on clean energy,” bemoaned Earthjustice attorney Kim Smaczniak.[18]

Secretary Perry for his part took the study as a caution to policymakers to “consider their intended and unintended effects” of their actions because it is now apparent in light of the report that “regulations and subsidies are having a large impact on the function of markets.”[19] Given this now measured impact on the electric power marker, Secretary Perry quickly took action. In late September, Secretary Perry proposed that FERC undertake the aforementioned rulemaking, directing the Commission to “develop and implement market rules that accurately price generation resources necessary to maintain the reliability and resilience of [the] Nation’s bulk power system.”[20]

Reactions to the proposed rules, just like those to the study that undergirds them, have been strong and polarized. Unsurprisingly, environmental groups and those in renewable energy have expressed fierce opposition to the proposed rules.[21] What is rare, however, is the diverse array of other interest groups, including oil and gas companies, public utilities, and electricity consumers, who find themselves aligned with environmentalists in opposition. For instance, the American Petroleum Institute, a prominent oil and gas advocacy group, released a joint statement against the proposal with the Electricity Consumers Resource Council, the Solar Energy Industries Association, and the American Wind Energy Association.[22] Despite this large and unusual coalition, opposition is not ubiquitous. For example, FirstEnergy Corp., a major electricity company in the Midwest and Mid-Atlantic, has commended the effort by the Department of Energy.[23] Similarly, Andrew DeVries, a senior analyst at CreditSights Inc., endorsed the proposal, calling it “a very well laid out plan” that “provide[s] financial support to coal and nuclear plants while preventing already profitable natural gas plants from piggybacking along for the ride.”[24]

After an extension of the rule’s review process, FERC decided not to adopt the proposed rule on grid reliability and pricing, but potential issues remain.[25] Following the Commission’s decision to reject Secretary Perry’s proposed rule, the Commission opened a new docket to investigate issues related to grid reliability with the goal of taking a broader and more comprehensive approach in future rulemaking. This effort is currently underway, and throughout this new process, the Commission hopes to develop a common understanding of what “resilience” in the grid really means, how to assess resilience, and to determine whether further regulatory action will be necessary.[26]

 

[1] Grid Resiliency Pricing Rule, 82 Fed. Reg. 46940, 11–12 (proposed Oct. 10, 2017) (to be codified at 18 C.F.R. pt. 86).

[2] Timothy Puko, Trump Plan for Coal, Nuclear Power Draws Fire from Environmental, Oil Groups, Wall Street J. (Oct. 22, 2017), https://www.wsj.com/articles/environmentalists-energy-companies-unite-in-fight-against-electrical-grid-plan-1508677201 (last visited Oct. 27, 2017).

[3] Grid Resiliency Pricing Rule, 82 Fed. Reg. 46940, at 11.

[4] Puko, supra note 2.

[5] Memorandum from Rick Perry, Secretary of Energy, to the Department of Energy Chief of Staff (April 14, 2017), https://s3.amazonaws.com/dive_static/paychek/energy_memo.pdf.

[6] Id.

[7] Chris Mooney, Rick Perry Asked for a Boring, Wonky Study of the Grid. Even that Was Controversial, Wash. Post (Apr. 18, 2017), https://www.washingtonpost.com/news/energy-environment/wp/2017/04/18/rick-perry-asked-for-a-boring-wonky-study-of-the-grid-even-that-was-controversial/?utm_term=.730f9490c08c (last visited Oct. 27, 2017).

[8] Id.

[9] Id.

[10] Id.

[11] Catherine Traywick et. al, Renewable Energy Not a Threat to Grid, Draft of U.S. Study Finds, Bloomberg (July 14, 2017), https://www.bloomberg.com/news/articles/2017-07-14/renewable-energy-not-a-threat-to-grid-draft-of-u-s-study-finds (last visited Oct. 27, 2017).

[12] Id.

[13] Id.

[14] Department of Energy, Staff Report to the Secretary on Electricity Markets and Reliability 13–14 (Aug. 2017).

[15] Id. at 126 (emphasis added).

[16] Steven Mufson, Rick Perry Gets His Electricity Grid Study. The Coal and Mining Industries Like It, Wash. Post, (Aug. 24, 2017), https://www.washingtonpost.com/business/economy/2017/08/23/fa4a506a-883e-11e7-a50f-e0d4e6ec070a_story.html?utm_term=.10fafa7ee7e5 (last visited Oct. 27, 2017).

[17] Id.

[18] Id.

[19] Id.

[20] Grid Resiliency Pricing Rule, 82 Fed. Reg. 46940, at 11.

[21] Puko, supra note 2.

[22] Id.

[23] Id.

[24] Timothy Puko, Energy Department Urges Pricing Shift That Could Bolster Coal, Nuclear Wall Street J. (Sep. 29, 2017) https://www.wsj.com/articles/energy-department-urges-pricing-shift-that-could-bolster-coal-nuclear-1506698449 (last visited Oct. 27, 2017).

[25] Grid Reliability and Resiliency Pricing, 162 FERC 61012, Docket Nos., RM18-1-000, AD18-7-000, at 1, (Jan. 8, 2018).

[26] Id. at 10.

Mason Malpass is a third year law student at the University of Texas School of Law. He graduated magna cum laude from Pepperdine University in 2014 with a B.A. in Economics. After graduation he will join Reed Smith in Houston.