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US FERC a central player in long-awaited power grid study

Washington (Platts)--24 Aug 2017 924 am EDT/1324 GMT


With the intent of starting "an important conversation about the future" of the US power grid and further exploring a wide range of market factors central to the discussion, the US Department of Energy late Wednesday released its long-awaited study on grid reliability.

While DOE had remained tight-lipped since commissioning the grid study in April, stoking concerns that it would be used by the Trump administration as a basis for providing out-of-market support for struggling coal and nuclear power plants, little new ground was broken in the study's findings. Most of the recommendations speak to ideas and initiatives that have been in play at various levels of government and industry.

The report observed that the wholesale power markets are currently functioning as designed, with a focus on ensuring system reliability and dispatching the least-cost resources at any given time.

Under such a model, wholesale energy prices have, on average, been low, benefiting wholesale power buyers but challenging the profitability of traditional baseload generation resources.

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Benefits that specific power plants provide beyond reliability and cost, "such as jobs, community economic development, low emissions, local tax payments, resilience, energy security, or the national security benefits associated with a nuclear industrial base," the report said, are not recognized or compensated through current market designs.

The Federal Energy Regulatory Commission has been making a similar point for some time through its price formation initiative launched in 2014. The markets simply cannot do what they were not designed for, the agency has said.

Whether these markets could adapt and should adapt to value a broader set of attributes has been the focus of recent debate at the commission over whether and how to integrate the development of state generation policies with the operation of wholesale power markets.

As for the notion of supporting coal and nuclear capacity, the study does call on FERC to move forward aggressively with its ongoing price formation efforts, which could clear the way for local, state and regional pricing schemes that recognize the value of baseload power from those energy sources.

The report added that "further efforts should reflect the urgent need for clear definitions of reliability- and resilience-enhancing attributes and should quickly establish the market means to value or the regulatory means to provide them."

In a cover letter attached to the report, Energy Secretary Rick Perry said the effort was long overdue. "The industry has experienced massive change in recent years, and government has failed to keep pace."

Noting that the report focused on the past 15 years, he asserted that policy makers and regulators "should be making decisions based on what the markets look like today, not what they looked like years ago."

In an apparent nod to market challenges facing certain generation types, Perry went on to contend that "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."

The US is "fortunate to have a variety of fuel sources," Perry continued. "We must utilize the most effective combination of energy sources with an 'all of the above' approach to achieving long-term, reliable American energy security."

The report, he said, should serve as "the starting point for an important conversation about the future reliability and resilience of our electric grid."

But John Moore, a senior attorney with the Natural Resources Defense Council working on the group's Sustainable FERC Project, called the report "a major disappointment."

"Rather than seeking to shape our power grid and markets around clean, carbon-free and affordable energy, the department seems determined to mold our grid around fossil fuels," he said. "We think DOE should concentrate on accelerating the growth of clean energy rather than creating barriers to it and clinging to the past."

He contended that the study gave "short shrift to renewables, especially in the recommendations section."

And while the body of the report "raised some issues that deserve further attention as we start to diversify into more renewables," it concluded with "entirely objectionable recommendations to gut our environmental standards, to build more coal plants, to exempt them from Clean Air Act requirements," Moore said.

He added that "there was very little discussion of the reliability and resilience values of renewables, which grid operators around the country have recognized."

The report said the growing penetration of renewable energy resources, which boast near-zero marginal costs, serves to "put additional economic pressure on revenues for traditional baseload."

These resources, spurred by government policies and mandates such as state renewable portfolio standards, federal tax credits and government-funded research, are displacing baseload as their lower variable operating costs allow them to be dispatched ahead of other generators.

Further, the intermittent nature of renewable resources is placing "a premium on flexible output rather than the steady output of traditional baseload power plants," the study said.

As a result, resources such as nuclear plants that provide reliability benefits but cannot operate flexibly are being passed over for other generation resources as well as non-generation sources such as flexible demand, increased transmission, and energy storage technologies, the report asserted.

Still, it ultimately found that "the biggest contributor to coal and nuclear plant retirements has been the advantaged economics of natural gas-fired generation."

Other recommendations include:

--FERC should promote the valuation of essential reliability services through fuel-neutral markets;
--DOE should support utility and grid operator efforts to enhance system resilience;
--DOE should focus research and development efforts on system reliability and resilience;
--DOE and other agencies should support electricity sector workforce development;
--DOE should prioritize the US' energy dominance in line with the president's recent executive order;
--Federal agencies should speed grid infrastructure project licensing and permitting, including nuclear and coal generation projects; and
--Industry, states, FERC and DOE should actively promote increased gas-electric coordination.

--Jasmin Melvin, jasmin.melvin@spglobal.com
--Chris Newkumet, chris.newkumet@spglobal.com
--Edited by Lisa Miller, lisa.miller@spglobal.com




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