Explaining Perry’s grid directive, for dummies

Source: Benjamin Storrow, E&E New • Posted: Thursday, October 12, 2017

Energy Secretary Rick Perry’s plan to pay coal and nuclear plants to maintain large stockpiles of fuel has been called, alternatively, a grenade, “the single greatest action that has been taken in decades” and “the squirrel plan.”

The bellicose language hints at the stakes. Perry’s plan has the potential to reshape electricity markets, provide the coal industry a jolt and hamper U.S. climate efforts. But you could be forgiven for missing that. The plan is filled with jargon. Cost-of-service regulation versus restructured markets, anyone?

So today E&E News is breaking down the former Texas governor’s plan in layman’s terms, with an eye toward what it might mean for the power sector, climate change and President Trump’s plan to revive the coal industry.

This sounds boring. Why is it a big deal?

This is Trump’s rescue plan for the coal industry. For the last eight years, Republicans and the coal interests have fought environmental regulations like the Clean Power Plan, former President Obama’s proposed carbon caps on power plants, and the Mercury and Air Toxic Standards (MATS). MATS in particular drove a number of older, less efficient plants out of the market when it was implemented by EPA in 2015, according to an analysis by the U.S. Energy Information Administration (EIA).

Today, utilities have already installed the equipment to comply with MATS, and the Clean Power Plan is headed for the scrap heap, but coal plants keep closing. A recent report from the Union of Concerned Scientists estimates 18 percent of U.S. coal capacity will be retired by 2030.

Just last week, Luminant announced it was retiring one of the largest coal plants in Texas. Low natural gas prices, the company said, were the cause.

Here’s the bottom line: If Trump is to fulfill his campaign promise to coal, he needs to address low natural gas prices. Rick Perry’s plan would do just that.

“The intention,” said Matt Preston, a coal analyst at Wood Mackenzie, “is to preserve coal and nuclear units, and to increase coal consumption.”

Got it. So what would Perry’s plan do?

Liam Denning, a Bloomberg Gadfly columnist, labeled Perry’s proposal the “squirrel plan” because it would pay coal and nuclear plant operators to hoard massive stockpiles of fuel at their facilities. More specifically, it would allow power plant owners to recover their costs plus a rate of return in exchange for maintaining a 90-day fuel supply that is protected against the elements.

What does that mean for the U.S. power sector?

The truth is, we don’t know (Perry’s proposal was notably short on specifics), but there are lots of theories. One school of thought holds that it would be the end to restructured power markets as we know them. Another argues that Perry’s proposal could be amended and shoehorned into the markets. The most likely practical outcome: Many analysts believe it would prevent coal and nuclear plants from closing by offering a new revenue stream to facilities that are struggling today.

There’s that term, “restructured power markets.” What the heck does it mean?

Traditionally, utilities operated as regulated monopolies. They generated electricity, sent it out over the transmission lines and delivered it to your electric socket. In that model, state regulators decided whether the utility’s investment was needed. If it was, the power company was allowed to recover its costs plus a rate of return.

They call this cost-of-service regulation, and it’s still used in about a third of the country today. The remaining two-thirds of the country began moving toward restructured markets in the 1990s under the theory that competition in the power sector would lead to lower electricity prices. That led to a severing of the utility model. Today, independent power producers or merchant producers compete to sell their electricity in a market, while utilities are charged with transmission and distribution.

Perry’s plan would only apply to restructured markets.

Why are some people calling Perry’s plan a grenade?

The main complaint with Perry’s proposal goes something like this: If you allow one company to get a guaranteed return, then you have to let everyone get a guaranteed return, or the market falls apart.

There are also questions about the price tag. The Industrial Energy Consumers of America, a trade group representing manufacturing interests, came out against the proposal yesterday. It’s concerned about the cost. The analysts at Morgan Stanley also reckon it will be expensive, writing in a note to investors last week that the plan would result “in higher electricity costs for consumers.”

Who thinks this is “the single greatest action that has been taken in decades”?

That would be Robert Murray, the CEO of the Ohio-based coal company Murray Energy Corp. (Greenwire, Oct. 10). Murray is one of Perry’s loudest supporters, and he argues that the proposal is essential for preserving the country’s source of reliable, low-cost power.

Speaking of which, what’s Perry’s rationale for doing all this?

Secretary Perry and his supporters like to point to the polar vortex of 2014, when frigid temperatures pushed natural gas generation offline and prompted many companies to run their coal plants full-bore. Their basic point: Storing fuel on-site can make the grid more resilient to extreme weather events or emergencies.

Is that really necessary?

Ultimately, it will be up to the Federal Energy Regulatory Commission to decide whether Perry’s plan is warranted or not.

But there are many skeptics. Perry’s proposal has given rise to an unusual alliance between natural gas and renewable interests, which argue that the Energy secretary’s whole plan is bogus.

More important, perhaps, are the recent findings of the North American Electric Reliability Corp., which is charged with ensuring the reliability of the grid, and a recent report from the Department of Energy. Both say the electric grid is reliable today, but that evolution away from coal and nuclear toward natural gas and renewables creates new challenges for the future (Energywire, Oct. 3).

So Perry might be onto something, then?

William Hogan, research director at the Harvard Electricity Policy Group, echoed many industry watchers last week, praising the challenges identified in DOE’s recent grid study but questioning the conclusions Perry drew from it.

“This would be a really big change if we went all the way to the solution proposed by Secretary Perry,” he said.

Hogan and several other analysts wondered if Perry’s real intention is not to pass his proposal but to push FERC to complete its own analysis of how to best deal with the grid’s evolution.

So there’s a problem here. I’m just not sure what it is.

America’s power sector has been turned on its head by the boom in natural gas production. Traditionally, coal and nuclear served as the foundation for the grid. Both types of plants are expensive to run because they need large amounts of labor and fuel and generate lots of expensive waste. But as long as they run around the clock, they are efficient ways to produce power.

That’s not happening to the same extent anymore. Power companies are increasingly apt to call on natural gas (which fracking has made cheap and abundant) and renewables (which have no fuel cost and federal tax incentives) before calling for coal and nuclear.

Coal plants’ average capacity factor (the amount of time they run) has fallen as a result, from 61 percent in 2014 to 52 percent last year, according to EIA.

Neither coal or nuclear was designed to run part-time from an operational or financial perspective, so many power companies have simply decided to shut plants down.

I’m still fuzzy on what the problem is.

The grid is increasingly reliant on natural gas and renewables, but renewables aren’t always available and natural gas pipelines can become constrained during cold weather, when the gas is also needed for heating.

So the problem is this: How do you make sure the grid produces enough power when it is needed most?

Could FERC actually pass this thing?

The early indications are that Perry’s plan faces a hard hearing. One Republican FERC commissioner took the unusual step of firing off a public warning shot, saying the commission wouldn’t blow up competitive markets (Greenwire, Oct. 5). Another Democratic colleague quickly endorsed the idea.

Anthony Clark, a former Republican FERC commissioner, said one of the most challenging aspects of Perry’s plan is his call for the commission to decide the question within 60 days. As a commissioner, he said, you know there’s a good chance FERC’s decision will be litigated. The compressed timeline makes it easy for a judge to overturn the case on administrative grounds without weighing the merits of the legal arguments.

So the plan faces an uphill challenge, to say the least.

I can’t believe you waited until now to tell me that this thing could be dead on arrival.

Hold your horses. One of the most interesting things about Perry’s proposal is not the proposal itself, but where FERC may take it. The commission already has opened several inquiries into market designs that dictate power prices, with an eye toward ensuring the reliability of the grid. Those changes could still help coal and nuclear without a radical change in how markets operate.

Let’s say this thing does pass. Would it affect my state?

Perry’s plan actually carries surprisingly little weight outside of the Mid-Atlantic. That’s because much of the West and South still employs cost-of-service regulation and isn’t under FERC’s jurisdiction. Restructured markets in California, New York and New England have little to no coal generation anymore, so it’s largely irrelevant there. Texas has a restructured market, but it isn’t under FERC’s jurisdiction. The Southwest Power Pool and most parts of the Midcontinent Independent System Operator are also out because they employ a degree of cost-of-service regulation. Under Perry’s plan, power plants that are already subject to cost-of-service regulation wouldn’t qualify.

That leaves the PJM Interconnection, which runs from New Jersey to Virginia west through the Rust Belt to Illinois. PJM is the world’s largest wholesale power market, so there is still a lot on the line.

What does any of this have to do with climate change?

As the Energy Department report notes, older, less-efficient plants (coal plants) have been retired and replaced (largely by relatively clean natural gas generation) at a faster clip in restructured markets than in the states where the cost-of-service model is still employed. The switch to gas has had a climate benefit. EIA estimates that coal-to-gas switching is responsible for about two-thirds of the carbon dioxide emissions reductions in the U.S. power sector since 2005.

There is an entire school of thought that views restructured markets as one of the most efficient ways to attack the climate question in the power sector. A lot of the thinking involves a carbon tax, but that’s another story (Climatewire, Dec. 7, 2016).