How DOE’s baseload power rule ‘would blow the market up’

Source: By Gavin Bade, Utility Dive • Posted: Tuesday, October 3, 2017

The Department of Energy’s proposed rulemaking to cover the costs of baseload coal and nuclear generators could lead to an unraveling of wholesale power markets if adopted by the Federal Energy Regulatory Commission, energy regulators and industry analysts told Utility Dive.

“This would blow the market up,” former FERC Chairman Jon Wellinghoff, a Democrat appointed to the commission by President Obama in 2010, told Utility Dive. “And you can quote me on that.”

On Friday, the DOE directed FERC to open a rulemaking proceeding to provide “full recovery of costs” for power plants that keep 90 days of fuel supplied onsite. DOE officials wrote that the Notice of Proposed Rulemaking (NOPR) would enhance the resilience of the nation’s electric system and “protect the American people from energy outages expected to result from the loss of this fuel-secure generation.”

Former FERC Commissioner Tony Clark, a Republican appointed by Obama, stressed that FERC is an independent federal agency and does not have to adopt the details of the DOE proposal. But FERC will likely have to address the NOPR in a rulemaking proceeding, and applying its basic tenets could threaten market operations.

“[FERC] could take a look and try to do something more modest,” he told Utility Dive. “But I think if they took the most aggressive angle that they could on it, which is … to figure out how to put money into coal and nuclear plants, it would be very challenging for the markets.”

The DOE directed FERC, which has the final say over power market regulation, to act on its proposal within 60 days. Energy lawyers say the vagueness of the NOPR language and the need to build a regulatory record will make that nearly impossible, adding that FERC will likely extend its rulemaking timeframe.

“What FERC will have to do is essentially start over,” Ari Peskoe, senior fellow in electricity law at Harvard Law School’s Environmental Policy Initiative, told Utility Dive. “It will essentially have to use this as a prompt for comments and then from that actually develop a proposed rule.”

Coal and nuclear operators praised the proposal, saying it could enhance power system resilience by ensuring baseload generators threatened by retirement stay online. But much of the sector joined with the former FERC commissioners in criticizing the rule on Friday, saying it could increase customer costs and power sector pollution while actually doing little to enhance system resilience.

“It’s gonna be as expensive as hell,” Wellinghoff said. “Expensive as it can be because we will be paying the full freight on coal and nuclear plants.”

FERC is unlikely to take up the proposal as written, analysts and former regulators agreed, but regulators currently at the agency have indicated they plan to address plant compensation and reliability questions — making the NOPR the Trump administration’s opening salvo in what is likely to be a long and contentious regulatory battle over the future of the fuel mix and competitive electricity markets.

Get electric utility news like this in your inbox daily. Subscribe to Utility Dive:

Resilience benefits questioned

The DOE proposal comes as part of the Trump administration’s fresh focus on the reliability and resilience of the nation’s power sector.

Throughout the year, EPA Administrator Scott Pruitt has repeated that the power sector needs generators with “solid hydrocarbons onsite” to protect from extreme weather or grid attacks. In the days before the NOPR’s release, Secretary of Energy Rick Perry framed power reliability as a national security issue in several public appearances, saying his agency could act to preserve power mix diversity and keep baseload generators online.

The administration’s concern is that across the nation’s wholesale power markets, low-priced natural gas generation and renewable energy are threatening older coal and nuclear plants, forcing many to retire before the end of their operational lives. Earlier this year, Perry ordered a reliability study of the nation’s bulk electricity system. Released in August, the study concluded that reliability is strong today, but that regulators should consider higher compensation for generators if they feel the power supply’s reliability is threatened in the future.

The language of the NOPR draws directly on lines from the DOE grid study, saying cost recovery is necessary because of the “recognition that organized markets do not pay generators for all the attributes they provide.” The proposal calls for grid operators to establish “just and reasonable rate tariffs” with a “fair rate of return” for generators that have secure fuel supplies and are able to provide ancillary and reliability services.

Wellinghoff questioned the DOE’s linking of the grid study to the directives in the NOPR, saying the report “in no way or in no place supports what’s in this letter to FERC.”

That and the NOPR’s specific connection of fuel supply to resilience led many industry experts to believe the proposal is aimed more at shoring up uncompetitive baseload generation than preserving the power supply.

“If you really were worried about resilience, what you would do is study the specific elements of resilience that are essential to the system and then create a market mechanism to go out and procure that service at the lowest cost or to pay for the value of that service,” Robbie Orvis, policy design projects manager for think tank Energy Innovation, told Utility Dive. “You don’t arbitrarily decide that 90 days of fuel onsite with no real underpinning or modeling showing that number is important … It’s just absurd.”

Securing fuel supplies onsite could help mitigate for fuel transportation interruptions, but would do little to help the grid respond to other outages, Orvis said. In Puerto Rico, the territory’s state-owned utility reported last week that many of its generating plants remained operational in the aftermath of Hurricane Maria last month, but power remains out to the island because of transmission and distribution grid damage.

“Having a mountain of coal in your backyard doesn’t mean [anything] if you can’t deliver the power,” said Mike O’Boyle, policy innovation expert at Energy Innovation, echoing comments from other sources. “How much would 90 days of fuel on hand have helped Puerto Rico?”

The Department of Energy did not respond to requests for comment from Utility Dive.

‘Dynamite’ the markets

If the DOE proposal were enacted, Orvis and other stakeholders said that most coal and nuclear plant operators would act immediately to boost stockpiles of fuel to meet the 90-day mandate, though analysts point out that would require huge stockpiles at each plant.

for 1250MW NGCC: ~6.3 LNG ships or ~400 acres of CNG tanks. Coal: ~12 acre pile.

— Joshua Rhodes (@joshdr83)

With so many plants angling for cost recovery, prices in wholesale power auctions are likely to be too low to support other generators, leaving markets to wither on the vine.

“There would not be competitive resources on the market if the rule’s text is to be taken seriously,” Montana Public Service Commissioner Travis Kavulla, a Republican and the former president of the National Association of Regulatory Utility Commissioners, told Utility Dive. Beyond coal and nuclear plants, gas generators that can also burn diesel are likely to stockpile that fuel to meet the 90-day requirement, Kavulla said.

“They would look at the rule and say, ‘Well, 50% of the resources in the market get the treatment where the market doesn’t matter to them because their costs are covered either through subsidies for renewables or cost-of-service regulation,’” he said. “They would say, ‘Well, it’s time to buy more coal to put on my plant site or it’s time to build a new diesel storage container so my gas plant has 90 days of backup fuel.’”

The market impacts of the NOPR will depend on how broadly FERC defines its criteria for cost recovery, Andrew Weissman, senior counsel at the law firm Pillsbury LLC, told Utility Dive.

“The broader the criteria are, the more the issue has to be addressed of, how do you reconcile this with the rules of the wholesale market?” Weissman said. He expressed hope that a more limited rule could maintain market functions while preserving fuel diversity.

“The potential issues it raises in terms of the functioning of the wholesale markets actually may turn out to be relatively limited,” Weissman said, “except to the extent that it may do a lot better job in maintaining fuel diversity and may be important in reducing the risk of exposure to [natural gas] price spikes.”

Weissman’s optimistic attitude was in the minority among stakeholders that Utility Dive spoke to, however. The NOPR language can be viewed as the culmination of subsidy pancaking, Kavulla and others said, where generating resources lobby for subsidies as they are granted to their competitors.

In May, FERC convened a technical conference to assess how to best integrate such state policies into the wholesale power markets, but the critics say the NOPR could derail those efforts.

“This takes that issue and says, ‘OK, I guess it’s time to dynamite [the markets] then,’” Kavulla said. “Grandma has a cold, let’s smother her with a pillow now.”

What FERC may do

Because of the potential damage to wholesale power markets, few expect current federal regulators to design a rule similar to DOE’s proposal.

“[The NOPR] flies in the face of everything FERC has done under the Federal Power Act over the past 20 years,” Peskoe said. Kavulla called it “inconceivable” that FERC would adopt the NOPR “anything close to as written.”

Clark agreed, saying FERC could choose from a wide variety of options to enhance the resilience of the bulk power sector. Only on “the far end of the spectrum” would be devising “a whole new compensation mechanism for coal and nuclear operators,” he said.

“It was always very top-of-mind for me to maintain the independence of the commission,” the former commissioner said. “I think I would take a look at [the NOPR] but would understand that from a legal standpoint you have an obligation to make a decision based on a record … and build a record that you can make a decision on.”

Wellinghoff concurred. FERC “doesn’t have to do anything” in terms of specific rules outlined by the DOE, he said. “I would set [the NOPR] over to the side someplace under a pile of papers because it would be something that I wouldn’t even consider or entertain.”

How acting and pending FERC commissioners will view the NOPR remains unclear. Acting Chairman Neil Chatterjee has said repeatedly that coal plants are not compensated properly for their attributes today, and told lawmakers this month that the issue is a top priority for the commission to address in the coming months.

Pending FERC nominees Kevin McIntyre and Richard Glick have also expressed support for reforms based on generation attributes, but stressed in their confirmation hearings that the commission is resource-agnostic and that it would first have to build a record on power reliability threats. FERC regulators do not comment on ongoing proceedings and DOE did not respond to requests for comment.

Wellinghoff had multiple conversations with Chatterjee before the current FERC head was confirmed by the Senate earlier this year. While he stressed he cannot speak for the chairman, Wellinghoff said Chatterjee is a “a supporter of maintaining a viable market structure,” while the NOPR “would totally undermine a viable market structure.”

The two nominees “sounded like in their Senate confirmation hearings they were even less interested in this resiliency issue and more interested in markets and ensuring markets were maintained as a viable entity,” Wellinghoff added.

McIntyre, a Republican, is slated to become Chairman if and when the Senate confirms him, and Chatterjee has said he does not want to move forward on major issues until the final two vacancies at the agency are filled.

When FERC does act, it will need to build a regulatory record with input on how generation attributes should be valued. Peskoe said the NOPR, with only about one page of regulatory language, gives little indication on how the commission should proceed.

“I would say this is not a proposed rule that could form the basis of a final rule,” he said. “Usually, proposed rules have far more detail that would provide a basis for comments on specific aspects of the proposal and that’s not really here.”

The ambiguity could mean that the 60-day order turns into a lengthy regulatory proceeding in which power sector stakeholders debate the future of market functions and resource compensation, experts agreed. That prospect inspired trepidation in some, but at least one observer remained optimistic.

“Whatever [the DOE] intent was, I personally hope that it will result in a more thorough rethinking of what the rules ought to be for the wholesale power markets,” Weissman said. “It may be that a more thorough rethinking is necessary.”

Correction: A previous version of this article misattributed a quote about Puerto Rico and onsite fuel supply. It was from Mike O’Boyle, not Robbie Orvis. 

Follow Gavin Bade on Twitter