FERC declined to adopt the plan forwarded by Energy Secretary Rick Perry to support coal and nuclear generation units, instead opting to seek more information from grid operators on whether further action on market design, price formation, or other areas is needed to address grid resilience.
The move earned praise from many energy industry trade groups who opposed the notice of proposed rulemaking (NOPR) from the Department of Energy (DOE), with officials commenting that the winners will be consumers and businesses in organized wholesale power markets who will not be paying to subsidize generators slated for retirement because of market prices.
The January 8 order (RM18-1, AD18-7) terminated the NOPR launched by Perry, with a nod expressing appreciation for him reinforcing that the resilience of the bulk power system is an important issue that warrants further attention. As many parties asserted in an avalanche of comments opposing the NOPR’s plan to provide out-of-market compensation for coal and nuclear units with on-site fuel supplies, the legal threshold of the Federal Power Act (FPA) proved to be too high for the Commission to embrace the proposal.
With three commissioners writing separate concurring statements, FERC directed each regional transmission organization (RTO) and independent system operator (ISO) to submit information within 60 days on numerous resilience issues. The order poses more than 20 questions for ISOs and RTOs to address about resource adequacy programs and challenges to improving resilience, such as extreme weather or other high-impact, low-frequency events.
The resilience issues to examined in the new proceeding “will remain a priority of the Commission and we expect to review the additional material and promptly decide whether additional Commission action on this issue is warranted,” FERC said in the order.
In a January 8 statement, Perry said he appreciates FERC’s consideration of the NOPR and the attempt to address what he termed “marketplace distortions that are putting the long-term resiliency of our electric grid at risk.”
In a DOE staff report that prompted the NOPR from Perry, DOE staff commented that many factors are at work affecting the changing generation mix, with the low price of natural gas making gas-fired generators more economic and leading to the retirement of coal and nuclear generation units. The NOPR asked FERC to act under FPA Section 206 to provide full cost recovery for power plants with 90 days of fuel on site in ISO and RTO regions that have energy and capacity markets, which was generally viewed as a step to provide additional compensation for coal and nuclear power plants in those regions. Adopting the NOPR would prevent such facilities from retiring because they have been priced out of the market by lower-cost generation resources.
“As intended, my proposal initiated a national debate on the resiliency of our electric system. What is not debatable is that a diverse fuel supply, especially with on-site fuel capability, plays an essential role in providing Americans with reliable, resilient, and affordable electricity, particularly in times of weather-related stress like we are seeing now,” Perry said in the statement.
DOE spokeswoman Shaylyn Hynes said Perry is pleased that FERC “heard his call” and is directing ISOs and RTOs to address resilience issues. She commented that the power grid is being maintained by an abundant and diverse supply of fuel sources today, but “the real question is whether or not this diversity will be here tomorrow.”
Most energy trade groups praised FERC for declining to adopt the NOPR or embrace the notion of additional compensation for generators based solely on having fuel supplies on site. Oil, natural gas, renewable energy interests, environmental groups and consumer groups applauded the decision, with Malcolm Woolf, senior vice president of policy at Advanced Energy Economy commenting that is shows commissioners take the role of FERC as an independent agency seriously.
The American Petroleum Institute, the Natural Gas Supply Association (NGSA), the American Council on Renewable Energy and others commended FERC for the move, noting that the NOPR would have undermined competitive power markets and strapped consumers with unneeded costs without improving grid reliability. NGSA dubbed the decision “a thoughtful and measured approach to evaluating resilience in the organized electricity markets.”
In a call with media members, NGSA President and CEO Dena Wiggins said she appreciates the leadership new FERC Chairman Kevin McIntyre showed in reaching the result.
FERC’s continued examination of resilience will show the contributions that the gas industry has made to support power grid reliability and resilience, and the new proceeding will allow a full airing of the issues and regional market dynamics, Wiggins said.
All sources of power generation contribute to improving power grid reliability, and “on-site fuel supply does not make the grid more resilient,” said Amy Farrell, senior vice president of government and public affairs at the American Wind Energy Association.
FERC’s decision to have ISOs and RTOs to address resilience issues is important in that it allows for a continued evolution of generation resources, with market rules reflecting current market dynamics and not the generation picture of 10 years ago, when coal and nuclear generators had about 70% of the generation market, added Dan Whitten of the Solar Energy Industries Association.
That point was brought up in the concurring statement of Commissioner Cheryl LaFleur, who said in her view, the NOPR sought to freeze the power generation resources of yesterday in place indefinitely, rather than adapting to current market conditions or trends toward the future. “I believe the Commission should continue to focus its efforts not on slowing the transition from the past but on easing the transition to the future. We must continue to guide grid operators in sustaining reliability and resilience within a system that is likely to be cleaner, more dynamic, in some instances more distributed, and deployed by an efficient market for the benefit of customers,” LaFleur said.
The January 8 order said that resilience remains an issue that warrants FERC’s attention, including through the development of a clear understanding of what each RTO and ISO does with respect improving resilience and what more they and FERC could be doing. The RTOs and ISOs are well-suited to understand the needs of their regions and assess resilience issues given their different geographic areas, the Commission said.
Not surprisingly, coal and nuclear groups expressed disappointment with the FERC order and vow to work with the Commission and ISOs on resilience issues in the coming months. By declining to act to preserve America’s nuclear plants, FERC preserved the status quo “in which markets recognize only short-term price signals and ignore the essential role of nuclear generation, will lead to more premature shutdowns of well-run nuclear facilities. Once closed, these facilities are shuttered forever,” said Maria Korsnick, president and CEO of the Nuclear Energy Institute (NEI).
NEI believes that the new proceeding on resilience “must lead to prompt and meaningful action, including on issues such as price formation,” Korsnick said.
It is incumbent upon ISOs and RTOs to adopt significant measures to safeguard the public from serious power supply disruptions, said Hal Quinn, president and CEO of the National Mining Association.
“Today’s disappointing lack of action” from FERC “follows a week in which the value of coal to Americans could not have been more clearly illustrated,” with coal-fired generation a leading supplier in many of the markets that experienced frigid temperatures, Quinn said. “That coal-powered electricity came from many plants that will no longer be available if retirements continue at the pace expected,” Quinn said.
Several grid operators relied on coal-fired generation for more than 40% of their electricity, noted Paul Bailey, president and CEO of the American Coalition for Clean Coal Electricity. The group vowed to work with the Commission and the ISOs and RTOs to assure that power markets value the attributes of coal, with Bailey cautioning that the power grid could become less reliable and less resilient while the information is being collected.
As is his custom, Robert Murray, chairman, president and CEO of coal mining firm Murray Energy went beyond the relatively staid comments of others. “This is a bureaucratic cop-out, whereby these FERC commissioners have totally avoided making a decision regarding the very urgent situation relative to the lack of reliability, resiliency, and security in our electric power grids,” he said in a statement.
Murray said he fears more coal and nuclear units will retire and further worsen the critical situation, which saw natural gas prices peak at $175/MMBtu during the recent cold snap. Power prices in some markets peaked at more than 10 times their normal level as a result.
About 37,000 MW “of supposedly natural gas-powered electricity were entirely unavailable due to the priority for home heating use and the inability of natural gas to flow at cold temperatures,” Murray added, while power customers in South Carolina were asked to voluntarily cut back on their electricity use because of critical margins in the power grid. “During these critical times, coal has far outperformed all other fuel sources, including natural gas, dispatching at over twice the level of gas plants” and well above the output from renewable resources, he said.
In the order rejecting the NOPR, FERC ruled that under FPA Section 206, there must be a showing that existing tariffs of ISOs and RTOs are unjust, unreasonable, unduly discriminatory, or preferential. Neither the NOPR itself nor the record developed in the proceeding satisfied that threshold statutory requirement.
Furthermore, the proposed remedy of certain facilities receiving cost-of-service rates has not been proven to be just and reasonable, and could be unduly discriminatory and preferential, FERC said. Providing such rate treatment only to facilities with 90 days of fuel supply on site would exclude other resources that may have resilience attributes, the Commission concluded.
In his concurring statement, Commissioner Neil Chatterjee said he believes the record supported adoption of some type of interim measure to avoid near-term resilience challenges from the changing generation mix while the long-term picture is examined.
In his role as chairman prior to the arrival of McIntyre, Chatterjee expressed his preference for an interim measure to improve compensation for coal and nuclear plants at risk of retirement and tying that step with a long-term solution to be worked out later. He said options that were examined included some form of reliability-must-run contract to keep certain plants from retiring if they have resilience and fuel security attributes, or a “show cause” order that directs ISOs and RTOs to keep certain plants running if they have those attributes but are not being compensated for them. Such steps would be based on the legal principle under the FPA that current market designs are unjust and unreasonable because they are not providing sufficient compensation for generation facilities with resilience attributes.
In the concurring statement, Chatterjee said either ISO and RTO tariffs nor grid reliability standards from the North American Electric Reliability Corp. require grid operators to assess fuel supply risks beyond their control, or to mitigate the potential impact on grid reliability.
As a result, he believes it would have been prudent, besides establishing the resilience proceeding, for FERC to issue an order under FPA Section 206 directing each ISO and RTO to either submit tariff revisions that provide interim compensation for resources that have necessary resilience attributes and are at risk of retirement before the end of the new proceeding, or show cause why they should not be required to do so.
He would have allowed the grid operators to define which resources provide necessary resilience attributes and are at risk of retirement, Chatterjee said. “Because of their detailed knowledge of their own systems, the RTOs/ISOs are well-positioned to understand the specific resilience risks in their footprints, to identify the resilience attributes that would most effectively mitigate those risks, and to tailor appropriate tariff mechanisms to meet their needs.”
He also would have required any tariff revisions proposed by the ISOs and RTOs to try and minimize the effect on wholesale markets, with any out-of-market mechanisms developed only as a last resort.
“While I would have preferred such an order, I am nevertheless encouraged by today’s order, which represents a positive step forward in addressing these critical issues,” Chatterjee said.
Commissioner Richard Glick wrote about the NOPR failing to meet the standard set in FPA Section 206. “The proposed rule had little, if anything, to do with resilience, and was instead aimed at subsidizing certain uncompetitive electric generation technologies,” he said.
He expressed comments similar to LaFleur, that resilience issues should be considered in the context of the changing generation picture and not to preserve the status quo. In that regard, ISOs and RTOs should consider the resilience issues raised in the proceeding through use of traditional technologies and resources and newer, less widespread technologies, such as distributed energy resources, energy storage and microgrids.
Because most power grid disruptions are the result of transmission or distribution system issues, he urged ISOs and RTOs to examine the resilience questions with an eye on those assets, rather than solely power generation assets.
Glick expressed confidence that FERC will address the issues in the same manner it tackles all issues, from a non-partisan perspective based on what the facts show, and the law requires. “If the RTOs and ISOs demonstrate that the resilience of the bulk power system is threatened we should act. If not, we should move on,” he said.
By Tom Tiernan TTiernan@fosterreport.com
This article appears as published in The Foster Report No. 3181, issued January 12, 2018
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