Nothing New in Department of Energy Grid Study

Ari Peskoe – August 24, 2017

In April, Secretary of Energy Rick Perry issued a memo to Department of Energy (DOE) staff, requesting a study of electricity markets and reliability, with a focus on whether “baseload” power plants are being: 1) harmed by EPA regulations and renewable energy programs and 2) adequately compensated for the value they provide to the grid. The Grid Study, released yesterday, echoes the findings of previous studies performed by DOE, the Federal Energy Regulatory Commission (FERC), and other experts.

The Grid Study recognizes that the fuel mix used to generate electricity in the U.S. is changing rapidly. Today’s grid is powered less by coal, nuclear, and natural gas baseload generators that run around the clock to meet the minimum level of consumer demand. Instead, wind and solar are increasingly meeting this demand, leading grid operators to prioritize flexible resources that can quickly react to changes in supply and demand.  Fast-acting resources, including demand response, energy storage and some natural gas plants, are therefore more highly valued than inflexible baseload plants that are unable to adjust to system needs.

DOE’s 2016 Quadrennial Energy Review (QER) already recognized these trends, and aimed to ensure that regulators and market operators had the tools to ensure reliability in the face of dramatic changes that challenge many of the industry’s long-held assumption. The new Grid Study finds nothing new, but its proposed responses are constrained by the terms of Perry’s memo. Rather than embracing and seeking to accelerate current trends, as the QER did, the Grid Study examines how to shoehorn old, inflexible generators into a rapidly evolving and more nimble grid.

The Grid Study will disappoint coal interests who have long blamed EPA regulations and renewable energy programs for their financial difficulties. Instead, the Study concludes that low natural gas prices and the development of more efficient natural gas plants are the “biggest contributors” to recent coal and nuclear plant retirements. Notably, the Study finds no correlation between increasing renewable energy generation and baseload retirements. Environmental regulations “were not the sole cause” of coal retirements, although they were found to be a contributing factor.

The Study also provides no evidence for invoking DOE’s emergency authority under the Federal Power Act (FPA) to boost the coal industry. Recent reports reveal that the coal industry urged the Administration to take the unprecedented step of declaring an emergency under FPA section 202(c) to prevent uneconomic coal plants from retiring. Section 202(c) allows DOE to order plants to operate when it concludes that there is an emergency due to a sudden increase in demand, a shortage of electricity or generation facilities, or a fuel shortage. The report finds that not one of those conditions exists.

The Grid Study finds that consumer demand is flat and concludes that “suppliers can no longer expect robust demand growth.” With regard to supply, the Study notes that all regions of the country have excess generation capacity. Furthermore, there is no fuel shortage, as “shale gas development has significantly expanded the availability of natural gas.” In short, the report provides coal companies with absolutely no support for the sweeping, unprecedented use of Section 202(c) that they advocate.

Highlighting ongoing market reform efforts at FERC, the Study suggests improvements in electricity market pricing and urges FERC to determine whether market prices can and should reflect the value “essential reliability services.” These are highly technical and computationally complex topics. FERC has been working on both issues for years, and its efforts thus far have reinforced the trend toward a more flexible grid. That said, some market operators are examining market price-setting mechanisms that would also benefit inflexible resources, and FERC is likely to consider such proposals in the future.

Finally, the Grid Study proposes topics for further research. Indeed, there is no shortage of studies that can be conducted about the U.S. electric grid, the world’s biggest machine. Differentiating between hot air and hard facts is not easy, and it seems unlikely that competing interests will ever come to consensus. As the Grid Study observes, “the stakes are high around these issues because electricity is crucial to modern society and economic activity, and because of the physical and financial magnitude of the industry.”

 

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