DOE grid study helps set the table at FERC
Former FERC Commissioner Tony Clark analyzes how the Energy Department's grid study impacts the agency
Editor's note: The following is a viewpoint from Tony Clark, former FERC Commissioner and current senior advisor with law firm Wilkerson Barker Knaur.
If one solely read the Twitter feeds of some of the more vocal members of the green lobby, you would be forgiven for thinking that the recently released Department of Energy Staff Report on Electricity Markets and Reliability was the end of the U.S. clean energy sector as we know it.
In reality, most objective observers have come to some variation of the following conclusion: The DOE staff played it pretty close to right down the middle, albeit with the sort of tonal focus on grid resiliency and affordability that you would expect in a report to a Republican Secretary of Energy.
While its observations are probably not earth-shattering to most energy industry aficionados, the report is a useful read nonetheless. In short, it is a solid, data-heavy primer for understanding the dynamics of today’s electricity markets, and it gives hints about what regulators and policy makers may view as priorities for the next several years.
For those who expected the DOE staff to devise a 25-point manifesto to fix electricity markets, to save a particular fuel resource, or to direct some government agency to enact a specific regulation, I would suggest:
- They are probably sorely disappointed, and
- They must not have read a DOE staff report before.
For those who have a better understanding of the “thought leadership” role that DOE plays in the electricity regulatory space, there are some intriguing policy nuggets to mine from the report. Beyond the sheer wealth of data in the report, these are the takeaways that have the greatest chance of moving the priority needle at the Federal Energy Regulatory Commission, which has far more direct authority to enact rules and regulations that impact the electricity grid and its operation than does DOE itself.
As I look at the report, a few action items stick out as those that may garner some attention at FERC:
- Price formation in electricity markets. FERC is aware of this issue, but the DOE staff report shines a little more light on it. Indeed, the Commission and its jurisdictional Independent System Operators have been formally exploring this very topic for the last several years. The importance of the DOE staff report is that adds a greater sense of urgency to matters surrounding the details of how electricity markets are structured, how generators offer in their units, and how they are compensated. Prior to FERC falling below a quorum, the Commission had, understandably, mainly grabbed the proverbial low-hanging fruit when dealing with this topic. Now, with the Commission apparently heading towards a full complement of five Commissioners, it seems exceedingly likely that this wonky market design topic will move up the batting order.
- Negative prices. This subset of the price formation issue seems likely to receive special attention. While a reasoned economic case can be made for negative prices during certain periods of generation over-supply, the issue of generators offering at prices designed solely to reap a production-based government subsidy has long been considered a prime target for regulatory scrutiny. The DOE staff report only makes this more likely.
- Quantitative Resiliency Modeling. Just as electric transmission system planners have long modeled “N-minus-one” contingencies to guide electric reliability decisions related to the Bulk Power System, there is a growing consensus that models should be strengthened to help us better understand and gain visibility into the potential electricity grid vulnerabilities that may exist should significant generator outages occur for any number of fuel supply disruption reasons (be they related to traditional, dispatchable generation, or from intermittent resources).
- A continued FERC focus on infrastructure issues. Even under the Obama administration, steel-in-the-ground policies – especially related to renewable-enabling electric transmission – received a fair amount of attention. I suspect you can safely add to that priority list an increased willingness to support policies that also streamline permitting for other critical energy assets like natural gas pipelines and hydroelectric facilities, especially to the degree the facilities support the resiliency and affordability themes laid out in the DOE staff report.
Moving beyond FERC, the report makes other admirable contributions, such as its persuasive and even-keeled explanation of the factors that are stressing traditional units like coal and nuclear. While DOE staff points out that low cost natural gas is today the dominant factor in driving the economics of electricity markets, the report also declines to sugarcoat the impact of Obama-era environmental rules on coal and nuclear plant retirements, especially the Mercury and Air Toxics Standard and Cooling Water Intake regulations. While this observation should not seem remarkable, it is plain speak long overdue given the implausibility of protestations to the contrary offered by the previous administration’s environmental regulators.
As important as what is in the report, is what is not. Perhaps the most prominent omission relates to the much ballyhooed rumor that DOE staff might attempt to shoehorn Section 202(c) of the Federal Power Act into an order to save an entire fleet of generation (read: coal). That absence is with good reason; there are few who saw that as anything but a very strained reading of DOE authority.
The authority vested in the Secretary of Energy to order specific units to run has always been viewed as a discrete power related to grid reliability emergencies. Given that regional grid operators model the reliability impact of specific planned plant retirements in advance, it would have been extraordinary for the DOE to argue that the Secretary should order a certain type of plant to continue operating en masse, indefinitely.
In sum, despite the sometimes overheated rhetoric of the D.C. spin machine, the report is a solid addition to the body of work that is shaping U.S. electricity policy. Furthermore, for those interested in crystal ball gazing, it offers a glimpse of some of the things regulators are likely to be exploring over the next several years. The spotlight of the report, along with the robust data, will help advance the initiatives already underway at FERC, in the ISO stakeholder groups and in the states and regions as they work together to sustain and improve the electric grid.