DOE’s Compensation Scheme For Coal And Nuclear Is Dead – Now What?

on January 16, 2018 at 10:00 AM

In a January 8 Order, the Federal Energy Regulatory Commission (FERC or Commission) swiftly dismissed the Department of Energy’s (DOE) proposed out-of-market compensation scheme for coal and nuclear units.  DOE’s proposal would have provided guaranteed profits to coal and nuclear plants, despite the fact that these aging units are losing out to more efficient and affordable resources.  Instead, FERC took a more measured approach, asking all regional market operators to submit additional information on resiliency issues within 60 days, and providing interested parties an opportunity to respond to those submittals within 30 days.  Here’s what we can expect next.

A robust process

The Commission has reasserted its independence and refused to be influenced by Secretary of Energy Rick Perry’s poorly-reasoned proposal, and DOE’s demand that FERC act swiftly without an adequate record.  FERC’s order makes clear that while it may take future action on resilience, it will only do so after a complete record and vetting of the issues.  FERC’s order provides a list of issues for Regional Transmission Organizations/Independent System Operators (RTOs/ISOs) to consider in order to develop a common understanding of resilience. It also sets the stage for developing an understanding how each RTO and ISO currently assesses resilience, and evaluating whether FERC action is warranted.

Resilience – Defined.

DOE asked FERC to compensate certain generators for resiliency attributes without any attempt to define the term.  Agreeing with the majority of commenters, including Environmental Defense Fund, that resilience needs to be defined, FERC has proposed for further vetting the following definition of resilience:

The ability to withstand and reduce the magnitude and/or duration of disruptive events, which includes the capability to anticipate, absorb, adapt to, and/or rapidly recover from such an event.

Various definitions of resilience have been previously cited by the National Academy of Sciences and others, and we can expect commenters to propose further refinements to this definition, especially given that resilience could encompass a range of attributes, characteristics, and services.

Is there a need?

FERC has asked RTOs/ISOs to respond to a list of questions to gauge how each currently evaluates resilience and how each mitigates threats to resilience.  Market operators will be required to think through the risks associated with resilience and how each currently identifies and plans for those risks.  They will also need to explain how existing procedures, market constructs, and standards consider and address resilience.  We’ve already received a preview of many of these issues in comments on the DOE proposal:

  • Midcontinent Independent System Operator (MISO): “MISO has existing processes already underway that are taking a holistic approach on ways to enhance grid reliability and resilience.” (MISO Reply Comments, p. 2).
  • PJM Interconnection (PJM): PJM’s rigorous analysis of the reliability of the resource mix “yielded encouraging results, and found no immediate (or even near-term) emergencies.” (PJM Comments, p. 15).
  • ISO New England (ISO-NE): “ISO-NE believes that the entire electricity industry, including RTOs and ISOs, should address ‘resilience’ on regional or utility-specific bases, and, to the extent necessary, develop market-based solutions to any identified needs.” (ISO-NE Comments, p. 2).
  • Southwest Power Pool (SPP): The important goal of ensuring grid resilience “should be addressed over a longer period of time and in a more deliberate manner that does not unduly disrupt” the competitive markets. (SPP Comments, p. 2).
  • California Independent System Operator (CAISO): “The CAISO already has mechanisms in place that ensure the CAISO [Balancing Authority Area] remains reliable and resilient in the face of unexpected loss of supply resources.” (CAISO Comments, p. 2).
  • New York Independent System Operator (NYISO): “There is no imminent threat to reliability in New York due to retirements of fuel-secure generation, and the resiliency risks of potential future ‘Polar Vortex’ events have been ameliorated.” (NYISO Reply Comments, p. 1).

To date, none of the RTOs/ISOs have identified a pressing resiliency threat warranting the type of response sought by DOE.  As demonstrated during the recent cold snap, long-standing and continually updated measures and practices provided the tools for the energy system’s resilient response to this extreme weather event.  While the RTO/ISO submissions may identify additional areas to improve resiliency responses, FERC should only take action if a clear customer need is demonstrated.

Fuel neutral, or not at all 

The grid is becoming cleaner, more dynamic, and more distributed, and any new market rules need to reflect that evolution.

As noted by Commissioner Cheryl A. LaFleur, freezing “yesterday’s” resources is not the proper solution.  Coal and nuclear units are not the supposed bulwark suggested by DOE.  Moreover, the fact that the Pilgrim Nuclear Power Station was removed from service in ISO-NE during the recent cold snap reinforces the point raised by the Rhodium Group’sanalysis that most grid failures are on the transmission and distribution system.  The grid is becoming cleaner, more dynamic, and more distributed, and any new market rules need to reflect that evolution.  Commissioner Richard Glick highlighted that the diverse array of generation resources (gas, solar, wind, geothermal, energy storage, distributed generation, and demand response) have contributed to, not hindered, the resilience of the bulk power system.  If FERC does act, any new rules must be fuel neutral, and priced within the market to ensure customers receive the benefits that a competitive market provides.

The road ahead

While DOE narrowly focused its resilience efforts on generator compensation for onsite fuel in organized markets, FERC recognized that evaluation of grid resilience should encompass a broader consideration of issues, including wholesale electric market design, planning and coordination, and North American Electric Reliability Corporation standards. These issues will take time to unpack, and this first step is likely only the beginning of a multi-year process. This process may also include discussions of PJM’s pricing proposal, which to date has not identified any meaningful nexus to resiliency.

There will be much more on resilience from the regional markets and FERC, so stay tuned. For now, FERC should take the necessary time to review the market operator responses, consider the record thoroughly, and take action only if warranted by that review.

By Natalie Karas

Originally Published on January 12, 2018

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