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DOE Plan To Aid Struggling Coal, Nuclear Plants Comes Under Withering Criticism From All Sides

October 31, 2017

Opposition to the Energy Department’s plan to provide cost recovery to financially struggling coal and nuclear plants is broadening – and hardening – as the proposal continues to come under withering assault from a wide range of stakeholders.

Since Energy Secretary Rick Perry unveiled the regulation a month ago, industries that are not often on the same policy side have become allies in efforts to persuade the Federal Energy Regulatory Commission to reject the initiative. Their arguments have been underscored by recent studies showing the cost to consumers could be in the tens, if not hundreds, of billions.

On Sept. 28, DOE submitted a Notice of Proposed Rulemaking (NOPR) under the Federal Power Act that directed FERC to “accurately price generation resources necessary to maintain reliability and resiliency.” The rule would provide for “recovery of costs of fuel-secure generation units frequently relied upon to make our grid reliable and resilient.” 

Generating units in wholesale power markets that have a 90-day fuel supply onsite would be eligible for "full recovery of costs” – language that is widely seen as giving relief to coal and nuclear facilities, both of which meet the requirements.

Reaction to the NOPR has been swift, widespread, and decidedly negative: 

  • The ISO/RTO Council filed comments in response, saying the regulation “would degrade the efficiency and effectiveness of existing organized wholesale markets, would provide improper incentives and disincentives to current and future market participants, would not promote the goals stated in the NOPR and would reverse the progress made in developing robust and reliable competitive electricity markets.” 
  • PJM Chief Executive Officer Andy Ott said, “I don’t know how this proposal could be implemented without a detrimental impact on the market." He went on to call it “discriminatory,” “simply unworkable,” and “contrary to law.”
  • The Energy Storage Association argued that the proposed rule “would undermine markets and unnecessarily increase costs for consumers.”
  • A group of 20 organizations – ranging from the Solar Energy Industries Association to the Independent Petroleum Association of America – charged that the plan would “prop up uneconomic generation that is unable to compete…and that is not otherwise needed for reliability.” 
  • Eight former FERC commissioners, including five ex-chairs, called the plan “a significant step backward.” They said “subsidizing resources…so they do not retire, would fundamentally distort markets...and inevitably raise prices to customers.” Moreover, they continued, implementation of the plan could cause investors to lose confidence in energy markets, further undermining reliability.
  • The American Petroleum Institute said the NOPR “would distort the markets and support power generators that cannot compete with superior economics of natural gas generation, citing reliability ‘emergency’ even though one has not been shown to exist.”
  • Companies from the technology and oil and gas industries – including Microsoft, ExxonMobil, General Electric, and Apple – have raised direct or indirect objections to the plan.
  • “Business customers will very likely pay more for electricity” under the regulation, Walmart warned. 

On the other hand, and not surprisingly, the proposal has won support from the coal and nuclear sectors it would ultimately benefit. Utility Dive reported that advocates are basing their arguments on a broader interpretation of the Federal Power Act to justify the proposal: 

Comments from key supporters of the DOE proposal, including coal generator First Energy, mining giant Murray Energy and nuclear operator Exelon, argue FERC has interpreted its mandate to provide just and reasonable rates too narrowly, not accounting for the long-term risks to power customers posed by the retirement of baseload generators.

Because of that, the commenters argue, FERC has designed power markets that do not adequately compensate coal and nuclear plants for their value in providing generation diversity and onsite fuel supplies.

“The organized markets were not designed to address resilience to fuel supply interruptions, and as a result customers have been left exposed to catastrophic risks,” Exelon, the nation’s largest nuclear generator, wrote in its comments. “As a result, the organized markets are no longer producing just and reasonable market outcomes, and they need modification in order to comply with the Federal Power Act.”

While the supportive commenters differed in how they want FERC to implement any new rules, their argument for a broader interpretation of the FPA could become central to a prolonged debate over market design as federal regulators respond to the DOE notice.

However, those positions are being undermined by analyses that 1) show the ultimate costs to consumers would be significant; and 2) question whether the foundation that underpins the plan – coal and nuclear are essential to ensure grid resiliency – were valid.

A study from the research firm ICF said ratepayers could take a hit of anywhere from $800 million to $3.8 billion annually through 2030. Meanwhile, the Brattle Group reported that saving coal plants alone from retirement would cost “several billion” dollars each year, most of which would be limited to PJM. And PJM’s independent market monitor said the cost to consumers could be massive, ranging from between $18 billion and $288 billion over 10 years. 

Additionally, a study by Energy Innovation put the price tag of out-of-market subsidies for power plants at between $2.4 billion and $10.6 billion per year, about 80 percent of which would go to just five companies: NRG, FirstEnergy, Dynegy, Exelon, and Entergy.

But interestingly, NRG and Dynegy – which together would get almost half of the $100 million to $3.5 billion that would go to coal plant operators – urged the plan’s rejection in their comments.

“Dynegy could potentially reap substantial benefits from the (Energy Department’s) proposal,” the company said.  However, it added, “even from the perspective of a coal generator, the proposed rule should not be adopted because it would substantially, and potentially irreversibly, harm the nation’s competitive electricity markets.” 

NRG said it opposed the regulation “despite the superficially attractive premise of rate-basing a substantial portion of our generation fleet, at enormous additional cost to ratepayers.”

Despite their opposition, both companies contended that market reforms were necessary.

Dynegy called on FERC to stop the advance of DOE’s plan and to work with grid operators and the North American Electric Reliability Corp. on reliability and price formation reforms that are currently in the works. NRG said that the process kicked off by the NOPR should be used to “refine, not abandon, wholesale energy markets.”

Although DOE initially said that the proposed rule would provide for “recovery of costs of fuel-secure generation units frequently relied upon to make our grid reliable and resilient,” that argument has been called into question.

The Rhodium Group, a research and advisory firm whose focus includes energy markets, submitted comments to FERC that said most power outages are unrelated to fuel issues.

It noted that from 2012 to 2016, utilities reported about 3.4 billion customer-hours were impacted by major disruptions. Of those, 96 percent of the associated lost service hours were due to severe weather. On the other hand, fuel emergencies or deficiencies at power plants caused 2,382 customer hours of lost service — just 0.00007 percent of the total.

“Our analysis demonstrates that from a nationwide perspective, fuel supply issues are a very small driver of electric power outages and total lost electric service,” the company concluded.

ExxonMobil Power and Gas Services, in its comments on the plan, affirmed that argument:

“The concern about fuel inventory is further shown to be misplaced, as very few major power outages are due to fuel supply problems, thereby marginalizing the benefit of on-site fuel inventory.”

The DOE proposal also brought accusations from current and former FERC members that the department was trying to seriously cripple, if not destroy, wholesale power markets.

Former commission chair Jon Wellinghoff said it “would blow the market up.” Current Commissioner Robert Powelson echoed that line, saying he “did not sign up to go blow up the markets.”  He added: “What that happens, we’re done. I’m done. I don’t need this job.” Commission colleague Cheryl LaFleur endorsed his comments on Twitter.

New FERC Chair Neil Chatterjee told reporters that while he was “sympathetic” to parts of the DOE plan, he would not go forward with policies that would “blow up” the markets or could not withstand court challenges.

Saying he believed strongly in markets,” Chatterjee – a former aide to Senate Majority Leader Mitch McConnell and a native of coal-reliant Kentucky – continued, “We’ve invested nearly two decades and billions upon billions of dollars in our existing market structure, and I don’t want to do anything to disrupt that market structure. And I also want to ensure that whatever steps the commission takes withstand legal scrutiny and are legally viable.”

Appearing before the House Energy Subcommittee, Perry did not back down. He testified that the proposed rule emerged because concerns over grid resiliency had for too long “been kicked down the road,” and went on to say: 

 “I respect the FERC members’ views. I think their picture is one that is a snapshot in time…What I think one of my roles is, is to think outside of the box.”