Electricity Markets

DOE directs FERC to issue rule on markets to preserve “fuel-secure” plants

In an unusual step that could have significant implications for U.S. wholesale electricity markets, Secretary of Energy Rick Perry on Sept. 28 directed the Federal Energy Regulatory Commission to issue a final rule that would require organized wholesale power markets to “develop and implement market rules that accurately price generation resources necessary to maintain the reliability and resiliency” of the country’s bulk power system.

The Department of Energy is focused on the need to preserve “fuel-secure” generation as a way in which to guard against threats to the reliability and resiliency of the power grid and it therefore wants to allow for the recovery of costs of those units.

In a Sept. 28 letter to FERC, Perry said that pursuant to section 403 of the Department of Energy Organization Act, he was sending to FERC a rulemaking proposal for consideration and final action by FERC.

“Distorted price signals in the commission-approved organized markets have resulted in under-valuation of grid reliability and resiliency benefits provided by traditional baseload resources, such as coal and nuclear,” wrote Perry in his letter, which was sent to FERC Chairman Neil Chatterjee and Commissioners Cheryl LaFleur and Robert Powelson.

The rule “will ensure that each eligible reliability and resiliency resource will recover its fully allocated costs and thereby continue to provide the energy security on which our nation relies,” Perry said.

He said that FERC will be required to take final action on the proposal “in an expeditious manner in accordance with the reasonable time limits specified” in the notice of proposed rulemaking that the DOE sent to FERC.

The proposed rule would affect the following FERC-approved regional transmission organizations and independent system operators: The California Independent System Operator, Midcontinent Independent System Operator, ISO New England, the New York ISO, the PJM Interconnection and the Southwest Power Pool.

FERC “must act now”

In light of threats to grid reliability and resilience, it is FERC’s “immediate responsibility to take action to ensure that the reliability and resiliency attributes of generation with on-site fuel supplies are fully valued and in particular to exercise its authority to develop new market rules that will achieve this urgent objective,” the proposed rule states.

The DOE said that the 2014 Polar Vortex, as well as the devastation from Superstorm Sandy and this year’s Hurricanes Harvey, Irma and Maria “reinforces the urgency that the Commission must act now. Moreover, the Commission should take action before the winter heating season begins so as to prevent the potential failure of the grid from the loss of fuel-secure generation – as almost happened during the 2014 Polar Vortex.”

The DOE said that FERC has developed a “vast record” of comments, hearings, and technical conferences on price formation matters, “but has not done enough to address the crisis at hand. Immediate action is necessary to ensure fair compensation in order to stop the imminent loss of generators with on-site fuel supplies, and thereby preserve the benefits of generation diversity and avoid the severe consequences that additional shut-downs would have on the electric grid.”

The NOPR goes on to say that over the past few years, FERC has been considering various aspects of accurate price formation with FERC-approved organized markets in its ongoing price formation docket and throughout these proceedings the commission “has declared that a key goal of price formation is to ‘ensure that all suppliers have an opportunity to recover their costs.’”

FERC has conducted technical conferences, sought and received significant stakeholder and public input and issued and approved several market rule changes to accomplish these goals, the DOE pointed out.

Proposed rule allows for cost recovery

The proposed rule would allow for the recovery of costs of certain eligible fuel-secure generation units. “Such resources provide reliable capacity, resilient generation, frequency and voltage support, on-site fuel inventory,” the DOE said.

The rule would allow for the full recovery of costs of certain eligible units physically located within FERC-approved organized markets. Eligible units would also have to be able to provide essential energy and ancillary reliability services and have a 90-day fuel supply on site in the event of supply disruptions caused by emergencies, extreme weather or natural or man-made disasters. Essential energy and ancillary reliability services are defined in the proposed rule as “including but not limited to voltage support, frequency services, operating reserves, and reactive power.”

Eligible resources would also need to be compliant with all applicable environmental regulations and not subject to cost-of-service rate regulation by any state or local authority.

The rule requires organized markets to establish just and reasonable rate tariffs for the purchase of electric energy from an eligible resource that would provide for recovery of costs and a fair rate of return for the eligible resource.

DOE cites premature retirements of plants

In explaining its rationale for the proposed rule, the DOE asserted that the resiliency of the country’s power grid “is threatened by the premature retirements of power plants that can withstand major fuel disruptions caused by natural or man-made disasters and, in those critical times, continue to provide electric energy, capacity and essential grid reliability services.”

These fuel secure resources “are indispensable for the reliability and resiliency of our electric grid -- and therefore indispensable for our economic and national security.”

 Along with what it called “significant retirements” of fuel-secure generation due to market changes, the DOE said the Polar Vortex exposed problems with the resiliency of the electric grid.

The Polar Vortex – a band of very cold weather that spread across much of the eastern and central parts of the country in early 2014 – created record high winter peak electric demand for heating and equally high demand for natural gas for residential heating.

During the vortex, the PJM Interconnection “struggled to meet demand for electricity because a significant amount of generation was not available to run,” the NOPR said.

And an August 2017 DOE staff report on electricity markets and reliability said that the loss of generation capacity could have been catastrophic, but a number of fuel-secure plants that were scheduled for retirement were called upon to meet the need for electricity.

The Polar Vortex “was a warning that the current and scheduled retirements of fuel-secure plants could threaten the reliability and resiliency of the electric grid,” the NOPR said.

The DOE also said that there is a growing recognition that organized markets “do not necessarily pay generators for all the attributes that they provide to the grid, including resiliency. Because wholesale pricing in those markets does not adequately consider or accurately value those benefits, fuel-secure generation resources are often not compensated for those benefits.”

Recent DOE staff report

In addition, the DOE said that the recent staff report on electricity markets and reliability “made clear the challenges to the grid and that resiliency must be addressed.”

The report said that the continued closure of traditional baseload plants calls for a comprehensive strategy for long-term reliability and resilience.

The DOE staff report’s first recommendation for protecting the resiliency of the grid is to correct distortions in price formation in organized markets, the DOE noted.

Next steps

In his letter to FERC, Perry said that now that a quorum has been restored at the federal agency, he is confident that FERC “will act in an expeditious manner to address this urgent issue.”

Perry is directing FERC to take final action on the proposal within 60 days of publication of the notice of proposed rulemaking in the Federal Register or, in the alternative, to issue the rule as an interim rule immediately, with provision for later modifications after consideration of public comments.

The final rule would take effect within 30 days of its publication in the Federal Register.

In addition, each FERC-approved RTO and ISO would need to submit a compliance filing within 15 days of the effective date of the rule, and any tariff changes filed in response to the final rule would become effective no more than 15 days after the compliance filings are due.