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Energy Secretary Rick Perry Orders Study of Electricity Markets and Reliability

May.10.2017

On April 14, Energy Secretary Rick Perry directed his staff to study whether the wholesale electricity markets are potentially leading to “the erosion of critical baseload resources” such as coal and nuclear plants, and asked for “concrete policy recommendations and solutions” by June 19. A link to Secretary Perry’s two-page memorandum is attached.

Secretary Perry’s memo is but one piece of an evolving administration strategy seeking to make good on President Trump’s campaign promise to revive the coal industry, and more generally to shift federal incentives away from renewable power and toward more traditional baseload resources. Participants in this initiative presently include the Environmental Protection Agency and the Department of the Interior; the Federal Energy Regulatory Commission is also likely to be an important piece of the puzzle in the future.

Although Secretary Perry did not direct that public comments be solicited, this is likely to be a “hot docket,” and it is widely expected that numerous stakeholders will submit statements nonetheless. (Advanced Energy Economy, the American Wind Energy Association and the Solar Energy Industries Association have already requested a formal public process.) The Department of Energy inquiry is an opportunity for interested parties to make their views known, and to help the administration develop its energy and environmental policy.

The Perry memo is terse, but covers a lot of ground. While not mentioning renewable power by name, it bemoans both “regulatory burdens” imposed by “previous administrations” that were designed to “decrease coal-fired generation” and the “market-distorting effects of federal subsidies that boost one form of energy at the expense of others.” These subsidies, according to Secretary Perry, “create acute and chronic problems for maintaining adequate baseload generation and have impacted reliable generators of all types.”

If “baseload power” (“coal, natural gas, nuclear, and hydroelectric”) is “necessary to a well-functioning grid,” what accounts for their economic difficulties in the wholesale markets and to “the erosion of [these]critical baseload resources,” and why are they being retired in such large numbers or forced to seek subsidies of their own? The Perry memo suggests three possible areas for staff to explore:

  1. Whether the “assumptions that shaped the creation of the [wholesale electric markets]” are still valid in light of “federal policy interventions and the changing nature of the electricity fuel mix.”
  2. Whether the wholesale markets are “adequately compensating” market participants for “attributes such as on-site fuel supply and other factors that strengthen grid resilience” and whether the level of compensation “could affect grid reliability and resilience in the future.”
  3. The extent to which “regulatory burdens,” mandates, and “tax and subsidy policies” are causing “the premature retirement of baseload coal plants.”

With this memorandum, President Trump’s DOE has now weighed in on one of the most controversial question in the electric power sector: how and to what extent may states provide financial support for power generation resources that they either want built, or want to stay in operation? That topic reached the Supreme Court last year in Hughes v. Talen Energy Marketing, LLC,, where the Court held that a Maryland program providing payments to a developer to ensure the construction of a natural gas plant was preempted by the Federal Power Act “because it disregards an interstate wholesale rate required by FERC.” 136 S. Ct. 1288, 1291 (2016). Similar issues are raised in several pending lawsuits challenging the constitutionality of state support mechanisms such as Zero Emission Credits (created by the States of Illinois and New York to provide financial credit to existing nuclear plants reflecting their environmental attributes).

The same question was addressed at FERC’s technical conference on State Policies and Wholesale Markets, held May 1-2, 2017. The conference focused on “the relative roles of wholesale markets and state policies” in determining resource adequacy. Industry experts weighed in on whether wholesale markets could be redesigned to preserve the benefits of the markets while also accommodating state policies, but there appeared to be little consensus on the matter.

The FERC conference highlights that there are no easy answers to this question, and the degree to which stakeholders and regulators are grappling to find a middle ground between the mostly “price only” characteristics of the FERC-regulated wholesale capacity markets in operation in 20 states, and state programs designed to support and maintain those resources that a state wants to promote even if for reasons other than to secure the lowest possible electricity price, be they coal, nuclear, renewable or other resources. Monitoring and participating in these evolving initiatives is essential for all stakeholders in the power generation business.

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Email: rlehfeldt@crowell.com
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