Summary of DOE Staff Report to the Secretary on Electricity Markets and Reliability

Continue Reading from Newsletter

The Department of Energy recently released its long-awaited Grid Study (the Staff Report to the Secretary on Electricity Markets and Reliability), which, identified several critical issues central to protecting the long-term reliability of the electric grid. The study was prepared in accordance with an April 14 memo from the Secretary of Energy, which asked staff to explore the evolution of wholesale electricity markets, including the extent to which Federal policy interventions and the changing nature of the electricity fuel mix are challenging the original policy assumptions that shaped the creation of those markets.

A central thesis in the report is the extent to which continued regulatory burdens, as well as mandates and tax and subsidy policies, are responsible for forcing the premature retirement of baseload power plants. According to the report, the recent and unprecedented rise of natural gas as a top electricity generation resource, the increase in Variable Renewable Energy (VRE) penetration, the flattening of electricity demand growth, and a host of policy issues—regulations, mandates, and subsidies at the state and Federal levels—have negatively impacted traditional baseload generation, particularly coal and nuclear power plants. The report does note that demand response has helped to meet peak demand.

Energy Efficiency is recognized in the report as contributing to a decline in the demand growth rate for electricity. Between 1970 and 2005, total U.S. electricity generation to meet customer demand grew at a compound annual growth rate (CAGR) of 2.7 percent. But since 2005, generation growth has stalled with a CAGR of only 0.05 percent from 2005 to 2015, even as the Nation’s GDP grew by 1.3 percent per year over the same period. Electricity demand historically had risen with economic growth (real GDP), but the two began decoupling around 2000. EIA attributes this decline in the demand growth rate to a variety of factors, including the cumulative impact of energy efficiency programs, standards, and codes; technology improvements in appliances, lighting, and other end-use equipment; (Editor’s emphasis) and broader structural changes, such as a shift toward less electricity-intensive industries and slower population growth. The report states that over the past several decades, new Federal and state policies, market forces, and broader economic factors have contributed to lowering levels of electricity consumption compared to what was expected to occur in absence of any new policy, as shown by the comparison of historical reference case projections to actual U.S. electricity sales. Randy – can we put a link here that says Continue Summary and link the remainder of this text from here to end?

The report identifies two significant impacts from the growth in energy efficiency. First, suppliers can no longer expect robust demand growth. Second, because customers are buying less electricity, the market price of electricity clears lower on the electricity supply curve (all else being equal). The report concludes that higher-cost power plants that might have been dispatched and earned revenues in a higher-demand market are dispatched less frequently and earn less revenue due to increased energy efficiency.

According to the report, to date, wholesale markets have withstood a number of stresses. While markets have evolved since their introduction, they are currently functioning as designed to ensure reliability and minimize the short-term costs of wholesale electricity despite pressures from flat demand growth, federal and state policy interventions, and the massive economic shift in the relative economics of natural gas compared to other fuels. The resulting low average wholesale energy prices, while beneficial for buyers of wholesale electricity, represent a critical juncture for many existing baseload generation resources and their role in preserving reliability and resilience. The report suggests that market designs may be inadequate given potential future challenges. VRE—with near-zero marginal costs and if at high penetrations will lower wholesale energy prices independent of effects of the current low natural gas prices. This would put additional economic pressure on revenues for traditional baseload (as well as non-baseload) resources, requiring careful consideration of continued market evolutions.

The report states that System operators are working toward recognizing, defining, and compensating for resource attributes that enhance reliability and resilience (on both the supply and demand side).However, further efforts should reflect the urgent need for clear definitions of reliability-and resilience-enhancing attributes and should quickly establish the market means to value or the regulatory means to provide them. The report suggests that evolving market conditions and the need to accommodate VRE have led to the increased flexible operation of generation and other grid resources. The report goes on to note that some generation technologies originally designed to operate as baseload were not intended to operate flexibly and in nuclear power’s case, do not have a regulatory regime that allows them to do so.

The report observes that generation from VRE can change widely over the course of a single day, which requires dispatchable power plants to be operated more nimbly. Additionally, in some areas of the country, there may be over-generation from VRE at some points in a day, which drives prices to almost zero yet requires quick-ramping assets when VRE subsides. Taken together, these trends have placed a premium on flexible output rather than the steady output of traditional baseload power plants. This flexibility is generally provided by generation resources. However, non-generation sources of flexibility—such as flexible demand, increased transmission, and energy storage technologies—are being explored as ways to enhance system flexibility.

NERC’s most recent annual State of Reliability report concludes that during 2016, the “bulk power system reliability remained within defined performance objectives to provide an Adequate Level of Reliability (ALR).” NERC reached the same conclusion for 2013 and 2015. However, in a May 2017 letter to the Secretary of Energy, NERC pressed the importance of reliability issues that require attention, including maintaining ERS as conventional generation retires and ensuring flexibility and sufficient transmission to supplement and offset VRE.

The report suggests that these issues are indicative of the technological and institutional changes that are now affecting the electricity sector, and dealing with these issues will require new levels of coordination and collaboration among the sector’s many constituencies. Presently, BPS reliability is adequate despite the retirement of a portion of baseload capacity and unique regional hurdles posed by the changing resource mix.

The report states that fuel assurance is a growing consideration for the electricity system. Maintaining onsite fuel resources is one way to improve fuel assurance, but most generation technologies have experienced fuel deliverability challenges in the past. While coal facilities typically store enough fuel onsite to last for 30 days or more, extreme cold can lead to frozen fuel stockpiles and disruption in train deliveries. Natural gas is delivered by pipeline as needed. The NERC letter to DOE emphasized ensuring natural gas fuel supply and mitigating delivery vulnerabilities.

Capacity challenges on existing pipelines combined with the difficulty in some areas of siting and constructing new natural gas pipelines, along with competing uses for natural gas such as for home heating, have created supply constraints in the past. Supply constraints can create increased price risk and in extreme cases, could impact reliability.

The report concludes that recent severe weather events have demonstrated the need to improve system resilience .The range of potential disruptive events is broad, and the system needs to be designed to handle high-impact, low probability events. This makes it very challenging to develop cost -effective programs to improve resilience at the regional, state, or utility levels. Planning, practice, and coordination on an all-hazards basis and having a mix of resources and fuels available when a major disturbance occurs are both essential to fast response. Work still remains to identify facilities that merit hardening; stage periodic exercises and drills so that governmental agencies and utilities are prepared for emergencies; and ensure that wholesale electricity markets are designed to recognize and incentivize investments that would achieve or enhance resilience-related objectives.

The report identifies the low cost and widespread usage of natural gas as a potential issue to consider stating that electricity generation, which has made exposure to natural gas price risk related to availability a growing concern in several regions. There are tradeoffs between multiple desirable attributes of the grid. For example, within power systems, it may be the case that a more reliable and resilient system is more costly than the least-cost system that a centrally-organized wholesale market is intended to deliver. Similarly, policies that seek to deliver more jobs, reduce pollution, or reduce risk may require more upfront investment at an initially higher cost to society as a whole than a least-cost system. The report states that it is important that policymakers have a clear understanding of the true costs and benefits of services to the grid, as well as an understanding of the tradeoffs between desirable attributes like reliability, flexibility, and affordability.

The increased use of natural gas in the electric sector has resulted in sustained low wholesale market prices that reduce the profitability of other generation resources important to the grid. The fact that new, high-efficiency natural gas plants can be built relatively quickly, compared to coal and nuclear power, also helped to grow gas-fired generation. Production costs of coal and nuclear plants remained somewhat flat, while the new and existing, more flexible, and relatively lower-operating cost natural gas plants drove down wholesale market prices to the point that some formerly profitable nuclear and coal facilities began operating at a loss. The development of abundant, domestic natural gas made possible by the shale revolution also has produced significant value for consumers and the economy overall.

The report states that another factor contributing to the retirement of power plants is low growth in electricity demand. Growth of total electricity use has slowed from averaging 2.5 percent annually in the late 1990s, to averaging 1.0 percent annually from 2000 to 2008, to remaining roughly flat since then. Changes in electricity demand —particularly the apparent decoupling of economic output and electricity demand —have been driven in part by energy efficiency policies. (Editor’s emphasis) The combination of slow growth in electricity demand and the 390,500 MW of capacity additions from 2002 to 2016 made significant amounts of older, higher-cost capacity redundant. Dispatch of VRE has negatively impacted the economics of baseload plants.  Since 2007, the contribution to total generation from wind and solar has grown quickly, accelerated by government policies and mandates. State renewable portfolio standards (RPS) have been the largest contributor associated with 60 percent of VRE growth since 2000 —followed by Federal tax credits and government research (which contributed to the dramatic drop in wind and solar technology costs). Because these resources have lower variable operating costs than traditional baseload generators, they are dispatched first and displace baseload resources when they are available. The report suggests state-level RPS and Federal tax credits for VRE as examples of wholesale market impacts and distortions.

The report also identifies a suite of environmental regulations scheduled for implementation between 2011 and 2022 which has had varying degrees of effects on the cost of generation. The report cites as an example that the largest number of coal plant retirements occurred in 2015—the deadline for coal and oil plants to add pollution control equipment for Mercury and Air Toxics Standard (MATS) compliance. In the same year, the Environmental Protection Agency (EPA) finalized its Clean Power Plan, which, if fully implemented, would, according to the report, place additional pressure on coal-fired generation. Nuclear power plants also face regulatory costs —principally the Cooling Water Intake Rule.  Three nuclear plants that announced closure (Oyster Creek, Diablo Canyon, and Indian Point) have cited disputes with their respective states, who implement the rule, as among the reasons for plant retirement. Read the full report here: DOE Grid Study.

1615 M Street, NW, Suite 800, Washington, DC 20036 | phone: 202/822-0950 | fax: 202/822-0955 | | Site Map