Secretary Perry’s Electricity Markets and Reliability Study – These Aren’t the Results You’re Looking For

by Alex Nichols and Kevin Swanson

Former Texas Governor and current Energy Secretary Rick Perry is known for questioning the federal government’s credibility. He’s done it with his 2010 book, Fed Up! Our Fight to Save America from Washington, and even at the Republican presidential debate stage in 2011 when he (eventually) said he wanted to nix the federal agency he currently manages. In keeping with Secretary Perry’s deregulatory mindset, he launched a study on the federal government’s role in picking favorites in the energy industry; he received his answer on Wednesday—just not the answer he expected.

In his April memo, Secretary Perry directed his staff and staff from the Office of Energy Policy and Systems Analysis, which ironically was eliminated in President Trump FY18 budget proposal, to examine three key issues: the evolution of wholesale electricity markets; whether wholesale energy and capacity markets adequately compensate all energy forms on their merits; and, regulatory burdens on the energy industry. However, the Secretary’s memo was a significant example of confirmation bias and presumably hoped that the final report would confirm that the cause of coal plant closures were regulations and clean energy tax credits enacted during the Obama Administration. The report entitled the Staff Report to the Secretary on Electricity Markets and Reliability was released last Wednesday night.

However, the report takes a different tone than Perry’s memo, which said regulations under the Obama Administration “destroyed jobs and economic growth”, and threatened the grid, and suggested that the favoring of renewable energy by the government “creates acute and chronic problems. Contrary to the report’s premise, the 187-page report concludes that, “The biggest contributor to coal and nuclear plant retirements has been the advantaged economics of natural gas-fired generation” fueled by the shale revolution. It went on to say, “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 report also said that the flattening of electricity demand growth, the increase in variable renewable energy penetration, as well as a host of policy and regulatory issues, “have negatively impacted traditional baseload generation, particularly coal and nuclear power plants.” Although the low price of natural gas was reported as a primary factor in the closure of coal plants, the study also cited that federal tax credits for wind and solar, as well as state renewable portfolio standards (RPS), were eating into “baseload” profits. Regardless, this was obviously not the desired conclusion the Secretary was fishing for.

Secretary Perry had shaped his perspective from the fact that from 2012-16, about 42,700 megawatts of coal-fired generation capacity have shut down in the US, as plants have found it difficult to compete with natural gas and renewable energy power. Though coal’s losses have been offset by 40,000 megawatts of gas-fired generation and 55,700 megawatts of new solar and wind power capacity, the report displayed the DOE’s skepticism of the reliability of our nation’s electricity networks. Though they are performing reliably now, the DOE believes future resiliency cannot be taken for granted.

The final report did not call for any definitive proposals. However, it did suggest revisiting nuclear regulations, permitting and siting requirements for new gas and power networks, and issued recommendations to the Federal Energy Regulatory Commission. These recommendations, which DOE has since discussed with the commission, include a need to review whether the electricity markets are delivering resilient power as the market change affects grid networks. The report also questions the need for providing extra compensation to coal and nuclear power plants due to the fact their fuel supplies are on-site, but stops short of making any formal recommendations.

In an attempt to highlight points in the study Secretary Perry was hoping would headline the report, he stated that certain regulations and subsidies have had a large impact on the markets, effectively “challenging our power generation mix.” He went on to say, “It is important for policy makers to consider their intended and unintended effects.”





















          Source: Department of Energy Staff Report to the Secretary on Electricity Markets and Reliability


          Power plant retirements have accelerated since 2011, and retirement trends vary significantly by generation source. For instance, the current wave of nuclear plant retirements only occurred over the last five years.u Some of the nuclear units now closing are doing so because of state policy pressure (as with California’s Diablo Canyon, New Jersey’s Oyster Creek, and New York’s Indian Point), and some have had maintenance issues that were too costly to fix. However, most plants are closing or threatening closure because–given the economics in some regions—they have become unable to compete against primarily low-cost, gas-fired generation and, to a lesser extent, subsidized and mandated VRE in a low electricity demand environment.

          The design of traditional baseload power plants assumed operations primarily at a constant output level with limited cycling (see Appendix C).24 As the electricity system continues to evolve and market conditions change, these plants are increasingly being moved into load-following operations, or are required to more frequently adjust the load and the on/off dispatch of their units. The extra costs incurred to do so can affect a retirement decision.



          Michael Best Strategies’ Energy Team

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