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Department of Energy Issues Grid Reliability Study

On August 23, 2017, the US Department of Energy issued the “Staff Report to the Secretary on Electricity Markets and Reliability” (Staff Report). The Staff Report was commissioned by the Secretary of Energy to provide an assessment of the reliability and resilience of the US electrical grid. The Staff Report’s general findings are that the wave of retirements of baseload generating resources, like nuclear and coal generating plants, is being driven mainly by economic forces, particularly increased price competition from natural gas power plants and the increased penetration of renewable resources. However, a closer reading of the Staff Report suggests that other modifications to electricity market designs and the regulatory regime surrounding power generation may be necessary to stanch the retirements of coal and nuclear power plants.

As noted by Secretary of Energy Rick Perry in his cover note to the Staff Report, recent “extraordinary technological and resource changes” in electricity markets are “challenging the regulatory paradigm that has guided the industry’s growth for decades.” Secretary Perry concludes:

It is apparent that in today’s competitive markets certain regulations and subsidies are having a large impact on the functioning of markets, and thereby challenging our power generation mix. It is important for policy makers to consider their intended and unintended effects. Federal and State policy makers must continue to work together in close consultation to address these important issues that have a deep impact on grid reliability and resilience.

Notably, the Staff Report concludes that markets are operating as expected and designed, namely “to ensure reliability and minimize the short-term costs of wholesale electricity.” (Emphasis added.) The increased use of natural gas generating plants to meet more power demand, including portions of baseload demand, takes advantage of the nation’s cheap natural gas supply. The Staff Report also stresses that the increased penetration of variable renewable energy (VRE) resources (like wind and solar), which have near-zero marginal costs, will continue to place economic pressure on revenues for non-VRE resources such as nuclear power plants.

But the Staff Report concludes that factors other than price are also driving nuclear and coal power plant retirements. One example is that the operational profile of VRE resources requires that generation sources be dispatched more flexibly, and grid operators are requiring that some resources that previously acted as baseload be dispatched more flexibly. The Staff Report suggests this may not be possible for all generation resources as “[s]ome 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.”

In further evaluation of how market designs may be failing, the Staff Report concludes that “[s]ociety places value on attributes of electricity provision beyond those compensated by the current design of the wholesale market.” For example, the Staff Report notes that although markets currently recognize and compensate reliability to an extent, they “must evolve to continue to compensate reliability.” The Staff Report discusses how the positive effect of on-site fuel supply on fuel assurance is a growing concern for reliability purposes. It further discusses how considerations other than price and reliability, such as local tax revenue and employment opportunities, have recently begun to be more valued by states and regulators, even though these considerations are unlikely to be captured in wholesale market designs.

The Staff Report further highlighted costs for regulatory compliance as having an impact on grid reliability and driving baseload power plant retirements. Relating specifically to nuclear plants, the report notes three plants (Oyster Creek, Diablo Canyon, and Indian Point) that have announced retirements related, at least in part, to disputes with their respective states relating to the Cooling Water Intake Rule.

In its recommendations, the Staff Report suggests that other agencies, like the Federal Energy Regulatory Commission and the Nuclear Regulatory Commission, now have the responsibility to assist with meeting these challenges.

Copyright © 2020 by Morgan, Lewis & Bockius LLP. All Rights Reserved.National Law Review, Volume VII, Number 248


About this Author

Timothy P. Matthews, Morgan Lewis, energy and litigation attorney

With a background in the nuclear power industry, Timothy P. Matthews represents and counsels electric utilities, nuclear industry suppliers, and other licensees before the Nuclear Regulatory Commission (NRC), the Department of Labor (DOL), and other regulatory agencies, and in US federal courts. He counsels clients in investigations, discrimination allegations, and regulatory compliance matters. He also advises on matters related to new nuclear plant development, electric utility industry restructuring, and complex disputes including mediation, arbitration, and...

Stephen Spina, Morgan Lewis, Energy attorney

Stephen M. Spina represents electric utilities and other electric industry participants before the Federal Energy Regulatory Commission (FERC) in restructuring, market investigations, and Federal Power Act regulatory matters. He advises electric utilities on issues relating to market pricing, transmission, reliability standards compliance, rate matters, and participation in regional transmission organizations, including capacity and energy market issues. His representation also extends to audits and investigations before FERC’s Office of Enforcement, as well as enforcement and audit proceedings involving the North American Electric Reliability Corporation.

Joseph Lowell, Energy and environmental attorney, Morgan Lewis
Of Counsel

Joseph W. Lowell counsels electric utility and natural gas clients on all areas of Federal Energy Regulatory Commission (FERC) regulation. Joseph’s practice focuses on FERC jurisdictional rates, Independent System Operator (ISO) and Regional Transmission Organization (RTO) rules and markets, transmission and interconnection services, investigations and audits, regulatory compliance and training, litigation and appeals, demand response, and acquisitions. While working as a junior economist for FERC’s Office of Energy Market Regulation, Joseph advised the FERC on electric...