United States: DOE Grid Report Pins Coal Decline Primarily On Economics Of Natural Gas

On August 23, 2017, the Department of Energy (DOE) publicly released a long‑anticipated study of the U.S. electrical grid titled "Staff Report to the Secretary on Electricity Markets and Grid Reliability." The report followed on suggestions by the Trump Administration that increasing concerns regarding grid reliability were warranted as a result of increased renewable energy adoption over the last decade. The report quashed those concerns.

In addition, it pinned the declining competitiveness of traditional baseload power sources—coal and nuclear—primarily on the economics of natural gas. Although the specific conclusions of the report are contestable, they are directionally consistent with earlier analyses by economic and energy experts: because of relatively cheap and abundant natural gas produced from shale formations, natural gas has successfully challenged coal for market share, while facilitating the use of renewable energy.    


Contrary to suggestions by the Trump Administration that incentives for renewable energy, such as tax policy, had driven increased reliability issues or served as primary reasons for the declining competitiveness of traditional baseload power sources—coal and nuclear—the report found neither. [1] Instead, DOE found that the primary contributor to coal and nuclear plant retirements over the past 10 to 15 years has been "the advantaged economics of natural gas-fired generation." [2] Even so, the report presents other contestable contributing factors that are alleged to have led to the shutdown of numerous nuclear and coal plants, including:

  • Stagnant electricity demand growth from the early 2000s through the present, which "has been driven in part by energy efficiency policies" allowing for the decoupling of economic output and electricity demand; [3]
  • Deployment of variable renewable energy (VRE) resources; and
  • Environmental regulations governing nuclear and coal baseload plants, which the report argues "have also negatively impacted baseload plant economics." [4]

Although the report does not focus on the intersection of climate change concerns with grid resiliency, it notes the significance of preserving nuclear plants—a carbon-free energy resource—to advancing climate change goals. 

Finally, the report also makes a number of high-level and not immediately actionable recommendations ostensibly aimed at enhancing grid stability and resiliency, including:

  • The Federal Energy Regulatory Commission (FERC) should improve energy price formation in the electricity markets administered by regional grid operators; [5]
  • The Nuclear Regulatory Commission (NRC) should not "unnecessarily add[] to the operating costs and economic uncertainty of nuclear energy"; [6] and
  • The Environmental Protection Agency (EPA) should avoid imposing additional permitting costs on coal plants in attempts to improve efficiency and reliability. [7]

Will Anything Really Change?

Although the report focuses its recommendations on FERC, NRC, and EPA, many of the substantive policy changes actually aimed at improving electric markets and reliability fall within the jurisdiction and expertise of FERC and the regional transmission organizations and independent system operators (RTO/ISOs) regulated by FERC. 

For at least three reasons, there is no indication that the report will lead to discernable changes in the way that FERC promotes competitive wholesale markets or how technical standards to ensure power system reliability will evolve.

First, a preliminary reaction to the report by Acting FERC Chairman Chatterjee noted the report "highlights many activities that the commission is carefully considering, including examining ways to enhance wholesale electric capacity markets and improve price formation in those markets, to increase electric and gas coordination, and to assure bulk power system reliability and resilience." [8]

Second, since 2014 FERC has been engaging with industry stakeholders in a comprehensive evaluation of issues regarding price formation in its jurisdictional energy and ancillary services markets. [9] The report contends that "after several years of fact finding and technical conferences, the record [in that proceeding] now supports energy price formation reform" as outlined by two regional grid operators: PJM and MISO. [10] However, the grid operators' positions cited by the Report were merely overviews of locational marginal pricing issues, and did not propose specific market reforms. [11] It is unclear how DOE's issuance of the Report will impact market reform efforts at FERC, particularly with two new commissioners now in place and likely a new Chairman and commissioner in the near future.

Third, the report recommends that FERC "study and make recommendations regarding efforts to require valuation of new and existing [Essential Reliability Services] by creating fuel‑neutral markets and/or regulatory mechanisms that compensate grid participants for services that are necessary to support reliable grid operations." [12] This recommendation seems to ignore the fact that, in its regulation of electricity markets and reliability, FERC generally is fuel-neutral. And although the report urges DOE to support efforts to enhance the "resilience" of the bulk power system, [13] the characteristics of resilience discussed are already key considerations in FERC's exercise of its reliability jurisdiction under Section 215 of the Federal Power Act and are core functions of the North American Electric Reliability Corporation (NERC) and its regional reliability regulators. 

Beyond FERC, it is unclear how the report's recommendations will influence policy at EPA or NRC – or how those agencies might affirmatively act with respect to electricity markets and reliability. It seems unlikely that this report will drive legislative action on energy.

Ultimately, while advancing some arguable claims, the report reflects a large dose of reality which contradicts some of the Administration's rhetoric because, after months of claiming that increasing concerns regarding grid reliability were warranted as a result of increased renewable energy adoption over the last decade, the  report soundly rejects that hypothesis.


[1] Grid Report, p. 13.

[2] Id.

[3] Id.

[4] Id. at p. 14. 

[5] Id. at p. 126.

[6] Id. at p. 127.

[7] Id.

[8] Chairman Neil Chatterjee Statement, August 24, 2017, https://www.ferc.gov/media/statements-speeches/chatterjee/2017/08-24-17-chatterjee.asp ("The Commission will remain focused on these and other issues that are critical to maintain the nation's competitive wholesale electric markets and keep the lights on.")

[9] See Docket No. AD14-14-000.

[10] Grid Report, p. 126.

[11] See PJM Interconnection, Energy Price Formation and Valuing Flexibility (PJM Interconnection, June 2017), http://www.pjm.com/~/media/library/reports-notices/special-reports/20170615-energy-market-price-formation.ashx (explaining that "PJM wishes to initiate dialogue" pricing reform issues); Midcontinent Independent System Operator Energy, "Extended Locational Marginal Pricing (ELMP)," November 2011, https://www.misoenergy.org/Library/Repository/Communication%20Material/Strategic%20Initiatives/ELMP%20FAQs.pdf (summarizing frequently asked questions about Extended Locational Marginal Pricing).

[12] Grid Report, p. 126. 

[13] Id.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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