United States: DOE's Grid Resiliency Pricing Rule Offers Hope For Nearly Extinct Coal, Nuclear Plants

Stephen Humes is a Partner in the New York office

The U.S. Department of Energy's recently-proposed grid resiliency rule offers new hope for nearly-extinct coal plants and endangered nuclear power plants operating in competitive organized wholesale power markets and, if successful, would deliver results on one of President Donald Trump's signature campaign promises to bring back coal jobs as well.

During the 2016 Presidential Campaign, Mr. Trump often promised to make coal-mining great again, in part by bringing back demand for coal and ending the Obama Administration's regulatory restrictions on coal-fired power generation. Despite President Trump's frequent promises to reinvigorate the coal industry, many in the electric utility industry and wholesale power generation sectors – and the broader media – pointed out that the economics of coal were no longer viable anyway, no matter what President Trump said. Data shows natural gas is the cheaper power generation fuel these days and, therefore, coal fired power plants are closing.

Coal-fired power generation is not the only type of power to be struggling these days in the competitive wholesale power markets. Even nuclear power generators have been feeling the pinch in recent years as the nuclear industry complains that their power plants can no longer compete with low-cost natural gas fired power plants.  Within the last year or so, states that include New York and Illinois have adopted programs to compensate at-risk nuclear power plant operators for the greenhouse gas reduction value of nuclear generation, as states recognize that the wholesale market price of power is insufficient to support nuclear generation. Other states, including Connecticut, New Jersey and Pennsylvania have similarly faced the issue of whether their nuclear power plants are viable long-term.

In issuing the proposed rule on September 29, 2017, Energy Secretary Rick Perry stated, "A reliable and resilient electrical grid is critical not only to our national and economic security, but also to the everyday lives of American families." Perry added that, "A diverse mix of power generation resources, including those with on-site reserves, is essential to the reliable delivery of electricity—particularly in times of supply stress such as recent natural disasters. My proposal will strengthen American energy security by ensuring adequate reserve resource supply and I look forward to the Commission acting swiftly on it." 

The proposed rule, which takes the extraordinary step of requesting that the Federal Energy Regulatory Commission either take direct final action within 60 days or issue the proposed rule as an interim final rule, seeks to have the federal government stem the tide of closing coal- and nuclear-fired power generation facilities by providing extra compensation to these so-called "fuel secure" plants due to their resiliency value and services to the grid. The proposed rule states that these fuel-secure resources are essential for the reliability and resiliency of the nation's electric power grid and, therefore, are indispensable to the nation's economy and national security.

According to the Department of Energy's January 2017 Quadrennial Energy Review, over the past 6 years, power plant retirements were dominated by coal plants (37 gigawatts [GW] in total), which accounted for 52 percent of recently retired power plant capacity in the U.S. Furthermore, over the next 5 years, another 34.4 GW of coal plants are scheduled to be retired. In fact, between 2002 and 2016, 531 coal fired generating plants representing 59,000 megawatts (MW) of capacity retired from the U.S. generating fleet, according to the DOE's Staff Report to the Secretary on Electricity Markets and Reliability, August, 2017. That same report noted that between 2000 and 2016, 4,666 MW of nuclear generating capacity was retired, and another eight nuclear reactors representing 7,167 MW of nuclear capacity (7.2% of U.S. nuclear capacity) have announced retirement plans since 2016.  The report also notes that a total of seven other nuclear reactors avoided early retirements due to state intervention.

The proposed rule concludes that there is a growing recognition that the competitive wholesale power markets do not necessarily pay generators for all of the attributes that they provide to the power grid, including resiliency. "Because wholesale pricing in those markets does not adequately consider or accurately value those benefits, fuel-secure generation resources are often not compensated for those benefits," the notice of proposed rulemaking states.

Meanwhile, the DOE is not the only federal agency taking decisive action to remove hurdles or regulatory burdens that impact coal-fired power generators. On Tuesday, U.S. Environmental Protection Agency Administrator Scott Pruitt announced that his agency is rolling back the Clean Power Plan, the highly-contentious effort of President Barack Obama's administration to use Section 111 of the Clean Air Act to mandate greenhouse gas reductions in the states. Industry perceived this rule to be particularly challenging for the coal industry as well. 

Taken together, the DOE's and EPA's efforts respond to President Trump's March 28, 2017 Executive Order entitled "Promoting Energy Independence and Economic Growth." See https://www.whitehouse.gov/the-press-office/2017/03/28/presidential-executive-order-promoting-energy-independence-and-economi-1.

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