Access to wholesale energy markets by generation resources that are receiving state subsidies leads to unjust and unreasonable rates.
Lately, the Federal Energy Regulatory Commission (FERC) is being called upon to permit energy projects that some states oppose. The tension between FERC’s role and that of the states is playing out in several natural-gas-pipeline permitting cases, where states deny water permits, stopping a project near dead in its tracks. States and parties to several other FERC proceedings regarding pricing mechanics of wholesale power markets are also ramping up, some to favor certain generation resources over others.

New Federal Efforts for Coal and Nuclear 

As written in previous columns, the administration and US Department of Energy have made repeated attempts to support coal and nuclear power generation to improve the financial position of plant owners and keep said plants operating. Each attempt has failed. Energy Secretary Rick Perry, in the Grid Resiliency Pricing Rule,1 proposed that FERC exercise its authority under Sections 205 and 206 of the Federal Power Act to establish just and reasonable rates for wholesale electricity sales to ensure that reliability and resilience attributes of electric generation resources are fully valued in markets. Of course, the presumption was that wholesale market structures and pricing were not adequately valuing coal and nuclear generation attributes, and hence current market rates for electricity were not just and reasonable.

The presumption was that wholesale market structures and pricing were not adequately valuing coal and nuclear generation attributes, and hence current market rates for electricity were not just and reasonable.

With low natural gas prices and low marketclearing prices for electricity, several large centralstation coal and nuclear power plants have closed, and others are threatening to close. As reported, based on the record in the proceedings, FERC rejected Perry’s proposal, viewing it as simply a way to prop up coal and nuclear power plants. FERC concluded that the secretary and his supporters failed to show that electricity markets are not just or reasonable.

When natural gas prices were in the double digits a decade or so ago, such baseload generation resources were doing very well as price-takers in wholesale markets, with prices being set at the marginal cost of natural gas generation.

Another Swing at Bat 

On June 1, 2018, not to be deterred in the quest to provide financial support to coal and nuclear generation, the president directed Perry to take immediate steps to shore up coal and nuclear power plants, referencing Section 202(c) of the Federal Power Act, giving the secretary authority to order certain power facilities remain open in a crisis. Such powers were intended to keep the electricity grid operable during catastrophic weather events and natural disasters, where such plants could backstop the grid. The administration also framed the directive to keep these plants open, citing the Defense Production Act of 1950, which grants the federal government authority to intervene in markets when national security is threatened.

FERC commissioners in recent congressional hearings and commentary have disavowed any direct threat to the grid from coal and nuclear plants closing. In addition, wholesale market rules in the nation’s regional transmission organizations (RTOs) require that immediate actions be taken if any such threat existed, including locking in power purchase agreements with fixed pricing over a specified term. Locking in would ensure a plant remains in operation until a market or regulated competitive alternative is available.

Wholesale electricity markets are structured to respond to plant closings with higher prices that would be set as fewer generation resources are available.

Commissioners do not agree that there is any impending threat to national security or to the reliability or resiliency of the grid if some plants continue to close. In fact, wholesale electricity markets are structured to respond to plant closings with higher prices that would be set as fewer generation resources are available. Thereby, these higher prices would signal to market participants a need for new generation or need for alternatives to generation that can meet the same system requirements. While timing of resource closures and additions might appear problematic, RTOs have processes in place to ensure the reliability and integrity of the grid is maintained while new resources are being added.

Now let us fast-forward. In a recent FERC order, issued June 29, 2018,2 three of five commissioners agreed that access to wholesale energy markets by generation resources that are receiving state subsidies leads to unjust and unreasonable rates. This agreement does not directly relate to the threat of coal and nuclear power plant closures and the administration’s interest in subsidizing them to keep them open. However, this FERC decision is setting the stage for another round of attempts to shore up the finances of these plant owners, and perhaps others as well.

Access to wholesale energy markets by generation resources that are receiving state subsidies leads to unjust and unreasonable rates.

Regulated Pricing in Competitive Markets

FERC is on record supporting zero-emission energy credits (ZECs) for nuclear power generation in New York and Illinois as a subsidy to improve the financial performance of nuclear generation plants and keeping them open, recognizing their carbonfree attribute, and the fact that such subsidies are paid outside of wholesale market operations. Part of the reason is that ZECs, subsidized by action of the states, do not in and of themselves interfere with FERC’s authority to oversee and regulate wholesale electricity markets. The argument follows that when state-level subsidies do interfere with market pricing, FERC will have a role to ensure the integrity and fairness and reasonableness of power pricing.

ZECs do provide financial benefit to plant owners, and such subsidies are paid by electric customers. ZECs are not directly tied to wholesale market participation, and such subsidies arguably do not affect bidding practices. These subsidies are paid outside of competitive markets. However, the US Supreme Court ruled in 2016 that a Maryland policy to support gas generation interfered with FERC’s authority. This decision was narrow and rested on the fact that the subsidy payment was based on a plant’s participation in wholesale markets.

FERC’s June 29 order addressed the integrity and effectiveness of the capacity market administered by PJM Interconnection. A claim was made by opponents to a PJM rule that power generation receiving state support might not otherwise be able to succeed in a competitive wholesale and that the amount of generation capacity receiving state subsidies (out-of-market support) has increased substantially.

What started as limited support primarily for relatively small renewable resources has evolved into support for thousands of megawatts (MWs) of resources ranging from small solar and wind facilities to large nuclear plants. As existing state programs providing out-of-market payments continue to grow, more states in the PJM region are considering providing more support to even more resources, based on an ever-widening scope of justifications. (FERC Order Docket Nos. EL16-49-000 et al.)

DeCotis, Paul A. (September 2018). “Wholesale Electricity Less Competitive, Price Regulation Tighter.” Natural Gas & Electricity 34/14, ©2018 Wiley Periodicals, Inc., a Wiley company.

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