This is one of the most important government studies you’ve probably never heard of.
In April, U.S. Energy Secretary Rick Perry ordered the Department of Energy (DOE) to perform a study examining electricity markets and grid reliability. The results will be released in July, and will focus on the impacts of current markets, regulations and policies (including existing taxes and subsidies) on baseload power plants, in particular. As we see increasing use of non-traditional resources like renewables and demand side management, there are real technical, policy and market issues that need to be addressed. DOE professional and technical staff have world-class expertise on these issues, and has already thoroughly examined electric reliability in the Quadrennial Energy Review (QER) published earlier this year.
Perry’s memo ordering the study leads one to wonder if the study will be based on the solid evidence-based analysis in the QER, and it has an important omission regarding reliability. Will the study reach conclusions well-grounded in facts and DOE’s technical expertise?
Here are three things to watch:
1. Will the DOE study present any credible evidence that system reliability is threatened?
The Perry memo implies that grid reliability is threatened because of the integration of variable renewable energy sources and early baseload retirements. However, the North American Reliability Council (NERC) found adequate levels of reliability maintained in its most recent State of Reliability report across all subregions of the United States. Roughly 7 percent of U.S. electricity generation is from variable energy resources such as wind and solar, and experts estimate that current grids have enough latent flexibility to meet up to 30 percent of electricity demand from wind and solar energy without creating reliability problems.
ERCOT and PJM regularly demonstrate that reducing reliance on baseload resources does not mean the grid is compromising reliability, and that the changing resource mix is being driven by competitive economic forces rather than subsidies. The Southwest Power Pool which oversees the grid in 14 states, has found that new operating procedures would enable the SPP transmission system to reliably handle up to 60 percent wind penetration, lowering overall costs and reducing price volatility. In February, it demonstrated these changes have already enabled it to manage 50 percent wind penetration.
Naturally, there are challenges with integrating resources that have different operating characteristics. And, as the overall resource mix changes, grid managers will need apply a variety of tools, policies, and technologies to maintain reliability. Baseload generating plants are not the sole providers of grid reliability services. What is essential is that the grid has a portfolio of resources capable of providing sufficient amounts of essential reliability services to maintain system balance.
2. Will the DOE study address the need for all power service providers to receive adequate value in wholesale power markets, or just focus on baseload plants?
Wholesale markets should value power services that enhance reliability, regardless of whether the power comes from a baseload, intermediate, peaker or variable power plant, or whether a reliability benefit is provided by energy efficiency or demand response.
The evolution of wholesale power markets is challenging the original policy assumptions that shaped the creation of those markets. Demand response (as a “supply” option) and variable renewable energy (RE) with essentially zero short-run marginal cost did not really factor into economists’ recommendations on the design of wholesale power markets in the 1980s and 1990s. However, market designs have been evolving, and remain under active discussion at FERC, in ISO/RTOs, at the state level, and in academia. These ongoing policy discussions apply to all power plants in terms of: whether and how they should be compensated for provision of energy (MWh), capacity (MW), and various ancillary services. Policymakers are also debating the appropriate role of bilateral contracting in ISO/RTOs.
Some nuclear plants are being retired before the end of their design lives (from an engineering perspective). However, if a unit retires for economic reasons, the retirement is not “premature” – it may be part of the least-cost means to serve customers. Some states, such as New York and Illinois, are taking steps to keep nuclear plants economically viable in face of low wholesale prices in energy markets. The environmental benefits of zero-carbon electricity play into debates over the merits of such steps.
3. Will the DOE study address the leading cause of U.S. power outages, namely, extreme weather?
As far as system reliability and resiliency is concerned, the second and final installment of the QER released this January declared that “the leading cause of power outages in the United States is extreme weather, including heat waves, blizzards, thunderstorms, and hurricanes. Events with severe consequences are becoming more frequent and intense due to climate change, and these have been the principal contributors to an observed increase in the frequency and duration of power outages in the United States.”
Perry’s memo has no mention of climate change – a serious omission. Yet curbing climate change is likely to reduce the extreme weather events that the QER found to be the leading threat to grid reliability today.
Methods to manage the grid will evolve based on the diverse characteristics of supply and demand side resources. The evidence shows us that current levels of variable renewable generation (7 percent of total generation) and retiring baseload capacity do not threaten reliability, and that renewable generation can grow substantially in the future without affecting reliability.
The DOE study will be used by the Trump administration to shape future energy policy. It must be done right. We hope the study will have a solid technical basis and not reflect other motivations. Three things we will be watching: 1) to what extent does the QER analysis inform the conclusions, 2) will diverse options be recognized as playing a part in ensuring reliability over time, and 3) does the risk of extreme weather and climate change inform the discussion on threats to reliability.