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DOE reliability rule causes uproar across energy industry

Q2: U.S. Solar and Wind Power by the Numbers

Essential Energy Insights - September 17, 2020

Essential Energy Insights September 2020

Rate case activity slips, COVID-19 proceedings remain at the forefront in August


DOE reliability rule causes uproar across energy industry

The U.S. natural gas industry did not take the news well when the U.S. Department of Energy proposed to direct the Federal Energy Regulatory Commission to issue a rule on energy grid resilience that favors coal-fired and nuclear power generation.

With initial comments due at FERC on Oct. 23 on the proposed rule to allow certain struggling nuclear and coal-fired generators to fully recover their costs, FERC staff has posed a long series of questions related to the plan. In an Oct. 4 notice, the staff asked interested parties to address whether existing power markets need to be reformed and, if so, exactly how FERC should craft a new rule.

But many legal questions were raised by the DOE proposal, partly because it is vague on what will promote the resilience of the grid and the reliability of energy delivery, but also because the Energy Department employed a rarely used provision of federal law, Section 403 of the Department of Energy Organization Act, to propose a rule for FERC action.

If FERC issues a final rule reflecting the DOE proposal, it most likely would be subject to considerable litigation. For instance, former FERC Commissioner Tony Clark in an interview said that under traditional FERC processes, the agency would have to find that existing rates are unjust and unreasonable before it could require a new rate to be established. On the DOE deadlines, Clark said they would be difficult to meet and leave any FERC action "very vulnerable" to legal challenges.

"You wouldn't want to do something that increases its likelihood of being overturned," Clark said.

The oil and gas industry rebuked the DOE. "[The Natural Gas Supply Association] is dismayed that the Department of Energy would pursue this drastic action that would distort energy markets," Natural Gas Supply Association President and CEO Dena Wiggins said in a statement.

The association and the American Petroleum Institute criticized the DOE for not allowing market forces to work, noting that competitive pricing has put natural gas in a strong position as a fuel in the domestic power sector.

"We need to be careful that government doesn't put its thumb on the scale. It's better to let markets choose, which is what the United States is seeing with the growth of natural gas as the United States' leading energy source for electricity in 2016," said Marty Durbin, American Petroleum Institute executive vice president and chief strategy officer.

The gas industry groups plan to fight the DOE plan. Already, the gas industry has joined forces with other energy trade groups in pushing back. On Oct. 2, a group of 11 industry associations representing gas, wind, solar and other sources of energy asked FERC to reject the DOE's proposed timeline for the rule. The organizations said in a filing that the proposed policy change could affect electricity prices for hundreds of millions of consumers, hundreds of thousands of businesses and tens of thousands of workers for a wide array of industries. With that level of impact and the complexity of the issues, the short timeline is unreasonable, they said.

That the gas industry must fight such a battle is shocking to many observers. They said natural gas won its increased share of the power stack through low prices, a predictable regulatory environment to install pipelines and low costs to build new plants. The policy decree is a departure from an August DOE grid reliability study, and the fact that such a market-disrupting approach would come from a Republican administration caught industry observers off guard.

In a recent note, FBR & Co. said the proposal could create economic and ideological backlash, with Energy Secretary Rick Perry and the Trump administration splitting from traditional Republican support for competitive markets.

"A de facto subsidy for coal and nuclear will inspire pushback from the oil and gas industry, in addition to renewable power and environmentalists," the note said.