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Power costs to soar under DOE grid proposal, critics say

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Essential Energy Insights - January 2021


Power costs to soar under DOE grid proposal, critics say

Critics of the U.S. Department of Energy's proposed grid resilience rule say it could cost consumers billions of dollars, but uncertainty remains over which "fuel secure" power plants would qualify for full cost recovery under the rule and how federal regulators will respond to the DOE's request.

The DOE in late September asked the Federal Energy Regulatory Commission to approve a proposed rule designed to ensure struggling nuclear and coal-fired power plants operating in wholesale power markets that keep at least 90 days of fuel onsite can recover all their costs. FERC has not yet responded to the DOE's request, but critics say such requirements will unfairly benefit coal and nuclear plants and cause power bills to skyrocket without increasing grid reliability or resilience.

Environmental group Sierra Club said $14 billion in costs could be passed onto consumers from the DOE proposal. The figure, which Sierra Club calculated using S&P Global Market Intelligence data, reflects 2016 operations and maintenance costs for all merchant coal and nuclear plants in the four power markets subject to Energy Secretary Rick Perry's directive — the Midcontinent ISO, PJM Interconnection, ISO New England and New York ISO. The Sierra Club did not say how the $14 billion estimate compares with the actual revenues those plants currently receive.

"Perry is essentially demanding America's manufacturers, small businesses, and families pay what will likely be billions in higher bills to hedge funds and big banks that made a bad bet on coal, to bail out uneconomic power plants that can't compete in the market anymore," said Mary Anne Hitt, director of Sierra Club Beyond Coal campaign. The organization noted a Rhodium Group study that found only 0.00007% of power outages between 2012 and 2016 were caused by fuel supply issues, which Sierra Club said shows the DOE rule is not needed.

Left-leaning think thank Center for American Progress said 30 states across the four affected power markets would be "bearing the brunt" of the DOE proposal. The center said the "coal bailout's" costs to ratepayers could range from $800 million to $3.8 billion, depending on the price of competing generation fuel natural gas.

The price of gas is a big factor in other analyses of the DOE grid proposal. Consulting firm Brattle Group released a new study showing the directive could lift coal production significantly if the U.S. Environmental Protection Agency eliminates the Obama-era Clean Power Plan and mining costs decline. But the group warned that persistently low gas prices, especially those around $3/MMBtu, will keep coal demand under pressure regardless of what policies the Trump administration puts in place.

Both Sierra Club and the Center for American Progress acknowledged the high degree of uncertainty in calculating the grid rule's impacts, in part because the proposal was so broad.

The DOE directive "provides so few details on how it will operate that it is challenging to estimate costs to ratepayers," the Center for American Progress said. "Analysts have indicated that the FERC has flexibility to apply the proposal to different aspects of the electricity markets, and the proposal's vague language makes it difficult to ascertain the full extent of its coverage."

The DOE's initial request to FERC said the rule would apply to power plants operating in regions with competitive wholesale energy markets run by regional transmission organizations and independent system operators. But the Federal Register notice of the proposal said the action would apply only to regions where the grid operators also run competitive capacity markets. Whether the rule the rule would apply to generators in MISO, which has a voluntary capacity market, is unclear.

The proposal's fuel inventory threshold has also raised questions. Paul Bailey, the president and CEO of the American Coalition for Clean Coal Electricity, testified at a recent congressional hearing that the U.S. coal fleet keeps an average of 73-82 days of fuel onsite, short of the DOE's target for receiving full cost recovery.

Perhaps the biggest question of all is how FERC, an independent agency, will respond to the DOE proposed rule. FERC Chairman Neil Chatterjee said the commission could reject the proposal, approve it, introduce a different notice of proposed rulemaking or ask for more comments, among other options.