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US DOE proposal for FERC market reforms draws heavy fire at GCPA

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The US Department of Energy's proposal that the Federal Energy Regulatory Commission revamp organized power markets to compensate coal-fired and nuclear generation for their reliability and resilience attributes drew sharp criticism Tuesday at a Gulf Coast Power Association conference in Austin.

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During a CEO roundtable, Pat Wood, former FERC chairman and current Dynegy chairman, said it was an unwelcome present.

He noted the irony of Secretary of Energy Rick Perry -- who as Texas governor oversaw the development of Texas' wholesale and retail power markets -- calling for what Wood called a "cost-of-service" regulatory model for coal and nuclear generation.

"Competitive markets are not properly pricing attributes that our secretary thinks are worth paying for," said Wood, who moderated the discussion. "In a major crisis -- let's just say weather or a major terrorist attack or an [electromagnetic pulse] -- could the grid survive without higher-cost nuclear and coal plants that populate the grid from coast to coast today?"



None of the panelists directly answered that question, but Bob Flexon, Dynegy president and CEO, said: "The subsidy war is alive and well."

"FERC has not been defending what they created," Flexon said, referring to competitive power markets. "We can compete with anybody on price. It's just hard to compete on subsidy."

The power market has "lived with" production and investment tax credits subsidizing wind and solar power, Flexon said, but these tax credits are being phased out, while the DOE directive to FERC "is a red herring for subsidies" for nuclear and coal generation.

That said, if FERC changes markets in such a way that rewards generators for having a 90-day fuel supply, "we'll find ways to get 90 days of inventory," said Flexon. About 40% of Dynegy's generation fleet is coal-fired, he said.

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Mauricio Gutierrez, NRG Energy CEO, said that if the federal government acts to prop up coal and nuclear generation "and leaves the rest to competitive forces -- that's a recipe for disaster."

"The concept of a just and reasonable return for generation, we are all for that, but it has to be in the context of a competitive market," Gutierrez said. "What this proposal does is create entitlement."

Buzz Miller, president of Southern Power, which is Southern Company's independent power producer subsidiary, said: "It looks like they are trying to come up with a scenario that makes coal and nuclear stand out."

But in the event of an electromagnetic pulse, nuclear power would be more vulnerable that other types of generation, because of its concentrated use of integrated circuits, Miller said.

The CEOs generally agreed that some reforms are needed to ensure resources are available when needed, but differed over how they should be accomplished.

In response to the Polar Vortex event of 2013-14, which resulted in more than a fifth of the PJM Interconnection's generation fleet shutting due to cold weather, PJM and ISO New England reformed capacity markets so that resources that failed to perform during emergency conditions had "to really pay a price" in penalties, Dynegy's Flexon said.

However, NRG's Gutierrez said the PJM Capacity Performance market reforms are "not delivering the results we all were expecting" in terms of rewards for dispatchable resources, which is why PJM is embarking on a price formation project designed to compensate resources that provide reliability services by letting them set prices.

Flexon said the energy market has changed significantly over the past 20 years, and "energy price formation needs to change with it."

However, in a subsequent keynote address, Curt Morgan, CEO of Vistra Energy, cautioned against too much change too quick.

"We believe [the Electric Reliability Council of Texas market] is one of the better power markets in the country," Morgan said. "I have been in every one of them, and frankly none of them are very good."

The pace of market rule changes in PJM and ISO New England's would "make your head spin," Morgan said.

--Mark Watson, markham.watson@spglobal.com

--Edited by Keiron Greenhalgh, keiron.greenhalgh@spglobal.com