We're about to get wonky.
We've covered the fundamentals of DOE's long-awaited grid reliability report. But this is a tone-setting resource for the DOE under Secretary Perry -- so it warrants a granular analysis.
Before we go deep, here's the short version:
- In April, Energy Secretary Rick Perry wrote a memo ordering DOE staff to investigate whether “regulatory burdens, as well as mandates and tax and subsidy policies, are responsible for forcing the premature retirement of baseload power plants.” That language alarmed clean energy advocates.
- In July, a rough draft of the report being written by DOE career staff was leaked, revealing a document that made clear that cheap natural gas and flat electricity demand, not renewable portfolio standards or zero marginal cost market advantages, were to blame for the rising number of coal and nuclear power plants retirements.
- On Wednesday, DOE released a final report that retained this core finding, and presented a set of anodyne and mostly already-in-place policy recommendations that left energy wonks debating the meaning of the report.
In the meantime, GTM Research and Wood Mackenzie have been analyzing the 187-page report, tracking changes from the rough draft to the final version, pointing out the minimal presence of distributed energy, energy storage, and grid edge technologies on its list of potential solutions, and looking for clues on how its findings could affect the country’s broader energy markets and regulatory frameworks. Here’s our latest analysis, starting from the top.
“I honestly thought that the evidence they cite, the studies they’re looking at, are all pretty reasonable,” said Shayle Kann, head of GTM Research, summing up the report’s data. “The analysis presented all seems to me to be substantiated and from reputable sources.”
At the same time, “We’re finding rhetorical means through which the study seems to push itself toward what Rick Perry appeared to want when he issued the memo,” he said.
What’s changed from leaked draft to final report
One of the GTM team’s first techniques has been comparing the leaked draft report against Wednesday’s final version, looking for what’s been changed, moved around, or left out. Here are a few of their findings.
MJ Shiao, head of Americas research at GTM Research, noted that the subject of what defines a “premature retirement” was moved from page 72 of the leaked draft to page 14 of the final report, putting it in front of the study’s core findings. The final version also removed the draft version’s footnote, which named state regulators and utility executives as the key players wrestling with this subject through their integrated resource planning and utility rate-case decisions. In these and other ways, “Without knowing the rationale behind the changes, the entire passage seems to be guiding the reader toward concluding that baseload is being retired prematurely,” he said.
Shiao also noted that the final report has changed its presentation of the federal subsidies given to different energy technologies. “Unsurprisingly, renewables take the lion's share, 72 percent of the pie,” he said. The leaked draft notes federal subsidy data in a graph from 1985 to 2015, presenting a long view of how subsidies have also supported nuclear energy, fracking and advanced natural gas turbines. The final report zooms in on 2013 -- the same year that DOE’s 1603 grant program made billions of dollars of direct investments in renewable energy.
GTM Research analyst Fei Wang noted that the draft version stated clearly and early on that "many retirements are consistent with observed market forces," and that regulations and renewable subsidies "play minor roles" in comparison. “In contrast, in the final version, regulations and subsidies, as opposed to market forces, are singled out as contributing factors when setting the tone."
‘Price formation’ and the renewables vs. baseload wholesale market debate
Moving to the report’s policy recommendations, the standout characteristic is the relative “milquetoast” quality, Kann said. Most of the top-line recommendations are asking for work that’s already underway, such as studying price formation in grid markets, or reducing barriers to siting, permitting and building new generation and transmission infrastructure. “They’re all about studying and extending efforts,” he said.
Even so, there are some important implications of what the DOE has asked its fellow federal agencies to do. While the report doesn’t explicitly call for financial support for coal and nuclear power plants, it asks the Federal Energy Regulatory Commission (FERC) to work with grid operators and utilities on efforts to “improve energy price formation in centrally-organized wholesale electricity markets.”
This is a neutral statement, and describes work that FERC is already doing with grid operators. But the report backs it up largely by citing utility arguments that today’s markets are unfairly distorted by renewable energy supports, and need to be counterbalanced to keep baseload power plants running.
These debates are now underway at FERC and the country’s big interstate grid operators. We covered the details of how mid-Atlantic grid operator PJM has been studying how to use minimum offer price rule (MOPR) structures, initially created to deal with fraudulent bidding, to manage the challenge of low-price, zero-marginal cost energy resources like wind and solar. ISO New England is studying approaches such as a two-tier auction for clean energy.
DOE’s report adds a sense of urgency, and even impatience, for these proceedings to yield real policy changes. “After several years of fact-finding and technical conferences, the record now supports energy price formation reform, such as the proposals laid out by PJM and others.”
This has rung alarm bells for clean energy advocates. “There’s nothing in this report that supports its conclusions, which says we should change the way energy markets work so that customers can bail out the companies that own these plants,” Don Furman, a former executive at Rocky Mountain utility PacifiCorp and current director of the Fix the Grid West coalition, said in a Thursday press conference.
But at the same time, energy markets actually do need reform to integrate rising amounts of wind and solar power -- not because they're making the grid less secure today, but because of their characteristics as a provider of energy at zero marginal cost.
“We know that solar in California and wind in the Midwest/ERCOT are already creating low or negative marginal prices and lack of capacity revenue that are a contributing factor in generator bankruptcies and retirements,” noted Wade Schauer, director for Wood Mackenzie's Americas Power & Renewables Research. The report specifically called for negative pricing to “be mitigated to the broadest extent possible” -- an existing priority at most grid operators.
One of the report’s findings is that power markets are functioning as designed, given a “short-term” time horizon, Schauer said. But over the long haul, the report finds that green energy “with near-zero marginal costs and if at high penetrations -- will lower wholesale energy prices independent of effects of the current low natural-gas prices,” a situation that will require “careful consideration of continued market evolutions.”
Essential reliability services: A backdoor for coal subsidies, or an open call for innovation?
The report’s second recommendation asks FERC to look into valuing essential reliability services, or ERS -- a broad category that includes such things as inertial stability, frequency response and ancillary services capabilities, fuel stockpiles, and other of characteristics that are shared by coal and nuclear power plants.
More specifically, it suggests that FERC work with grid operators to "establish market means to value or regulatory means to provide reliability and resilience-enhancing attributes,” with “fuel-neutral markets and/or regulatory mechanisms that compensate grid participants for services that are necessary to support reliable grid operations.”
Given that coal and nuclear plants provide the spinning mass that keeps the grid stable, this could be seen as an opportunity for them to secure new revenue streams. “If one were looking for how this study could be used as cover for the administration's stated goal to save coal, it would be found in the discussion around the need to ‘establish market means to value or regulatory means to provide reliability and resilience-enhancing attributes,’” Kann said.
This view was made explicit by incoming FERC Chairman Neil Chatterjee, who said in a recent interview that “baseload power should be recognized as an essential part of the fuel mix." He also said that "generation, including our existing coal and nuclear fleet, need to be properly compensated to recognize the value they provide to the system.”
In that light, the ERS proposal “definitely seems like a precursor to Chatterjee's suggested incentives to keep coal on the grid,” Shiao said.
But the fuel- and technology-neutral parts of this recommendation open the door to other technologies, Kann noted. “Any resulting support for such attributes could just as easily provide value for energy storage, microgrids, market integration and transmission infrastructure,” he said.
That’s if the concept gets off the ground. Unlike price formation, the concept of essential reliability services requires “further study and reform,” according to the report, with more work to be done by system operators on “recognizing, defining, and compensating for resource attributes that enhance reliability and resilience on both the supply and demand side.”
“They’re not as strong as they could have been,” Kann said. “They could have said, 'FERC should explore the possibility of opening a new market that specifically compensates resiliency value.' They didn’t do that.”
Or, as Schauer noted, “It looks like they suggest that markets, not government, need to figure this out. That seems reasonable. My question is, will markets figure it out before it is too late?”
The report is also light on consideration of how renewable energy, energy storage and demand-side resources can help solve the essential reliability challenges it describes, according to Michael O’Boyle, a power sector transformation expert at Energy Innovation.
“Wind is already providing frequency regulation in MISO, and solar was shown in NREL pilots to be capable of providing the same service,” he wrote in an email. “More significant, batteries and grid-connected devices present a huge untapped resource to balance short-term imbalances between supply and demand virtually instantaneously, and retired plants can often be converted to synchronous condensers.”
“In other words, we have many of the pieces and plenty of run-time to figure this out. But we must figure out how to value these services, rather than assuming they will be there as they have been with a baseload-heavy system.”
What’s missing: Grid modernization, microgrids and distributed energy
We’ve already covered how the report’s research and development policy recommendations left out the name of ARPA-E, a key DOE agency involved in the very research efforts it was promoting. GTM Research analysts have compiled a further list of solutions that are missing from DOE’s report, including some that are part of the agency’s core mission.
Grid edge analyst Daniel Munoz-Alvarez highlighted the DOE’s Grid Modernization initiative, a $220 million effort involving more than 100 companies, utilities, research organizations, state regulators and regional grid operators. Solving grid reliability and resiliency challenges is its core mission.
Yet it was mentioned only twice in the report, once in passing -- “DOE’s Grid Modernization Initiative works to better understand what resilience means for the power system and how to measure and achieve it” -- and once as a policy recommendation to “consider additional applications of high-performance computing for grid modeling to advance grid resilience.”
Grid edge analyst Colleen Metelitsa noted that the DOE report went into some detail on how coal plants' fuel stockpiles provide grid resiliency -- a term that includes recovering from storms and cold snaps, cyberattacks, and other emergencies. But it relegated microgrids to a footnote.
“While the DOE report highlights that coal often stores 30 days' worth of fuel on site, centralized power plants are rarely in close physical proximity to consumers, and that can represent a real reliability and resiliency risk in an extreme weather event,” she said. “A microgrid can enhance resilience by enabling power to stay on near where it is needed. A solar-plus-storage microgrid does not have the fuel delivery risk discussed with respect to natural gas. Of course, microgrids aren't the only answer to reliability and resilience, but they do help bring value to DERs in that respect.”
But the DOE report’s discussion of microgrids is limited to a footnote in its energy storage section: ”Storage is an important component of most microgrid designs reliant on [variable renewable energy] and is expected to play an essential role in helping customers and the [bulk power system] recover from extreme weather events (and should improve resilience and recovery following severe, high-impact events)."
The report also minimized or left out important grid reliability projects funded and supported by DOE itself, GTM's Fei Wang noted. Just last month, the DOE’s SunShot program awarded $46.2 million to 48 projects working on lowering solar costs and improving reliability and efficiency.
“This does not directly fall under grid modernization, but if innovation efforts supported by DOE lead to more deployment of solar and storage, particularly when utilities are involved, the increased decentralization improves resilience,” she noted.