What You Should Know About the Department of Energy’s New Report on Electricity Markets & Reliability

In a recent federal report published by the Department of Energy (“DOE”) on August 23, 2017, titled “Staff Report to the Secretary on Electricity Markets and Reliability,” Energy Secretary Rick Perry discusses in his cover letter a need to keep the electric grid reliable and resilient for the American people now and in the future.

The report assesses power plant retirements, reliability and resilience, wholesale electricity markets, affordability, policy recommendations, and areas for further research.

The study highlights the following critical issues[1]:

  1. The evolution of wholesale electricity markets, including the extent to which Federal policy interventions and the changing nature of the electricity fuel mix are challenging the original policy assumptions that shaped the creation of those markets.
    • While centrally-organized markets have achieved reliable wholesale electricity delivery with economic efficiencies in their short-term operations, changing circumstances have challenged both centrally-organized and, to a lesser extent, vertically-integrated markets.
    • Evolving market conditions and the need to accommodate variable renewable energy (“VRE”) have led to the increased flexible operation of generation and other grid resources. Some generation technologies originally designed to operate as baseload were not intended to operate flexibly, and in nuclear power’s case, do not have a regulatory regime that allows them to do so.
    • Society places value on attributes of electricity provision beyond those compensated by the current design of the wholesale market.
  2. Whether wholesale energy and capacity markets are adequately compensating attributes such as onsite fuel supply and other factors that strengthen grid resilience and, if not, the extent to which this could affect grid reliability and resilience in the future.
    • Markets recognize and compensate reliability, and must evolve to continue to compensate reliability, but more work is needed to address resilience.
  3. The extent to which continued regulatory burdens, as well as mandates and tax and subsidy policies, are responsible for forcing the premature retirement of baseload power plants.
    • The biggest contributor to coal and nuclear plant retirements has been the advantaged economics of natural gas-fired generation.
    • Another factor contributing to the retirement of power plants is low growth in electricity demand.
    • Dispatch of VRE has negatively impacted the economics of baseload plants.
    • Investments required for regulatory compliance have also negatively impacted baseload plant economics, and the peak in baseload plant retirements (2015) correlated with deadlines for power plant regulations as well as strong signals of future regulation.

Although the details of how this report will impact coal-fired and nuclear power plants, change is coming.

[1] Direct excerpt from Section 2 of the DOE’s Staff Report to the Secretary on Electricity Markets and Reliability, published August 23, 2017.