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Analysts Question Short Fuse on DOE’s NOPR Directive to FERC

The notice of proposed rulemaking (NOPR) that the Department of Energy (DOE) submitted to FERC on Friday -- a first of its kind proposal to implement reforms on the reliability and resiliency of the electricity grid -- may not be completed in the timeline requested, nor exactly as DOE prescribed, analysts said Monday.

Under DOE’s proposed Grid Resiliency Pricing Rule, the Federal Energy Regulatory Commission would "exercise its authority under sections 205 and 206 of the Federal Power Act, to establish just and reasonable rates for wholesale electricity sales." Changes detailed in the NOPR would benefit nuclear and coal generation at the expense of natural gas.

DOE’s NOPR, submitted via its non-emergency authority under Section 403 of the DOE Organization Act of 1977, directed FERC to issue a final rulemaking or interim final rule within 60 days of publication of the NOPR in the Federal Register.

But the massive amount of work involved in the process could mean the 60-day timeline won’t be met, some analysts said.

“Our primary takeaway from this event is that DOE really wants FERC to address the issue now,” ClearView Managing Director Christi Tezak told NGI. “But such a massive departure from current approaches -- notwithstanding the large record DOE implies is already at the Commission -- looks to be something that isn’t going to be fully completed within 60 days.”

In the NOPR, DOE allocated 45 days for comment and 15 days for FERC to complete the rule. Clearview analysts said they “would not be surprised if -- like DOE needed for its own grid study -- the FERC requires more time to act than the DOE has targeted.” Still, DOE clearly wants the NOPR at the top of FERC’s near -term priority list and the Commission is expected to move swiftly on the issue.

The decision "ultimately lies in FERC’s hands," said Tudor, Pickering, Holt & Co. (TPH) analysts. "We believe it is unlikely the DOE gets exactly what it wants given FERC’s latest commentary about being an independent agency and the expected fierce opposition across the industry.

"However, we do believe a high priority for FERC is both energy and capacity price formation reform, which could result in improved economics for baseload generators."

The 60-day timeline in the DOE order "is very aggressive in our eyes, and we do not expect FERC to act within that timeframe, given its large backlog and the lack of a full slate of commissioners," as two people still are in the confirmation process. Others pointed out that failure of FERC to give the measure a full review could undermine it if/when it is challenged in court.

As to what sectors benefit, the DOE proposal "is not binding, but it does strengthen the spotlight on the issue of compensating baseload generators," said the TPH analysts.

"Unlike the DOE study, which we believe was non-consequential, we do believe this latest proposal will be a much bigger part of company management conversations when discussing their respective strategies going forward.

"This is bearish for the Texas market," said the TPH team. As an example, Vistra Energy, the parent company for TXU Energy and Luminant, could "hesitate" on announcing coal plant retirements before finalizing possible federal economic support.

"We do not believe FirstEnergy Corp. (FE) and Entergy Corp. will change their commitment to divest baseload merchant plants, but FE could see improved bankruptcy settlement talks while both could see improved near-term earnings."

Finally, said TPH analysts, with Public Service Enterprise Group Inc., Dominion and Exelon Corp. "already pushing for nuclear compensation, the DOE proposal is a welcomed move for the integrateds."

FERC has received DOE’s request and given it a docket number (RM18-1), but had no other comment Monday.

“The Commission is reviewing it now,” a FERC spokesman said.

On Monday, a group of 11 energy industry associations, including the American Petroleum Institute, Interstate Natural Gas Association of America and Natural Gas Supply Association, filed a motion at FERC calling for “a deliberative process that considers stakeholder input as it determines whether or how to move forward with a rulemaking.”

The comment period for the NOPR should be at least 90 days, the group said. The associations also called for a technical conference to be held, and said other deadlines in the DOE proposal are “wholly unreasonable and insufficient” and should also be extended if FERC decides to move forward with the rulemaking.

Acting Chairman Neil Chatterjee has said FERC will remain an independent agency under his watch. Pressed at a recent House Energy and Commerce subcommittee meeting about the possibility of compensating coal and nuclear generation, Chatterjee left the door open, but said FERC is “fuel neutral.”

“In terms of strategies or a path forward, the Commission is fuel neutral and will look to ensure as the grid undergoes this transformation that we make sure we evaluate the attributes of fuel sources to see what values they provide, and if there is a demonstrated need for reliability whether those things can be compensated.”

The NOPR is needed "to protect the American people from the threat of energy outages that could result from the loss of traditional baseload capacity," according to DOE Secretary Rick Perry. From 2010-2015, 37 GW of coal-fired generation was retired, accounting for 52% of all power plant retirements, and by 2020 another 34.4 GW of summer capacity (49% of it coal, 30% natural gas and 15% nuclear) is planned to be retired, Perry said in a letter to FERC last week.

Between 2002 and 2016, 531 coal-fired generation units representing about 59,000 MW of generation capacity were retired from the U.S. fleet, according to DOE, and another 12,700 MW of coal generation is expected to retire by 2020. Nearly 4,700 MW of nuclear generating capacity retired 2002-2016, and eight more reactors representing 7,167 MW have announced retirement plans since then, DOE said.

There are expected to be significant challenges to DOE’s assumption that grid reliability is threatened by the rising tide of gas-fired generation and the coal and nuclear retirements.

“The DOE proposal threatens established power markets by propping up uneconomic coal and nuclear generation under the guise of fuel diversity, all on the backs of consumers,” an NRG spokesman told NGI. The Princeton, NJ-based power company’s 51,229 MW North American generation portfolio includes 48% natural gas, 30% coal and 2% nuclear.

“While NRG is pleased that the DOE recognizes that there is a problem with price formation in wholesale markets, the solution is not to re-regulate large swaths of the competitive market, but to ensure that fuel-neutral and competitive policies value all forms of generation and fuel types.”

While natural gas industry groups vehemently opposed the proposal, coal and electricity organizations, on the other hand, have shown support for the NOPR.

“We commend Secretary Perry for initiating a rulemaking by FERC that will finally value the on-site fuel security provided by the coal fleet,” said Paul Bailey, CEO of the American Coalition for Clean Coal Electricity. “The coal fleet has large stockpiles of coal that help to ensure grid resilience and reliability.  We look forward to working with FERC and grid operators to quickly adopt long overdue market reforms that value the coal fleet.”

Edison Electric Institute’s Richard McMahon, vice president of energy supply and finance, said DOE had recognized “that a balanced energy mix that includes 24/7 energy sources is vital to sustaining a secure, reliable, and resilient energy grid.

“While we are still reviewing the NOPR, we believe competitive electricity market rules should promote a diverse energy mix and should recognize the role that all generation sources play in maintaining the reliability and resiliency of the energy grid.”

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