Why competitive markets need to remain competitive, 2018 and beyond

As written in a previous column, the US Department of Energy released the Staff Report on Electricity Markets and Reliability in September 2017.
This gave FERC until November 27, 2017, to respond—which by all accounts is uncharacteristically fast.

Energy Secretary Rick Perry requested the report in April, directing that the department review the closure of “baseload” coal and nuclear power plants and “market-distorting effects of federal subsidies that boost one form of energy at the expense of others.” Following the report’s release, the Department of Energy (DOE) issued a Notice of Proposed Rulemaking (NOPR) on September 28, 2017, seeking action by the Federal Energy Regulatory Commission (FERC) to address the role of coal and nuclear plants in helping maintain grid reliability and resiliency. The secretary requested that FERC act on this request within 60 days. This gave FERC until November 27, 2017, to respond—which by all accounts is uncharacteristically fast.

In the Grid Resiliency Pricing Rule,1 the secretary is proposing that FERC exercise its authority under Sections 205 and 206 of the Federal Power Act (FPA), to establish just and reasonable rates for wholesale electricity sales to ensure that reliability and resilience attributes of electric generation resources are fully valued in markets. The presumption is that current wholesale market structures and pricing does not appropriately value these attributes. 

Initial comments on the NOPR were due October 23, and final comments were filed on November 7. It is clear from statements made by FERC Chairman Neil Chatterjee and other commissioners that any final determination and rule will likely take longer than 60 days. It is important to note that FERC is an independent body and that it is not responsible to, nor beholden to, supervision or direction of any officer, employee, or agent of DOE.

It is not responsible to, nor beholden to, supervision or direction of any officer, employee, or agent of DOE.

FERC agreed to consider comments, and commissioners have expressed interest in the issues being addressed by the NOPR. FERC is expected to respond in some form by November 27. At that date, FERC could even choose to do nothing based on the record of comments and analysis received in response to the NOPR, or FERC could continue the investigation into the issues raised by the NOPR.

COMMENTS RECEIVED

Hundreds of initial and reply comments have been filed with FERC, and surprisingly, few, if any, new insights on the issue have surfaced.

Parties that would benefit financially from increasing prices paid to coal and nuclear power plants support FERC taking some action, while those opposed to the continued burning of coal and nuclear power generation are opposed. Some consider an increase in prices paid to these generators as being fair and reasonable and necessary to ensure that attributes and ancillary services provided by these plants (that support grid resiliency) are properly valued and reflected in market prices. Others argue that competitive market pricing demonstrates that these plants can no longer compete against natural gas–fired generation or renewable energy resources and should rightfully close and be replaced by other forms of generation or technologies that better manage demand.

Some consider this action a way to bail out coal and nuclear plants that are price-takers in wholesale electricity markets (i.e., they don’t set prices but are paid the market clearing price at any given point in time set by higher-cost generation on the margin).

ECONOMICS DICTATE NO CONTROL

When natural gas prices were $15 to $16 per dekatherm a decade or so ago, many argued that coal and nuclear plants were profiting excessively as price-takers, with gas setting the clearing price. Then, the operating costs for coal and nuclear units were low, much as these costs are today. Wholesale electricity markets are competitive and operate well, with market structures and procedures in place for market participants to be actively involved in deliberations and any changes proposed to market structures. Competition rarely ever exists in its purest form, yet it is evident in most markets.

Competition requires that no single entity has enough market dominance to control price, because there exist enough market players offering the same or a similar product or service. Very simply put, as prices rise, more players enter the market, and as prices fall, uneconomic players leave the market—the basic principles of supply and demand drive market behavior.

Excessive profits will cause new players to enter the market, increasing competition and driving prices lower. Low profitability will force players to exit the market, driving prices higher. In both instances, price will tend toward equilibrium, stabilizing where supply and demand are equal. Market prices are the barometer or signal to market participants to invest or not invest capital to share in the market returns.

Wholesale market operators, including regional transmission organizations and independent system operators, believe that the market structure and pricing scheme used today is appropriate and that moving toward a “cost-of-service” form of pricing, reminiscent of regulated market pricing, would interfere with competitive markets and lead to a suboptimal portfolio of resources.

They argue that their own analyses confirm that the electricity markets are reliable and resilient.

POLICY PRESCRIPTIONS

Providing additional revenue to coal and nuclear plants to keep them profitable might represent one way, but many others exist. New York and Illinois established the “Zero Energy Credits” (ZECs) program to provide an additional revenue stream to nuclear power plants to compensate them for being a clean and nonemitting source of electricity. The ZEC program has so far withstood a court challenge and is under appeal. However, the way the ZEC program operates does not affect wholesale market clearing prices—rather, it is a subsidy collected by all electricity customers through their bill, and paid to generators outside of the market. In this way, competitive market pricing remains unaffected and nuclear units remain a price-taker, with natural gas prices continuing to set the market clearing price.

If the underlying goal of the NOPR is to support a reliable and resilient grid, policymakers and regulators could direct or support utility investment in modernizing the grid with, for example, new distributed generation resources being added strategically to the grid; investing in advanced metering infrastructure and two-way communications, sensors, and controls, investing in microgrids, demand response, storage, and other technologies. If the goal of the NOPR is to keep coal and nuclear power plants profitable, it should be done through tax policy, fiscal policy, or direct subsidy payments and not through mechanisms that interfere with or disrupt the competitive market pricing of electricity.

COMPETITIVE MARKETS SHOULD REMAIN COMPETITIVE

While the FERC NOPR might be well intentioned, it should leave competitive wholesale markets alone. Any decision to provide additional revenues to coal and nuclear generation should be done as a public policy objective and implemented through tax-law changes, regulator or administrative fees, ZECs, or some other mechanism and not be collected through or added to market clearing prices.

If the goal of the NOPR is to improve grid reliability and resiliency, a myriad of investments can be made, independent of coal and nuclear power generation.