Ferc: Electric Reliability And Resilience

Mission/Overview

The Federal Power Act tasks FERC, along with the FERC-designated North American Electric Reliability Corporation (NERC), with promoting the reliability of the bulk power system (the transmission and generation needed to power the electric grid).107 NERC develops technical standards, and FERC adopts them as mandatory standards (including cyber security standards) with which transmis- sion providers, generators, and utilities must comply. Under the Federal Power Act, critical electric infrastructure security and issues like electromagnetic pulse (EMP) are addressed by both FERC and DOE.108 In addition, the Infrastructure Investment and Jobs Act directed FERC to establish incentive-based rate treat- ments by encouraging utilities to invest in advanced cyber security technology and participate in cyber security threat information-sharing programs.

Needed Reforms

There is a growing problem with the electric grid’s reliability because of the increasing growth of subsidized intermittent renewable generation (like wind and solar) and a lack of dispatchable generation (for example, power plants powered by natural gas, nuclear, and coal), especially during hot and cold weather.109 FERC and NERC have been studying the potential for generation shortages across the nation in the summer110 and winter.111 Cyber and physical attacks also threaten the grid. Specific areas for reform include the following:

Reform the application of reserve margins. Reserve margins have become largely meaningless. Traditionally, the electric industry has used “reserve margins” to ensure that the grid has enough power plants to guarantee reliability. Generally, reserve margins represent the amount of generation available (power plants) to meet peak electric demand (the time of day and year when people are using the most electricity) plus a percentage of additional generation for backup.113 However, given the increasing number of intermittent resources (like solar, which may be available during the heat of the day but disappears as the sun sets), other dispatchable generation needs to be available to meet customers’ electricity requirements. Therefore, the definitions and calculations of reserve margins and peak load need to be updated to focus on the modern grid’s reliability challenges for all times of the day and year.

Recognize the interdependence of electric generation and natural gas. The interdependence of electric generation and natural gas pipelines continues to grow. Given natural gas’s important role in generating electricity, especially as backup when renewables are not available, lack of natural gas pipelines or attacks on existing pipelines could threaten our ability to generate electricity.

Expand resource diversity and reliability. Resource diversity is needed to support grid reliability. Pressure to use 100 percent renewables or non– carbon emitting resources threatens the electric grid’s reliability. A grid that has access to dispatchable resources such as coal, nuclear, and natural gas for generating power is inherently more reliable and resilient. Protect against cyber and physical attacks. The threat of cyber and physical attacks on electric infrastructure by foreign actors like China, Russia, North Korea, and Iran, as well as terrorists, continues to grow. The attacks with guns on substations in North Carolina in December 2022 that left customers without power demonstrate the grid’s vulnerability.114

Limit the impact of subsidized renewables on price formation. Subsidized renewable resources are undermining electric reliability in RTOs. The increase in subsidized, intermittent resources is undermining the ability of RTOs’ pricing models to support the reliable dispatchable generation that is needed to serve the grid at all times.112

New Policies

Update the definition and calculation of reserve margins to support reliability. FERC, NERC, and DOE should revise the definition of reserve margins to ensure the grid’s reliability throughout the day and the year. This will mean recognizing that reserve margins may need to consider “net peak” and exclude non-dispatchable resources from inclusion in reserve margin calculations.

Expand and protect natural gas infrastructure in support of electric generation. FERC needs to ensure that its consideration of natural gas pipeline applications recognizes the role that natural gas plays in electric reliability. FERC also needs to make sure that RTO pricing mechanisms support generators that need to contract for natural gas service on a firm basis.  l Reform RTOs to require reliability. FERC should direct RTOs to establish reliability pricing for eligible dispatchable generation resources or require intermittent resources to procure backup power for times when they are not available to operate. In addition, Congress should repeal subsidies for generation resources.

Support resource diversity and reliability. FERC, NERC, and DOE play key roles in balancing consumer, industrial, and national defense interests to ensure an ongoing reliable, plentiful, and accessible national electricity supply. NERC reliability reviews and FERC’s reliability roles should be aware that overreliance on any one power generation fuel source entails concurrent cost and availability risk. FERC should reform market rules that unduly discriminate against dispatchable resources needed for reliability. Strengthen security against cyber and physical threats. FERC and NERC need to enhance the security of the bulk power system by, for example, banning Chinese-made components, investing in transformers, and hardening substations and other critical infrastructure. DOE should play a leading role in identifying and addressing threats to the grid.

FERC: RTOS/ISOS AND “ELECTRIC POWER MARKETS”

Mission/Overview

For more than 20 years, FERC has issued regulations and directed policies for the creation and operation of regional transmission organizations (RTOs) and independent system operators (ISOs) to manage the dispatch of generation and — 402 —Department of Energy and Related Commissions transmission of electricity.115 Under the misnomer “electric power markets,” these regulatory constructs use marginal price clearing auctions (in some cases both hourly day-ahead auctions and five-minute day-of-need auctions) and locational marginal pricing to procure electric generation and set prices to meet the needs of the grid. Some RTOs also have capacity auctions. Of the nation’s seven RTOs, six are subject to FERC jurisdiction (but not ERCOT in Texas). Areas without an RTO include the Southeast and portions of the West (although California is in an RTO).

Needed Reforms

Too many conservatives have assumed that because RTOs are described as “electric power markets,” market forces of supply and demand set electric prices and benefit customers. RTOs are complex regulatory constructs (with rules set by FERC) that obscure government interference and preferences for preferred resources. Furthermore, government preferences and subsidies for resources like wind and solar distort price formation for electricity that is undermining the reli- ability of the grid. Finally, customers are not seeing the full economic benefits that non-fuel, subsidized resources should provide. Additionally:

RTOs are not providing the full economic benefits of renewables to customers. Because RTOs use marginal price auctions where natural gas usually sets the clearing price paid to all generators, the economic benefits of renewables (no fuel, tax credits, etc.) are flowing mainly to renewables investors and not to customers (although customers do benefit from some decrease in marginal costs). Yet reliability is decreasing, so customers are getting the worst of both worlds, paying more for electricity and having less reliability for the money.

Big Green and Big Tech want RTO expansion. Renewable developers, large industrial users, and Big Tech tend to want RTO expansion for their own economic and ESG reasons. These entities can benefit economically from the complexity and marginal pricing regime of the RTOs. Increased costs and reliability problems are often shifted to other customers.

Electric reliability is threatened in many RTOs. As subsidized renewables (like wind and solar receiving tax credits) and state renewable portfolio standards (RPS) programs have disrupted market functions, price distortions have driven out reliable, dispatchable resources like coal, natural gas, and nuclear generation in various RTOs. The result: Electric reliability is decreasing in many parts of the country.116 As noted, FERC and NERC have been studying the potential for summer and winter shortages.117

Unlike vertically integrated utilities that are accountable to state elected officials and state public utility commissions, RTOs and their participants are accountable only to FERC. Even then, however, accountability is indirect through the tariffs (rules) that the RTOs adopt and FERC approves. In addition, unlike utilities, generators in an RTO have no obligation to serve customers.

New Policies

FERC must make reliability of the grid and service to end use top priorities. To do so, it should:

Reexamine the premise of RTOs. RTOs no longer seem to work for the benefit of the American people. Marginal price auctions for energy are not ensuring the reliability of the grid and are not passing the full economic benefits of subsidized renewables on to customers. FERC needs to reexamine the RTOs under its jurisdiction to make sure that they procure reliable and affordable electricity for the benefit of the American people. Ensure that RTOs return to market fundamentals so that they serve customers, not special interests and political causes. FERC should require RTOs to ensure that reliable, dispatchable resources are properly valued to provide electricity when needed for the benefit of customers.

Potential reforms could include:

Requiring renewable generators to provide intra-day backup by dispatchable on-demand generation so that bids by intermittent resources into RTOs equate fairly with far more valuable on-demand dispatchable resources; 2. Creating dual energy markets for dispatchable and nondispatchable resources; or 3. Eliminating capacity markets where intermittent resources participate and instead establishing “reliability” markets where dispatchable on-demand resources participate.

Alternatives to marginal price auctions also should be considered.

Direct the RTOs to ensure that the economic benefits of renewables (like tax credits and no fuel costs) are passed on to customers.

End undue discrimination that allows subsidized resources to distort price formation in RTOs. Affirm its commitment that states will decide whether to join an RTO instead of imposing RTOs on regions that do not want them. FERC should also consider allowing states to enter into non-RTO power pools with alternative structures for the sharing of resources and electric generation.

FERC: ELECTRIC TRANSMISSION

Mission/Overview

Under the Federal Power Act, FERC has the authority to regulate the rates, terms, and conditions of interstate electric transmission. (Pursuant to court cases, interstate transmission can be entirely within a state, although the part of Texas served by ERCOT is not under FERC transmission jurisdiction.)

Needed Reforms

New Policies

FERC should either change course on its existing transmission rulemakings (if still in progress) or issue a new rulemaking to:

FERC has been considering how to plan for and allocate costs for new trans- mission lines and how new generation resources will be interconnected to the transmission grid. (Transmission expansion and replacement decisions are usu- ally made by local utilities or by an RTO or regional planning entity). Through two major rulemakings,118 FERC is attempting to facilitate the building of more long-range transmission lines and to socialize more of the costs of transmission buildouts to more customers in order to make it cheaper for renewable develop- ers (primarily) to interconnect to the grid and sell their power. Socializing such costs is a form of subsidy for generators and will cause further price distortions in RTOs and ISOs that will make it less economical for reliable, dispatchable resources like coal, nuclear, and natural gas to stay operational and support reliability.119

Also, under the Infrastructure Investment and Jobs Act, DOE and FERC are granted authority to site and permit high-priority transmission lines as National Interest Electric Transmission Corridors (NIETCs). The Inflation Reduction Act provides funding to DOE to support transmission expansion.120 These initiatives will undermine state input and decision-making. FERC will consider rules on how NIETC transmission applications are to be made.

Ensure that transmission planning and interconnection processes are resource neutral.

Prevent socializing costs for customers who do not benefit from the projects or justifying such cost shifts as advancing vague “societal benefits” such as climate change. Stop cost allocation from becoming a subsidy for generators, such as renewables.

With respect to NIETCs, FERC and the new DESAS should ensure that state interests are respected and not allow such NEITC transmission lines to be devel- oped as a mere subsidy to renewable developers. Furthermore, much of the transmission buildout (including its attendant costs) is being driven by renewable developers seeking market share. These projects are causing rates for customers to go up and hurting reliability. FERC needs to ensure that transmission buildouts are planned for the benefit of customers.