Energy Secretary Rick Perry's proposed rule to prop up coal and nuclear plants looks to upset two decades of electricity market reforms, while potentially stifling the development of natural gas power plants that have become a leading source of the nation's electricity.
Although Perry has said he meant the rule to begin "a conversation," that hasn't stopped the proposal from moving forward at unprecedented speed while prompting a major backlash from a broad swath of the energy industry.
Perry last week teetered back and forth on whether the proposal is a conversation starter or taking direct "action" to ensure "our diverse generation mix," while testifying before the House Energy and Commerce Committee's energy subcommittee. "As secretary of energy, I will not sit idly by when I see a threat to that reliability, or a reasonable course of action that is within my authority to mitigate it," he said in prepared remarks.
Rep. Fred Upton, R-Mich., chairman of the energy subcommittee, said that while he will "reserve judgment on the policy solutions, the fact that the secretary stepped into this complicated debate reflects the current need to have a broader conversation about the functioning of the nation's electricity markets."
The rule looks to provide market incentives to coal and nuclear plants for providing increased "resilience" for the grid.
A range of businesses, from crude oil and natural gas to wind and solar companies, have pushed back against the proposal. Analysts suggest the rule would require months of deliberation and modeling before it could even approach the proposal stage, especially for a regulation that could affect billions of dollars in investments and planning decisions.
Instead, the Perry proposal was shipped over to the Federal Energy Regulatory Commission on Sept. 28 in a peculiar way that broke with 40 years of commission precedent. FERC typically doesn't issue rulemakings at the behest of a Cabinet-level agency.
A proposal from the Department of Energy "is not the standard process" for writing a rule that represents a "significant departure" from the last two decades of electricity regulation, said Judah Rose, senior vice president and managing director at the energy consulting firm ICF, on a recent conference call trying to decipher the harm the rule could cause.
Another unprecedented step by FERC at the behest of Perry is the length of time it is giving businesses, states and others to comment on the proposal. It is providing a bare-bones 21 days. Most complex rules require at least a 90-day public comment period, with additional time for stakeholder responses, almost like the structure of a court proceeding ahead of oral arguments. Perry wants the entire process wrapped up in 60 days.
Rose suggested it would be next to impossible in that time frame to do the modeling and analytics required by the commission to evaluate the proposal's impact. On top of that, ICF sees major costs for natural gas generators trying to abide by the new rules. "So there are costs" for complying with the rule, which is "driving uncertainty," Rose said.
It also is not clear if natural gas plants would be able to benefit from the proposal under the 90-day fuel criteria. Renewables, such as wind and solar, which don't use fuel, "do not appear to qualify" for any incentives, Rose said. A preliminary analysis by ICF said the rule would cause the growth of gas-fired power plants to drop off because fewer coal and nuclear plants would close.
Perry is attempting to solve a problem that he framed as grid resiliency. He says power plants, primarily coal and nuclear, need to be compensated for being able to withstand an infrequent, but devastating, event such as a hurricane or some other potentially catastrophic scenario such as a cyber or physical attack on the electric grid.
Coal and nuclear plants can store 90 days worth of fuel on site in the form of piles of coal or a reactor's fissile material that can last months in the reactor before having to be replenished, Perry says.
But the plan seems to be gaining more detractors than champions.
The latest big hit came from Thomas Pyle, the former head of Trump's Energy Department transition team, and the president of the Institute of Energy Research.
Pyle's group issued an analysis last week that concurred with the scores of industry group, utilities, oil companies, renewable energy groups, and other conservative groups opposing the Perry 90-day rule.
Pyle's group is willing to go the furthest to give the proposed rule the benefit of the doubt.
The group concedes that the Energy Department has "identified a real problem," dinging the "growth of intermittent sources of electricity like wind and solar" that have increased the need for "reliable" baseload power plants, "but the expansion of natural gas generation is an important consideration as well."
Despite its willingness to entertain Perry's ideas, the group came down hard on the way he has translated those ideas into regulation. The proposal is "excessive and unnecessarily distortive" to the electricity markets it would undoubtedly destroy.
"Like using a sledgehammer to swat a fly, this rule would end up causing enormous destruction even if it also managed to provide more resilient baseload capacity," the analysis read.
"Guaranteeing cost recovery for certain types of generation would destroy electricity markets."
FERC oversees the wholesale electricity markets in some of most densely populated and industrial parts of the United States. FERC-overseen market operators such as the Northeast's PJM Interconnection typically look to address a problem like the one identified by Perry through their own processes.
But the problem is that stakeholders haven't said that compensating power plants for resilience is an issue.
"This whole effort would undermine [the FERC restructured markets] particularly in the Northeast," said Phil VanHorne, CEO of energy retailer Blue Rock Energy, which uses the markets to deliver lower costs to manufacturers, which is one of the major benefits of the FERC-overseen markets.
The Northeast is one of the most energy-constrained markets in the U.S.
Perry's "philosophy" that there is "somehow a reliability issue ... is just not true," he said.
VanHorne worked in the electricity industry before wholesale markets existed and has seen the reliability benefits created by the transition. He said the Perry proposal goes back to the days when states would funnel money to utilities through higher rates.
"We got all our costs recovered, but there was no incentive to perform," Van Horne said. "So, sometimes we'd spend the money and sometimes we wouldn't."
Back in the 1980s and 1990s, brownouts were "a regular thing" especially on hot days when the power system would be taxed, he said. Those outages were directly related to power plants, not consumer behavior.
"It was a regular event in the 1990s that when we would go to schedule our plants across the summer peak, there was always a problem," he said. "There was some partial outage, some feed water pump, fan, boiler, something always broke. And then we would spend our time scrambling, particularly then, to buy [electricity] from Canada.
"Then, we deregulated the power market in 1996 with the advent of the New York [Independent System Operator] PJM, and then the New England ISO. And [those problems] are all gone because the competitive power plants make absolutely sure that they're available at the time of peak because that's their opportunity to make money," Van Horne said.
"Under this [proposed rule] they say, ‘We really don't care if you actually perform, all we want to know is how much money you spent, and we'll make sure you recover 100 percent of whatever your capital expenses were,'" VanHorne said. "And don't worry about performing, we'll just assume that that translates into reliability when you need it the most."
John Shelk, president of the Electric Power Supply Association, a utility group that is part of the coalition opposing the regulation, said he foresees large piles of coal, but not much else, coming from the regulation.
"Moving coal from the mine to the plant site with 90 days on site doesn't necessarily mean more coal [is used to produce electricity] unless [the Department of Energy] also intends for [FERC-overseen grid operators] to change their dispatch rules and owners of subsidized plants are allowed to bid below their true costs," Shelk said. "In other words, the result of all this could be, in part, coal plants with big coal piles just sit there, with customers picking up the tab."
The plan also has the potential to backfire by forcing electricity prices to fall below the level at which coal and nuclear plants are profitable. The already over-supplied power market would lead to artificially depressed prices for "everybody, including the coal and nuclear that are the intended beneficiaries," he said. To compensate for the lower costs, the "subsidies have to increase," resulting in a "vicious subsidy circle-cycle."
A trade group representing manufacturers asked Congress to step in and direct Perry to withdraw his proposal.
"The proposal would force U.S. manufacturers to pay billions of dollars in subsidies to the owners of uneconomic and obsolete coal and nuclear power plants," read the letter to Senate Energy and Natural Resources Committee Chairwoman Lisa Murkowski and top committee Democrat Maria Cantwell from the Industrial Energy Consumers of America.