U.S. Secretary of Energy Directs Regulator to Assure Cost Recovery for Coal and Nuclear Generators

In late September 2017, the U.S. Secretary of Energy (Rick Perry) issued a Direction and “Notice of Proposed Rulemaking” to the Federal Energy Regulatory Commission (FERC) requiring the establishment of market rules to assure cost recovery for baseload generators. The specific requirement is for the FERC to enact rules that allow for “the recovery of costs of fuel-secure generation units that make our grid reliable and resilient.” The requirement would apply to generation units that can provide essential energy and ancillary reliability services and have a 90-day fuel supply on site in the event of supply disruptions caused by emergencies and extreme weather. Practically speaking, this means that the cost recovery market rules would benefit coal and nuclear generation facilities.

Secretary Perry’s Direction is premised on a stated concern that the American public needs protection from “the threat of energy outages that could result from the loss of traditional baseload capacity.” Particular concerns are noted about the impacts from natural disasters and the “polar vortex” (with no mention of climate change), and the need to ensure that “fuel-secure generation resources are available at times of crisis. The Direction, which follows closely on a very recent U.S. Department of Energy study about whether renewable energy is threatening the reliability or the power system, indicates that assured cost recovery is necessary to assure that there is no “premature retirement” of the baseload generation facilities that meet the stated criteria. 

There has been a lot of negative reaction to this Direction (see, for example, articles published by Bloomberg and Vox). Among the main criticisms are that the protection for coal and nuclear generation is not needed, and that cost protection for these generators will unfairly upset the wholesale power market and disadvantage renewables. 

On the first point, critics note that the very recent U.S. Department of Energy study cited in the Direction found that there is no near-term concern that renewables are making the power system less reliable (see here). In other words, there is no current issue that needs to be fixed. Moreover, to the extent that there are any future concerns, this can be addressed in a focused manner, rather than by providing cost-recovery assurances to all qualifying coal and nuclear generators.

On the second point, the concern is that assuring cost recovery for certain baseload generators will depress the wholesale market for other generators. This would inhibit the development of other forms of generation, especially renewables.

Secretary Perry’s Direction instructs the FERC to implement new market rules within 60 days (or to issue an interim order in the same timeframe). While that timing might be very difficult to achieve, the FERC does appear to be moving quickly in response. On October 2, the FERC issued a Notice Inviting Comments on the proposed market rules, requiring that initial comments on the proposed rule must be provided by October 23, with reply comments by November 7. Subsequently, FERC staff issued a list of questions for commenters to address. Presumably the concerns noted above will be included in the responses provided to the FERC. It remains to be seen how the FERC will move ahead once all the submissions are received. Given that the FERC is an independent agency, it is by no means assured that the FERC will simply adopt the approach set out in the Direction.