Market Forces Must Drive Grid Reliability and Resilience Rule

On Tuesday, more than a hundred groups submitted final public comments on a proposal that, if adopted, would represent one of the most fundamental transformations to the U.S. energy market in decades.

The comments center on a proposal by the energy secretary that the Federal Energy Regulatory Commission consider a new regulated fee structure to compensate power plants that can “withstand major fuel supply disruptions caused by natural or man-made disasters” and are “able to provide essential energy and ancillary reliability services and have a 90-day fuel supply on site in the event of supply disruptions.”

In practical terms, this would be a subsidy for the few sources of power that can store large amounts of fuel on site, namely coal and nuclear facilities, which both have been struggling to compete with cheaper fuel sources over the past decade.

The Interstate Natural Gas Association of America, a trade association representing long-line, high pressure gas pipelines, supports the administration’s goal of enhancing system resilience and reliability. But we do not believe that the proposed solution is the correct one. Not only does it break with FERC’s long and successful tradition of promoting competition in wholesale electricity markets through fuel-neutral policies, it would drive up costs for consumers while doing little or nothing to enhance the performance of the grid.

Indeed, the United States already enjoys a robust electric power grid. The president of the North American Electric Reliability Corporation testified before Congress last year that “the state of reliability in North America is strong and continues to trend in the right direction,” a point borne out by the Department of Energy’s own August Staff Report, which gave the nation’s grid an excellent rating.

The secretary’s proposal challenged those assessments. It criticized the performance of the grid generally, and the natural gas industry specifically, during several recent extreme weather events, including the 2014 Polar Vortex.

But the facts don’t support this analysis. Natural gas and pipeline transportation infrastructure has an extremely reliable record. During the Polar Vortex, nearly all “firm” contracts were satisfied. (In case you’re wondering, “firm” pipeline customers are equivalent to a sports team’s season ticket holders.) This performance led regulators to conclude that the natural gas industry (along with demand response and wind) performed beyond expectations.

More than 14 GW of coal and 1.4 GW of nuclear were forced offline due to extreme cold and frozen coal stockpiles during the Polar Vortex. Meanwhile, during Superstorm Sandy in 2012, another weather event cited in the proposal, three nuclear reactors were shut down and another five were forced to scale back operations.

These experiences point to a critical flaw in the DOE’s rationale. By specifying “fuel-secure generation” — in other words, on-site supply — the administration confuses fuel diversity with the diversity of attributes that a fuel mix should provide. This creates a false dichotomy between different generation sources.

As a result, the proposal ignores the natural gas industry’s exemplary record of satisfying firm, interstate pipeline contracts over the last decade – reliability – and that modern gas-fired combined-cycle technology plants can ramp up electricity generation to meet demand in a matter of minutes – resiliency.

This is not to say that more can’t be done to enhance our nation’s power grid. Certain regions lack physical infrastructure, and there have been times when pipeline capacity has been constrained. But market forces must be used as the foundation of any rule seeking to address these issues.

Instead of a top-down, one-size-fits-all subsidy regime, FERC should direct the different regional grid operators to examine whether their current policies sufficiently value reliability. Based on their feedback, the commission can develop innovative, fuel-neutral and market-based rules to properly incentivize resilience, without unnecessarily driving up costs for consumers.

The past two decades of competitive energy markets for both natural gas and electricity have brought greater reliability, increased efficiency, more innovation, lower prices and fewer emissions. While the DOE proposal has a laudable goal, it would turn back the clock on competition, jeopardizing this progress and doing little to enhance system reliability or resilience. The key to addressing those issues must come through a market-based solution that can be tailored to meet the needs of each regional system.

Donald F. Santa is the president and CEO of the Interstate Natural Gas Association of America, the North American association representing the interstate and interprovincial natural gas pipeline industry.

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