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2011, FERC also issued Order 745, which ruled that DR be compensated on an equivalent basis to other generation resources in wholesale electricity markets. While providing a significant boost to DR, the order was challenged in the courts on the premise that FERC, whose authority is limited to regulating interstate wholesale power markets, was intervening in states’ rights to regulate retail markets within their borders. The order was vacated by a Court of Appeals in 2014 but ultimately upheld and reinstated by the US Supreme Court in 2016.

Energy security

Grid reliability and resilience

The United States has for many years maintained a robust system that assesses and manages grid reliability to avoid power shortages. Looking ahead, however, the changing US fuel mix – in particular, the growth of natural gas and renewables at the expense of coal and nuclear generation – is raising new concerns about potential impacts on grid reliability (limiting disruptions) and resilience (minimising the duration and impact of disruptions). While reliability has long been a focus of grid operators, the concept of resilience is gaining traction and prompting more regulatory attention (National Academies of Sciences, Engineering, and Medicine, 2017).

NERC assessments

NERC’s Reliability Risk Management group performs assessments on the reliability and adequacy of the bulk power system and identifies potential risks. In this capacity, it provides bulk power system awareness, event analysis and performance analysis to ensure ongoing monitoring and preparedness (NERC, 2019a).

On an annual basis, NERC conducts assessments and reports on the overall reliability and adequacy of the power system, as well as identifies risks to reliability on both a seasonal (winter and summer) and long-term basis (NERC, 2019b). In cases where it identifies risks, NERC conducts special assessments to provide more detailed insight, technical analysis and recommendations to industry to improve reliability.

The electricity chapter in the EPAct 2005 called for the establishment of a self-regulatory electric reliability organisation (ERO) across North America, under the purview of FERC within the United States. As such, NERC issues the following ERO reports:

Long-term reliability assessments: assesses the adequacy of the bulk electricity system in the United States and Canada over a ten-year time horizon on an annual basis, including by forecasting supply and demand, evaluating transmission adequacy, and identifying issues that pose risks to reliability.

Summer and winter assessments: assesses the adequacy of power supply in the United States and Canada for the next summer and winter peak demand periods. Summer assessments are published in May and winter assessments in October.

Special assessments: performed on an as-needed basis to assess regional, interregional or interconnection-wide reliability risks.

Methods and assumptions documents: outline the methodology and assumptions that underpin reliability assessments.

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In response, the FERC in January 2018 issued an order that unanimously rejected the DOE’s NOPR on the grounds that it did not provide sufficient evidence of supply risks to the grid, and therefore did not demonstrate that current RTO/ISO tariffs are “unjust or

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unreasonable”, which is the threshold requirement to pursue changes to rate structures (FERC, 2018). Instead, FERC directed regional grid operators to undertake a comprehensive, longer-term evaluation of grid resiliency.

Following FERC’s rejection of DOE’s NOPR in support of fuel-secure baseload generation, the commission in January 2018 opened a study on grid resilience – defined as the grid’s ability to recover from disruptions – that is still under way (Utility Dive, 2019c). The purpose of the investigation is to receive stakeholder input regarding whether further action is needed to protect the resilience of the bulk electricity system. Regional grid operators made their submissions to FERC in March 2018. Among the many comments received, PJM argued for FERC to develop a national approach to defining and compensating resiliency attributes, while other grid operators pushed to allow RSOs and ITOs to develop plans based on resilience risks identified within each region, highlighting ongoing divisions across the industry on the issue.

Capacity market reforms

As state-level clean energy policies push more renewables into the power mix and, in some instances, subsidise nuclear plants, other sources of electricity (especially coal) are finding themselves disadvantaged from depressed prices, in some cases forcing early retirement. As a result, grid operators are currently attempting to redefine rules for capacity markets, to adjust for the state-driven subsidisation of certain generation sources. FERC in June 2018 rejected two proposals from PJM on capacity market reforms to address state-subsidised generation resources. While FERC previously approved a similar proposal from ISO-NE, the rejection of PJM’s proposal was because of its focus on subsidised existing generation (especially nuclear) rather than new subsidised resources (which the ISO-NE rule proposed including in a second round auction in which retiring generation could transfer capacity supply obligations to new, subsidised resources) (Utility Dive, 2018a). The ruling could lead to a fundamental shake-up in capacity markets. PJM has since proposed a resource carve-out plan that would disqualify subsidised resources from the capacity market through a minimum offer price rule, or a price floor. FERC is due to rule on PJM’s revised proposal in the first half of 2019, which would take effect for its next scheduled capacity auction in August 2019.

Changes to capacity markets in reaction to state-level support are an integral component in the broader debate on grid resiliency (S&P Global Platts, 2019).

Other capacity mechanisms

Individual grid operators have also changed market rules to adjust to changing generation mixes. CAISO has a short term resource adequacy mechanism. Resource adequacy has become a concern in CAISO, as generating capacity has exited the market, notably older oil/gas thermal capacity originally constructed for baseload and mid merit operations. This capacity with high heat rates and start-up costs is not suitable to rapid variations in supply and demand, especially after the fast penetration of solar PV (CAISO had 10 GW of utility-scale solar PV and 6 GW of behind-the-meter solar PV in 2018). The California Public Utilities Commission is considering revising short term contracting requirements in its existing out of market “forward” (one-year) resource adequacy protocols to require contracts for up to five years to ensure that retirements do not threaten reliability. FERC is examining a complaint by a CAISO generator to abandon its resource adequacy mechanism in favour of a full capacity market.

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Elsewhere, ERCOT – which does not operate a capacity market – is facing low reserve margins (7.4% in summer 2019 compared with a target of 13.75%) as around 4.7 GW of coal-fired capacity has retired since May 2017 (RTO Insider, 2019). In response, ERCOT implemented changes in March 2019 to its operating reserve demand curve, which informs scarcity pricing during periods of tight supply. The changes effectively increase payments to generators during shortages by raising the probability of an outage (that is used for calculating payments) (Utility Dive, 2019d). ERCOT hopes that the higher payments will motivate new investments in generation capacity (or prevent the closure of existing capacity).

Fuel security

Amid the growing focus on grid resilience, grid operators are beginning to evaluate the fuel security of their systems, especially as more coal and nuclear capacity is pushed out of the power mix in favour of natural gas, which is more susceptible to supply disruptions and price volatility. The situation is particularly salient in the Northeast, where extreme winter temperatures often result in fuel scarcity for natural gas, forcing generators to switch to coal and fuel oil, both of which are seeing capacity retirements. ISO-NE estimates that around 4 600 MW of power plants supplied by non-natural gas fuels will go offline by June 2021.

In response, ISO-NE released an assessment of its fuel security challenges in light of growing natural gas dependency in January 2018. The report concluded that in 19 out of 23 scenarios examined, the region – which is dependent on electricity and LNG imports

– would face fuel shortages that would result in rolling blackouts. The study will serve as the basis for ongoing discussions about fuel security risks and mitigation options.

In May 2018, ISO-NE requested that FERC waive its market rules to prevent the 1 700 MW, natural gas-fired Mystic Generation Station from retirement on the grounds that the plant’s shuttering would force the closure of the neighbouring Everett LNG import terminal, which is critical to gas supplies in the Northeast, especially during peak periods. As such, the request focused on security of fuel supply rather than the reliability attributes of the power plant itself. FERC in July rejected the request, but upheld the grid operator’s fuel security concerns and requested alternative proposals that address cost support for the plant as well as fuel security. In December, FERC approved ISO-NE’s revised interim proposal, under which ISO-NE can enter into cost-of-service agreements with retiring generators considered necessary for fuel security reasons, until the grid operator can arrive at a compensation system for fuel secure generators. The interim proposal requires that generators with fuel security agreements be price-takers in forward capacity auctions, which allows them to be counted in capacity auctions and prevents over-procurement. The ruling sets up for future changes that could value and compensate generation resources based on their fuel security attributes.

Towards the end of 2018, PJM released the results of a fuel security study it launched in May in response to FERC’s grid resilience docket. The report found that over the next five years, there were no fuel security risks to the grid in the PJM region, even under extreme winter weather, based on the expected retirements of coal and nuclear facilities (PJM, 2018). However, the report also noted that in a scenario of accelerated closures of coal and nuclear facilities, fuel supply disruptions could force outages. Moreover, PJM highlighted that fuel security was a critical component of reliability and resilience; as such, the grid operator is also looking into measures that would value resources based on their fuel security attributes.

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