Department of Energy Study Examines U.S. Grid Reliability, Electricity Markets

The U.S. Department of Energy has released a much-anticipated report assessing and analyzing the reliability and resilience of the electric grid and the evolution of electricity markets.
Policy recommendations generated from the study include: improving energy price formation in centrally-organized wholesale electricity markets; enhancing system resilience; supporting R&D of next-gen tools and technologies; accelerating and reducing costs for the licensing, re-licensing, and permitting of grid infrastructure; and increasing coordination between the the electric and natural gas industries to improve reliability and resiliency.
Secretary of Energy Rick Perry ordered the study.
“This review is something that was long overdue. The industry has experienced massive change in recent years, and government has failed to keep pace. This report examines the evolution of markets that has occurred over the last fifteen years. Policy makers and regulators should be making decisions based on what the markets look like today, not what they looked like years ago,” Energy Secretary Rick Perry wrote in a letter introducing the study (.pdf download).
Some of the study findings are summarized here:
While markets have evolved since their introduction, they are currently functioning as designed — to ensure reliability and minimize the short-term costs of wholesale electricity — despite pressures from flat demand growth, Federal and state policy interventions, and the massive economic shift in the relative economics of natural gas compared to other fuels.
Market designs may be inadequate given potential future challenges. VRE [variable renewable energy] — with near-zero marginal costs and if at high penetrations — will lower wholesale energy prices independent of effects of the current low natural gas prices.
Seasonal and time-of-day overgeneration of renewable energy is driving prices down to near-zero during certain periods. “Taken together, these trends have placed a premium on flexible output rather than the steady output of traditional baseload power plants.”
Americans and their elected representatives value the various benefits specific power plants offer, such as jobs, community economic development, low emissions, local tax payments, resilience, energy security, or the national security benefits associated with a nuclear industrial base. Most of these benefits are not recognized or compensated by wholesale electricity markets, and this has given rise to a variety of state and private efforts that include keeping open or shutting down established baseload generators and incentivizing VRE generation.
“… Technological and institutional changes that are now affecting the electricity sector, and dealing with these issues will require new levels of coordination and collaboration among the sector’s many constituencies. Presently, BPS [U.S. bulk power system] reliability is adequate despite the retirement of a portion of baseload capacity and unique regional hurdles posed by the changing resource mix …”
Fuel assurance is a growing consideration for the electricity system.
Recent severe weather events have demonstrated the need to improve system resilience.
“There are tradeoffs between multiple desirable attributes of the grid. … It may be the case that a more reliable and resilient system is more costly than the least-cost system that a centrally organized wholesale market is intended to deliver. Similarly, policies that seek to deliver more jobs, reduce pollution, or reduce risk may require more upfront investment at an initially higher cost to society as a whole than a least-cost system.”
A variety of factors — the rise of renewable energy and natural gas, [renewables] penetration, the flattening of electricity demand growth, and a host of policy issues — have “negatively impacted” traditional baseload generation, such as coal and nuclear power plants. “The biggest contributor to coal and nuclear plant retirements has been the advantaged economics of natural gas-fired generation.”
Investments required for regulatory compliance have also negatively impacted baseload plant economics, and the 2015 peak in baseload plant retirements correlated with deadlines for power plant regulations as well as strong signals of future regulation.
