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Key Takeaways: Achieving Low-Cost Decarbonization Through Power Markets, Infrastructure and Grid Operations



McDermott hosted Rob Gramlich, Founder and President of Grid Strategies, LLC, on July 16 for a discussion of low-cost decarbonization strategies for the electricity sector. We framed the discussion around 2020 US Presidential Candidate Joe Biden’s recently announced goal of getting to zero carbon emissions from the electricity grid by 2035.

Here are three takeaways from our conversation:

1. Three Areas of Change. Rob highlighted three areas where improvements can be made to substantially increase the deployment of wind and solar resources: Power markets, grid infrastructure and grid operations. With respect to power markets, Rob emphasized that regional transmission organizations (RTOs) can play a bigger role in achieving very fast dispatch over large geographic areas. With respect to infrastructure, he emphasized that new transmission lines will be required to reach the best wind and solar resources, but also that many of those new lines can be built on existing rights-of-way. And with respect to grid operations, he emphasized that there are technologies and operating practices that can help us improve the efficiency of the grid.

2. Flexible FERC. Rob suggested that under a new Democratic administration, FERC would likely prioritize flexibility in pricing design and in FERC’s interactions with states. He emphasized the importance of a flexible design for the pricing of “capacity” services and suggested that a Biden administration would likely be supportive of state level efforts to promote renewable energy.

3. Transmission Costs vs. Electricity Costs. Rob suggested that over the next ten years transmission costs will become a greater share of the overall cost of electricity, but that building out transmission would help bring that overall cost down.




FERC Rejects Department of Energy Proposal Benefitting Coal and Nuclear

On January 8, 2018, the Federal Energy Regulatory Commission (FERC) rejected the Department of Energy’s (DOE) Proposed Rule, which would have required organized wholesale electricity markets run by independent system operators (ISOs) or regional transmission organizations (RTOs) to establish tariff mechanisms for purchasing energy from eligible “reliability and resilience resources” and mandated a recovery of costs plus a return on equity for such resources. Eligible reliability and resilience resources would have to be (1) located within an RTO/ISO, (2) able to provide essential reliability services, and (3) have a 90-day fuel supply on-site. Practically, these requirements would limit participation to coal and nuclear plants. (more…)




Department of Energy Proposes Rule Benefiting Coal and Nuclear to FERC

On September 28, 2017, the US Department of Energy (DOE) submitted a proposed rule to the Federal Energy Regulatory Commission (FERC) that, if implemented, could reshape organized wholesale electricity markets. Citing electric grid reliability and resiliency issues like the 2014 Polar Vortex and recent hurricanes, DOE asked FERC to enact a new compensation system for coal and nuclear power plants—dubbed “fuel-secure resources” by DOE. Coal and nuclear plants have been retiring prematurely and, according to DOE, the retirements are “threatening the resilience of the Nation’s electricity system.”

In order to stem the tide of retirements, DOE submitted to FERC a proposed rule requiring organized wholesale electricity markets run by independent system operators (ISOs) or regional transmission organizations (RTOs) to develop and implement market rules that “accurately price generation resources necessary to maintain the reliability and resiliency” of the bulk power system. The proposed rule would require ISOs and RTOs to provide “a just and reasonable rate” for the purchase of electricity from a fuel-secure resource and “recovery of costs and a return on equity for such resource.” Eligible resources must (i) be located within an ISO or RTO, (ii) be able to provide energy and ancillary services, (iii) have a 90-day fuel supply on site, (iv) be compliant with all environmental laws, and (v) not be subject to cost-of-service rate regulation at the state or local level. Practically, these requirements limit participation to coal and nuclear plants. (more…)




Transmission Planning and Construction Right of First Refusal Ruled Unduly Discriminatory, Not Mobile-Sierra Protected

The provision contained in incumbent electric utility tariffs—conferring on the holder the right of first refusal (ROFR) to construct additions to the high-voltage electrical grid, regardless of who conceived of and proposed the addition—is unduly discriminatory, the U.S. Circuit Court of Appeals for the D.C. Circuit held in a July 1 decision in Oklahoma Gas & Electric Co. v. FERC, No. 14-1281.   The court’s decision upheld utility-specific applications of the FERC mandate—a central open-access innovation of the agency’s Order No. 1000 (Transmission Planning and Cost Allocation by Transmission Owning and Operating Public Utilities)—that directed independent system operators and regional transmission organizations (ISO/RTO) to remove from their existing tariffs and membership agreements the ROFR provision (Removal Mandate).

Earlier in South Carolina Public Service Authority v. FERC, 762 F.3d 41 (D.C. Cir. 2014), the same court generally had upheld the Removal Mandate as applied to ISO/RTOs but had reserved judgment on whether the 60-year-old Mobile-Sierra presumption that the rates in negotiated arm’s length natural gas and power sales agreements are just and reasonable applied to the ROFR provisions of the ISO/RTO tariffs and membership agreements.  In Sierra, the Supreme Court of the United States held that the presumption applies against not only the parties to a negotiated agreement but against FERC itself; thus, if it were found to apply to the ROFR, FERC could overcome the presumption only by showing that the ROFR seriously harmed the public interest.

The court could have resolved ISO/RTO and incumbent utilities’ challenges to the Removal Mandate in either of two ways.  First, it could have determined that the context in which the ROFR provision was included in the tariffs and membership agreements prevented the presumption from applying in the first instance because of infirmities or unfair dealings in contract formation, such as fraud or duress.   Second, it could determine that the presumption did apply and then address the question of whether FERC had overcome the presumption with evidence that the ROFR in member agreements seriously harmed the public interest.  The court took the former course.  It ruled that the Mobile-Sierra presumption never applied in the first instance because (quoting Order No. 1000 and citing South Carolina), the ROFR “created ‘a pre-existing [i.e., not negotiated] barrier to entry’ for nonincumbent transmission owners.”  Citing precedent from the Seventh Circuit, the court found that “such terms” as the ROFR are “self-protective and anti-competitive [and] cartel-like.”

By cabining its holding to the anticompetitive effects of the ROFR, the court was able to bypass two other and possibly more complicated issues.  First, it bypassed the issue of whether the Mobile-Sierra presumption applies not only to the rates in regulated natural gas and power sales agreements, but also to agreement terms that affect rates.  As the court noted, both the petitioners and FERC argued the case based “on the premise” that the presumption applies to both to rates and agreements terms that affect rates.  Second and possibly more nettlesome is whether the Mobile-Sierra presumption would protect other provisions of ISO/RTO tariffs even [...]

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