Prescribing on-site fuel storage is an unreasonable approach to grid resiliency


The U.S. Energy Department’s proposed rulemaking to the Federal Energy Regulatory Commission (FERC) is, at best, a myopic and inefficient approach to grid resiliency. The proposal prescribes one measure, among many options, to address a single, low-to-medium salience aspect of grid resiliency. That is, it proposes to compensate extended on-site fuel storage as the means to address the security of fuel supply across the power-plant fleet.

Fuel security is an important issue to evaluate objectively, but it’s been politicized immensely by rent-seeking interests. This clearly influenced the DOE proposal, which cherry-picked the evidence to make its case. The proposal selectively pulled information from the insightful DOE technical report issued in August. The proposal exalts the benefits of fuel-secure nuclear and coal, but ignored that the report highlighted substantial fuel-related outages at coal plants. Many coal plants couldn’t obtain fuel from their own on-site stockpiles because conveyor belts broke and coal piles froze.

Reducing fuel shortages at many power plants is not even a function of whether fuel is stored on-site. The biggest issue with natural gas plants lacking fuel – in the 2014 polar vortex or otherwise – is that they lacked the incentive to firm their fuel supply. Firming a fuel supply could come from on-site storage (e.g., backup oil) as well as off-site delivery, such as contracting for guaranteed pipeline service. Since the polar vortex, market reforms have increased the incentive to firm fuel supplies, and this has improved generator performance during severe weather events. In the PJM Interconnection, the largest grid operator, this largely came in the form of firming gas supplies using third-party marketers, which improves fuel security without increasing on-site supplies. Critically, this came from voluntary actions by the private sector, which creatively chose the lowest-cost ways to improve plant performance that fit their unique set of circumstances.

The DOE proposal cites the polar vortex as a cautionary tale of fuel insecurity. Yet the biggest issue was weather-related outages, as many plants couldn’t operate because temperatures dropped below a plant’s design basis (e.g., external instruments froze). If anything, it’d be more important to ensure weather-secure generation than fuel-secure generation.

Regardless, it shouldn’t be the role of government to compensate plant weatherization, on-site fuel storage or any other measure to possibly improve generator performance directly. Instead, regulators should ensure an incentive structure exists for the economically efficient level of weatherization, fuel assurance improvements and other performance-enhancing measures like improved maintenance. All these measures have costs, and only a well-functioning market should determine which costs are worth incurring to keep the lights on.

A market-based approach to reliability and resiliency values the performance or capability to provide a specific service. It does not explicitly value specific measures associated with performance or capabilities. Dozens of measures improve performance and capability, and the lowest-cost way of doing so is to provide proper incentives to market participation to decide their own course.

In contrast, the DOE proposal would result in compensation for one politically preferred measure. For government to favor a certain measure simply reveals the bias of central planning, which has a track record of raising costs unnecessarily. To the extent that on-site fuel improves generator performance, markets should reward the measure indirectly through a fuel- and technology-neutral paradigm that procures specific services.

Take “black-start” capability, for example. A power plant with black-start ability can start up without power assistance from the grid. This is critical for resilience, as it provides the ability to restore operations in case of a full grid blackout. Procurement of black-start capability predominantly occurs through administrative processes, rather than market mechanisms. Re-examining the determinants of black-start procurement and using a market approach may boost prospects for cost-effective resiliency.

A thoughtful, market-compatible approach to reliability and resiliency, like that recommended in the DOE technical report, is welcome. The current DOE proposal provides an example of what not to do. It is deeply flawed, rushed and anti-competitive. The fallout from the DOE’s proposal will hopefully encourage the administration to reinvent its strategy on resiliency to bolster market performance and empower consumers, rather than undercut them by prescribing actions. In the meantime, FERC must uphold market principles and push forward with an economically sound agenda. FERC only needs to cite the DOE’s technical report as an example of what to do, as it respectfully declines DOE’s political albatross.



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