Making FERC hot can keep the climate cool
Despite its centrality to economic growth and decarbonization, regulatory reform has been slow to catch on. Naturally, bureaucratic rules marked by an alphabet soup of acronyms do not translate into campaign slogans or media click bait. But removing barriers to entry is the hidden gem of the clean transition.
It begins with making the technocratic Federal Energy Regulatory Commission (FERC) publicly relatable. In an effort to make the uncool cool, Democrats launched the “Hot FERC Summer” campaign last month to boost the agency’s visibility on Capitol Hill. If they frame it correctly, they can popularize regulatory reform at FERC as central to letting clean energy and the economy thrive.
Popularizing FERC reform
A heavy dose of levity helps elevate the profile of wonky electricity issues. For example, a recent article in The Atlantic brought rare, focused attention to transmission policy with an opening line expounding the author’s agony of beginning to care about the issue. Indeed, few things induce more naps than FERC transmission rules. But in this case, the mundane is the sublime.
The popularization of FERC is a scary proposition for some. Many industry insiders see it as a path to politicizing a historically evidence-based, technocratic agency. That’s a valid risk, but one that is outweighed by the value of encouraging broad stakeholders to appreciate FERC’s role.
Aligning FERC with climate objectives also has its detractors. The Wall Street Journal (WSJ) editorial board warned of the need to keep a skeptical eye on FERC as a climate agenda back door. Indeed, FERC is not an environmental regulator, which was publicly reinforced by Chairman Richard Glick, and will be tested in areas like carbon pricing and pipeline policy. However, the WSJ piece failed to acknowledge that some FERC reforms, like enabling distributed resource participation, are pro-market and have sizable climate benefits to boot. Looking ahead, FERC’s advance notice of proposed rulemaking on transmission and generator interconnection reform may dwarf anything Congress does in the infrastructure package.
This theme is pervasive and profound: FERC can stay in its lane as an energy regulator while unlocking vast climate benefits.
Electricity rules are rooted in an outmoded worldview of conventional generation and inflexible demand. So it’s unsurprising that the primary headwinds for robust demand participation, energy storage and renewables result from regulatory barriers. These depress transmission capacity; elevate congestion curtailment risk; cause inflexible system operations; increase interconnection costs and delays; anchor incumbent-biased governance; and produce uncertain and declining “capacity credit” for reliability service. To address these, three appropriate FERC priorities are generator interconnection, transmission and reliability policy reform.
Generation developers must apply for interconnection to the transmission system, which is necessary for reliability purposes, but structural flaws and process inefficiencies are resulting in a clean energy blockade. Over 70% of the clean energy capacity needed to meet 2030 targets is hung up in interconnection queues. An Americans for a Clean Energy Grid report finds that this is “causing a massive backlog and delay in the construction of new power projects” and calls for FERC reforms to better align interconnection costs with system beneficiaries in a proactive manner.
Much interconnection improvement has to do with nitty-gritty processes. The independent monitor of the PJM Interconnection, the largest domestic wholesale electricity market, recommends process improvements to remove unviable projects from the queue; advance commercially viable projects that have failed to progress; reduce timelines and delays in interconnection study results; and improve the likelihood that projects in advanced phases successfully enter service. The monitor also recommends outsourcing interconnection studies to avoid conflicts of interest, as the incumbent transmission owners who currently conduct these studies may also own generation that they seek to insulate from new entrants.
As noted in Congressional testimony by Rob Gramlich, president of Grid Strategies, there is no lack of private capital willing to build transmission. He notes the real barriers to transmission are the “Three P’s” of regulatory reform: planning, permitting and paying. A transmission regulatory overhaul is warranted on economic grounds consistent with FERC’s mission, while also being vital to the clean transition.
Transmission planning processes chronically underestimate transmission benefits and artificially silo projects into economic, reliability and public policy bins. More comprehensive planning could cut customers’ bills by $100 billion and unlock vast amounts of clean energy in the process. Further aligning the allocation of transmission costs to its beneficiaries remains necessary.
Revising the FERC Order 1000 framework could go a long way to drive more holistic, consistent and proactive benefits methods in transmission planning while better aligning cost allocation with beneficiaries. This may be insufficient for interregional projects, however, which may warrant an institutional makeover. For example, an independent third party could model multiple regions at once and avoid the incongruences and conflicts of interest that chronically deter cooperation between regional entities.
Current transmission regulation also results in poor economic discipline by developers and asset managers, which makes transmission expansion less economical and drives consumer bills up unnecessarily. This occurs because the regulatory framework entrenches monopoly incumbents who, under cost-of-service regulation, profit by spending excessive capital and suppressing innovative, lower-cost alternative technologies and new entrants. This explains persistent “dead zones” at the local level and the weak adoption of advanced grid technologies, like weather-adjusted line ratings and topology controls — especially when they are less costly than alternatives.
Enabling transmission competition between incumbents and non-incumbents, as well as between wires and non-wire alternatives, would potentially save tens to hundreds of billions of dollars while also increasing system capacity for the clean transition. Consumers are already rallying around transmission competition for cost purposes, while leading scholars have noted that catalyzing transmission development requires ending the “utility protection racket.”
The clean transition is on a collision course with reliability hawks, but this need not be the case. Correcting deficiencies in reliability policy and institutions can simultaneously reduce barriers to entry for unconventional resources, improve reliability and minimize the consequences of reliability events. Deficiencies include siloed reliability institutions; disjointed state-federal coordination; reliability standards that force unconventional resources to mimic conventional ones; incongruous market and reliability policy development; uniform treatment of diverse customer reliability preferences; retrospective rather than anticipatory planning inputs; and understatement of common mode failure.
Improving reliability evaluations is also crucial. Flawed assessment tools lead to false negatives, such as thinking “healthy” peak reserve margins indicate low loss-of-load probability. It also leads to false positives, such as inaccurate studies misgauging the reliability effect of so-called baseload plant retirements.
If the reliability community loses confidence in the energy transition, it will invite a slew of interventions like reliability must-run contracts to artificially retain incumbent generation. And that confidence, at present, is not high. While clearly not opposing the transition, the President and CEO of the North American Electric Reliability Corporation (NERC) recently made a plea for attention to the pace of the transition and the reliability challenges it creates.
Fortunately, NERC is revamping assessment tools like reliability metrics and launching productive initiatives, such as the Energy Reliability Assessment Task Force and expanded collaboration with the Electric Power Research Institute. As the resource mix evolves, the determinants of reliability have less to do with NERC’s reliability standards and more to do with the cumulative effect of decentralized market participants and other institutions’ policies. These include state legislatures, utility integrated resource plans and regional wholesale market design.
Market design is reliability policy, but it is often not recognized by reliability institutions as such. Incentive compatibility is central to market design; the rules align financial motives with the efficient and reliable operation of the electric system. Such principles will be put to the test in FERC’s upcoming energy and ancillary service markets technical conference on issues like improved scarcity pricing. Try as FERC might, any appetite for an “energy-only” market migration ended in February, so we must include capacity markets in the future of market design dialogue.
The evolution of capacity market design is imperative to signal the reliability value of unconventional resources on a comparable basis with conventional ones. For example, the PJM Interconnection’s effective load carrying capability methodology recognizes some capacity value of renewables and storage. But its presumption that thermal plants are “unlimited resources” misses the point that all resources have limitations. This is becoming more evident during severe weather when correlated outages are most extreme. Despite difficulties calibrating such methodologies, capacity markets have far superior potential to align with regional reliability requirements compared to fragmented, uncoordinated monopoly utility resource plans.
The path forward
The latest assessment report from the Intergovernmental Panel on Climate Change underscored that climate change is a global emissions problem. Domestic electricity reforms could reduce global emissions 1% to 3%. Despite this modest potential for direct impact, the United States can have an outsized indirect impact on other countries’ emissions by serving as a model for a wealthier, healthier world.
Optimizing complex electricity institutions is in our self-interest economically and is essential for deep decarbonization. By doing so, the United States can set an institutional example that could be replicable and scalable globally. Developing countries, in particular, are looking for a blueprint to privatize and liberalize their electricity systems to slash emissions and propel economic development. Other countries examine the United States closely — including foreign delegations routinely meeting with FERC — to learn how to best orient their own institutions.
Credit progressives for initiating the FERC dialogue. But conservatives would be wise to recognize their ability to lead on a regulatory rework. All told, FERC reforms are a tremendous alignment of climate objectives and sound economic policy. Democrats coined “Hot FERC Summer.” Perhaps Republicans foresee a “Sizzling FERC Fall.”