Teeing up Congressional Grid Reliability

The outlook for electric grid reliability is precarious. Unsurprisingly, this has been a recurring theme in recent congressional energy hearings. In an oversight hearing of the Federal Energy Regulatory Commission (FERC), FERC Chairman Willie Phillips said the reliability of the electric system faces unprecedented challenges. A hearing this Thursday will examine the state of grid reliability through the eyes of electric grid operators, who oversee regional transmission systems.

Most customer outages result from damages to distribution systems, which are overseen by state authorities. Nevertheless, bulk system reliability (i.e., high voltage transmission system) is subject to federal oversight and has come under increasing stress in recent years. The long-term outlook for the bulk system is deteriorating.

Numerous factors determine bulk system reliability. Familiar themes include the changing generation mix, environmental regulation and reliability standards. However, policies unfamiliar to reliability discussions present growing reliability threats and solutions. For example, policies that inhibit new generation development—especially approvals for generator interconnection, permitting and siting—are creating mounting reliability concerns. These were manageable when electric demand was flat. However, resurgent demand growth (e.g., expanded electrification, manufacturing, data centers) is causing grid operators to fear that new supply cannot keep up. Reducing barriers to new supply has quickly become a reliability imperative.

Congress must prioritize a deeper understanding of interconnected reliability threats and identify market-enhancing reliability solutions. Different existing policies help or hurt reliability. The hearing plans to focus on subsidies, state policies and federal regulation. This brief frames each issue set, adds overlooked reliability solutions and provides suggested questions for congressional members.

Subsidies

Subsidies have become a popular reliability talking point, especially after passage of the Inflation Reduction Act (IRA). In a FERC oversight hearing in May, Commissioner James Danly said the main reliability culprit is subsidized renewable energy, because subsidies distort prices and undermine the economics of conventional power plants. Subsidies undoubtedly distort prices, and the evidence suggests that the IRA’s subsidies are highly inefficient economic policy, as noted in R Street’s congressional testimony opposing the IRA. Nevertheless, the claim that subsidies result in a shortfall of reliability services is odd. Generally speaking, subsidies shift a supply curve right and increase market-clearing quantities.

There is no evidence that the electricity industry is immune to this effect. If the concern is that less-reliable renewables are replacing more-reliable conventional plants, the focus should be on procurement rules for reliability services (e.g., market design). The electric industry is unique in that oversupply can cause operational reliability problems, prompting renewable-heavy areas like California to develop oversupply protocols. The more valid reliability arguments against subsidies are that the production tax credit makes it profitable for resources to operate during oversupply conditions when prices go negative.  

Potential questions for Congress to ask grid operators include:

1. Is there any evidence that supply subsidies decrease supply in the electricity industry?
2. How extensive are oversupply concerns incented by subsidies?
3. How well are current practices curtailing generator output when needed?

State Policies

State policies run the gamut. Those that enhance energy efficiency and demand response typically improve reliability. Policies that prevent new development or force generator retirements create the largest reliability concerns, whereas those that leverage market-compatible policies like emissions pricing do not threaten reliability. State permitting and siting laws are becoming more restrictive, choking new supply in red and blue states alike. Many blue state restrictions are forcing fossil retirements and prevent expansion of natural gas power plants or supporting infrastructure despite market signals indicating that they are economical. The inability to substitute for fossil resources in time is creating untenable reliability outlooks in some regions, especially in the Northeast during cold-weather events.  

A new R Street report finds that states with restructured wholesale and retail electricity have distinct reliability advantages. In short, competitive suppliers have better reliability incentives and performance, while markets have inherent advantages for system planning, operations and demand-side flexibility. The reliability advantage is growing with technology advancements and the changing generation mix.

Potential questions for Congress to ask grid operators include:

1. Can a region maintain long-term reliability if states do not remove barriers to new supply?
2. What state policies resolve environmental concerns without harming reliability?
3. Do suppliers in competitive states respond to reliability price signals better than monopoly utilities?
4. What state market constructs yield flexible demand that reduces reliability risk?
5. What are the reliability dis/advantages of regional transmission organizations?

Federal Regulation

The default regulatory instrument is reliability standards, which are typically formulated by the North American Electric Reliability Corporation (NERC) and approved by FERC. Standards typically require uniform engineering practices of power facilities. They have various deficiencies, including retrospective rather than anticipatory planning inputs and a lack of cost-benefit criteria. Standards can also be incongruous with state utility oversight or market rules that incent reliable generation and stifle demand flexibility by requiring all firm load to be treated the same. Progress is being made in some areas, like how to consider coincident power plant outages (e.g., pipeline loss, severe weather), rather than the traditional practice of assuming outages are independent of one another.

Economic electricity regulation has growing reliability consequences. The design of markets determine what types and levels of reliability services are procured and how they are compensated. In May, FERC Commissioner Mark Christie blamed faulty capacity markets as a main reliability problem. This is overstated, but there are valid market design elements that should be modernized to more cost-effectively ensure procurement of all reliability services. The important point is that the alternative to markets for capacity planning—monopoly utility integrated resource planning—is a growing reliability liability.

Reliability can also be affected by federal environmental regulations. The Environmental Protection Agency’s (EPA) proposed rule requiring fossil plants to adopt technologies unproven at scale has created quite the stir. It is unlikely a similar final rule would cause early power plant retirements, because the courts are likely to overturn the rule before the compliance period kicks in. But court decisions can take years and, in the meantime, even an impermanent EPA proposal or final rule may chill investment in new natural gas generation. Effects are highly sensitive to the exemptions in the rule, such as for small and low-utilization or “peaking” power plants. The EPA’s proposal would likely shift the natural gas fleet to more plants operating less frequently, which ironically have greater emissions intensity. A simulation by the New England grid operator found a compliance path that reduced output from affected gas units by 19 percent, while exempted smaller combustion turbines would increase 119 percent.

Potential questions for Congress to ask grid operators include:

1. What would be the reliability consequences of EPA’s proposed power plant rule, if enacted as written?
2. Can regional markets satisfy regional reliability criteria better than fragmented utility planning?
3. Can reliability standards resolve most reliability threats, or do other policies like development restrictions and environmental regulation have bigger impact?
4. What reliability problems can well-designed markets resolve? Which can they not?

Overlooked Opportunity

Grid reliability assessments, standards and reforming interventions like EPA rules grab the attention of reliability forums, but often overlook institutional defects contributing to chronic reliability risks. In particular, various defects exist in natural gas policy, transmission planning and retail electric policies. Trends in the generation mix place added reliability value on natural gas systems to firm supplies (even if they are used less), the ability to transfer power within and between regions and to enable flexible demand, where consumption reflects consumer preferences and mirrors supply availability. For example, winter storms Uri and Elliot highlighted redundant inadequacies in the natural gas system, inflexible demand management and poor interregional transfer capability that contributed to extended outages with billions in economic costs and over 200 deaths.

Potential questions for Congress to ask grid operators include:

1. Outdated reliability standards, substandard market rules and incongruent state policies inhibit demand flexibility, which makes involuntary customer outages far more likely. Would you support a joint FERC, NERC and state initiative to ensure robust demand flexibility?  
2. The natural gas system, including production and pipelines, plays an increasingly pivotal role in maintaining grid reliability. How do we ensure gas infrastructure and services are sufficient, especially during extreme cold events?
3. Studies show that interregional transmission has large and growing reliability value, yet development has been nearly nonexistent. How do we plan to fix this?