The Implications of President Trump’s Executive Order on Grid Reliability

Amid a flurry of executive actions on energy policy, President Donald J. Trump issued an executive order (EO) yesterday to improve electric grid reliability and security. In contrast with previous EOs to “unleash” America’s energy supply, the new order targets the retention of existing power plants whose retirement might jeopardize grid reliability. The action also uses emergency authority under the Federal Power Act despite the fact that none of our regional grids face an imminent emergency.

A temporary solution at best, the EO could marginally benefit grid reliability in the near term. However, it would also impose higher costs to retain uneconomic power plants and deter the development of new plants, which themselves carry reliability benefits. The reliability imperative is to unleash supply for all resources and prevent forced retirements of economic plants.

Current grid processes work fairly well, especially in areas with competitive power markets. Amid a surge in power demand and a lag in new supply, markets have sent signals to retain legacy power plants when economical. Competitive power plant owners have responded by withdrawing plans to deactivate power plants where markets reflect their need. In contrast, cost-of-service plant owners make retirement decisions based on the cost to keep a plant open as compared to building a new one—not the market signal for reliability.

Grid operators already review plant owners’ deactivation requests to ensure consistent grid stability and other system reliability criteria will be maintained. If not, the power plant is put on a “reliability must-run” (RMR) contract. This amounts to a temporary subsidy until a permanent solution—such as replacement generation or transmission—materializes. Care must be taken to avoid RMR abuse, as the contracts create barriers to exit that disrupt markets. Typically, RMRs are used for peripheral reliability services that markets do not compensate for (e.g., voltage support) as opposed to services they do compensate for (e.g., capacity to maintain sufficient reserve margins).

However, RMRs are voluntary and may not supersede other laws requiring a plant to retire. Further, unlike other reliability services, there is no prevailing reliability criteria for sufficient system capacity on which to base an RMR. Fixing such holes in RMR criteria and authority would be a productive policy objective. In short, a potent scalpel is needed—not an obtuse barrier to exit.

The first Trump administration proposed an absurdly obtuse barrier to exit in the form of a proposed rule from the Department of Energy (DOE) to the Federal Energy Regulatory Commission (FERC) to subsidize power plants with on-site fuel supply. Experts and market participants panned the proposal, citing that it would “dismantle competitive markets for electricity” and “be extremely costly, discourage efficiency, and create perverse incentives.” FERC wisely chose to reject it, and conservatives began to examine the potential for an energy reset.

The new EO is comparatively surgical, but blunt nonetheless. It runs a high risk of creating expensive barriers to exit; however, its potential impact largely boils down to implementation.

Within 30 days, the EO directs the Secretary of Energy to devise a methodology to identify current and anticipated regional power reserve margins that are below acceptable levels. This methodology will accredit generation resources based on the historical performance of each generation resource type. Importantly, regional market operators already determine target reserve margins and generation accreditation. Resource accreditation is limited outside of regional markets, and accreditation itself is a lengthy technical process in which regional stakeholders take years to develop proposals that must then undergo intensive scrutiny for FERC approval.

It is impossible to come up with a better accreditation methodology for these regions in under a month, and it would be enormously disruptive if the implementation of this EO departed markedly from existing practices. Billions of dollars in financial arrangements have already been made based on clear rules of resource accreditation in procurement practices. The real risk is central planning bias to reward certain resource types, as the EO emphasizes resources with “redundant fuel supplies that are capable of extended operations.” However, if the EO merely codifies existing industry accreditation and reserve margin determination practices, then it would provide a reliability safety net with limited downside risk to markets. Regardless, such centralized codification would limit opportunities for regional stakeholders to refine accreditation methodologies on their own.

Overall, the EO’s potential impact is wide ranging. It is critical to guide implementation soundly in the coming weeks. This includes adopting accreditation best practices based on resource merit rather than political preferences. To the extent possible, the DOE should endeavor to rightsize the reserve margin component so that the intervention applies only when emergency conditions truly exist. Erecting barriers to exit dilutes market signals to entry, offsetting reliability benefits and raising costs as a result. This is why good RMR policies like those employed in Texas state clear terms under which new entry would enable a legacy plant to retire. Trump’s latest EO risks creating a one-way ratchet in which new capacity is merely additive rather than enabling competitive replacement—a recipe for artificially suppressing new supply that contradicts the administration’s objectives to unleash supply and lower energy costs.