New draft DOE memo moves to save fuel-secure generation

What is the “DOE memo”? A May 29, 2018, U.S. Department of Energy (DOE) draft Addendum, also referred to as the “DOE memo,” has been circulated publicly addressing the resilience of the power grid to attacks or natural disasters, including major disruptions of natural gas fuel supply, on pages 9 and in Section B. 2 “Threats to the Natural Gas Sector”. Resilience is distinguished from reliability in Section II of the memo.

The Addendum discusses a directive to System Operators for a period of two years to prevent the retirement of fuel secure power plants, referred to as Subject Generation Facilities (SGFs), on page 3 of the memo. SGFs are not identified by name in the Addendum but are likely large coal and nuclear plants, and possibly hydroelectric plants. The Addendum asserts that DOE will order System Operators make payments to keep these plants online. It also refers to a DOE Order (not provided), establishing the Strategic Electric Generation Reserve (SEGR) that is also left undefined.

What Is the Reasoning Behind the Memo?

The DOE Addendum bases the need for this directive on two primary conclusions:

1. DOE concludes that the retirement of fuel-secure generation significantly decreases the resilience of the grid when combined with growing threats to energy infrastructure, including deliberate adversarial attacks on the infrastructure (see Section B., Section III “The Grid’s Vulnerability Due to Loss of Fuel-Secure Generation Capacity.”)
2. DOE concludes current efforts underway to assess the extent and scope of the problem and to develop solutions are moving too slowly and, therefore, that emergency action is required. “DOE supports the Commission’s continued efforts in this regard, but too little progress has been made while the risk of high-impact events, especially those caused by intentional attacks, continues to grow.” (page 18) The Addendum also addresses other issues including the costs of blackouts and the benefit of generation diversity (pages 20-23 related to nuclear, and pages 25-31 more generally). It also asserts that DOE has statutory authority to undertake such action based in large part on the Defense Procurement Act and Federal Power Act, “In 2008, a Defense Science Board report stated that DOD installations are 99% dependent on the commercial power grid.” (page 24).

What Uncertainties and Issues Are Not Addressed by the Memo?

There is uncertainty regarding the Addendum itself. DOE has not released the document, it is marked as a confidential draft, and it discusses documents not available, including an Order and a Directive (page 3). Furthermore, there are basic uncertainties about the definition of fuel-secure units, including: (i) whether gas units with back-up oil onsite qualify as fuel-secure (page 10), and, if so, how much on-site fuel is required; and (ii) how fuel-secure units would be compensated by the System Operators (e.g., cost of service, contracts for differences, etc.) However, press reports indicate that DOE is actively engaged in advancing this process.

ICF did not update its preliminary illustrative analysis of the September 2017 DOE NOPR in part because the uncertainties regarding the Addendum are too great

ICF does not opine on the likelihood of a major loss of gas supply infrastructure and, hence, does not opine on the need for or benefits of any resilience policy. ICF also has not fully studied the costs of the DOE program as suggested in the Addendum but did make preliminary illustrative estimates of selected costs of DOE’s Notice of Proposed Rulemaking (NOPR) of September 28, 2017.

The Addendum does not mention the DOE NOPR, but is similar to the new DOE Addendum in its focus on fuel secure units, as discussed below, but it also has some significant differences in terms of duration and other characteristics. ICF also does not opine on the current resilience processes in terms of adequacy and speed.

ICF does not opine on the likelihood of major gas industry interruptions including adversarial attacks nor on the full costs and benefits of fuel security proposals. ICF analysis is limited to impacts of assumed interruptions and selected aspects of the economics of proposed policies

How Does the Memo Compare to the 2017 DOE NOPR?

Several comparisons with the DOE NOPR of September 2017 are in order:

• The Addendum is not a Notice of Proposed Rulemaking. While we are not lawyers, it is associated with orders that appear not to require FERC rulemaking as a predicate to action, although court challenges to prevent implementation of a potential order are likely.
• The Addendum does not mention the requirement that units have 90 days fuel supply or any other specific amount, but rather refers to selected units not defined in the document. Some possible definitions based on the document include: (i) baseload facilities, a defined term (page 14), (ii) “large-capacity coal and nuclear plants” (page 14), (iii) units with 30 days of onsite fuel (see page 38), and (iv) units with 14 days onsite fuel based on the need for defense facilities to be responsible for their own energy supply (page 25). In contrast, the DOE NOPR was explicit about the units having 90 days of onsite fuel in order to receive payments.
• The Addendum relies more heavily on national defense and adversarial attacks (page 1; also referred to as intentional attacks, page 18) as a basis for action than the DOE NOPR. For example, the Addendum emphasizes the Defense Procurement Act (not mentioned in the DOE NOPR at all), and contains extended discussion of national security threats. The addendum also states, “Additional information regarding serious and sophisticated threats to the energy sector is contained in classified documents available to certain personnel of the Department and maintained by the Office of the Director of National Intelligence.” (page 10) In contrast, the DOE NOPR did not emphasize adversarial attacks and national security. Indeed, the NOPR did not use the terms adversarial or intentional attacks.
• The Addendum prohibits retirements of specified units that include regulated units not heavily reliant on RTO or ISO markets, “DOE also is directing SGFs outside of the RTO/ISO territories to continue generation and delivery of electric energy according to their existing or recent contractual arrangements with Load-Serving Entities.” (page 3) The DOE NOPR was limited to RTO markets only.
• The Addendum focuses more on natural gas delivery issues (page 9), and discusses more studies of the gas industry’s integration with the power industry. The NOPR is almost silent on natural gas industry issues.
• The Addendum does not mention cost of service or recovery of and on capital; rather it refers to payments. In comparison, the DOE NOPR referred to cost recovery and a fair return. However, even though we do not have legal expertise, it appears likely that private property required by the government to operate in part in support of national defense would receive cost of service payments.
• Neither the Addendum nor the DOE NOPR addresses whether FERC would act to mitigate the impact on wholesale markets. However, because the moratorium is only for two years, as compared to the NOPR which was open-ended with respect to duration, the impacts on capacity markets would likely be less in the case of the Addendum. This is because some markets already have locked in capacity arrangements and prices for more than two years.

How Much Would this Initiative Cost?

ICF’s Preliminary Illustrative NOPR Estimate as of October 2017

In October 2017, ICF presented a preliminary illustrative estimate of the annual consumer cost of the DOE NOPR of 2017 to ratepayers between 2018 and 2030 at approximately $1 billion to $4 billion per year.

A detailed and updated analysis of consumer costs would need to address more issues than ICF's preliminary illustrative estimate.

The estimate was limited to a contract-for-differences approach, or how much additional revenue would be needed to keep affected plants online. Key limitations of the October 2017 estimate included:

• The analysis did not include recovery of and on capital (and, hence, was on the low side), but rather the minimum payments for the plant to stay on line.
• On the other hand, the analysis also did not estimate the decrease in wholesale electricity market prices due to the increased supply from plants that otherwise would retire and, hence, was on the high side.
• ICF’s preliminary October 2017 illustrative estimate of the DOE NOPR also indicated that if implemented it would result in a 4 to 7 percent decrease in gas prices.This is because the lower retirements decrease gas demand. However, it was not included in the $1 billion to 4 billion estimate and, hence, the estimate was on the high side.

ICF has not updated its preliminary illustrative cost estimate from October 2017. However, a detailed analysis would address the full set of above issues.

Next Steps

ICF will continue to review developments in this area in light of the importance of DOE’s suggested policy and the significant uncertainty that remains in its specification. Connect with us on Twitter or subscribe to the Energy Digest for continuing updates.