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oY A uaAwNE (UO i PRE-DECISIONAL DRAFT // NOT FOR DISTRIBUTION June 26, 2017 Electric Power System, Markets and Reliability Study Interim Draft Report July 2017 Prepared by U.S. Department of Energy Paget Electric Power System, Markots and Refabiliy Study U.S. Department of Energy 44 45 46 a7 48 H NOT FOR DISTRIBUTION June 28, 2917 (U0 PRE-DECISIONAL DRAF Table of Conients Table of Contents... List of Figures... List of Tables... 1 Introduction, 1d Study Outline... 12 1.3. Information presentation in this study. ndings of this study... 1.4 Framing the study. 15 Study evaluation criteria and values... 1.6 Supply, demand and energy market prices and quantities 2 Assessing baseload resousces... 2.1 Applying the baseload generation definition... 2.2 — Baseload generation —looking forward and next steps. 3. Baseload plant retirements ~ what retired and wh wx... 3.1. Overview — power plant retirements since 2000... vs sosneeBD 3.2. Big picture — multiple causes compounded to force power plant retirements, changing the supply curve for electricity 37 3.3 Cause ~ electricity demand is lower than projected ... 3.4 Cause -- falling natura! gas prices have reduced wholesaie elect 35 Cause ~subsidie 3.6 Cause ~regulations .. 3,7 Cause ~renewables. 3.8 Consequence auclear plant re 3.9 Consequence -- coal plant retirements... 3.20 Consequence — natural gas-fires power plant retirements 3.11 Nota consequence — hydropower retirements. 3.12 Premature retirements ~ what's premature? nn 3.13 Baseload retirements — looking forward and next steps... 3.44 Regional Profiles... 4 Reliability and resiliency... 4.4 Reliability and current reliability performance 42 Essential n liability services and baseload power plants 43. Effects of high lavels of renewable penetration on the grid... Page? Elecite Power System, Markets ard Reliability Study U.S, Department af Energy 50 St 52 53 54 55 56 357 58 59 60 61 62 63 64 65 66 67 68 68 70 7 R 3B 74 75 76 77 B (OU0 // PRE-DECISIONAL DRAFT // NOT FOR DISTRIBUTION June 26, 2017 4.4 — Fuel diversity and resource portfolios.. 45 Grid resiliency, fuel assurance and on-site fuel storage 4.6 Diversity, reliability and resource portfolios. 47 Reliability and resiliency —looking forward and next step: S Renewable energy growth, reliability impacts and prospects 5.1 Growth in renewable energy penetration ... 5.2 Impacts of renewable energy on grid operations. 5.3 Integrating renewable energy to maintain reliability. 5.4 Renewable energy growth will continue,, 5.5 Reliability and resilience, 5.6 High levels of wind penetration can be integrated into the grid without harming reliability..102 103 5.7 Reliability and resiliency — looking forward and next staps. 6 Powermarkets... 6.1 Wholesale Electricity Markets... 62 Evolution of U.S. Wholesale Electricity Markets... 6.3 Challenges in Today's Electricity Markets... 6.4 Negative pricing... 6.5 Market distortions, price formation and price suppressfon 6.6 Markets~ looking forward and next steps. Affordability - Looking forward and next steps 8 Values and extra-market considerations... 9 Solution Options... 10 Recommendations... Glossary of Key Terms and Concepts. ‘Appendix A: Memo from Secretary Perry. Appendix C. Key Environmental Regulations and Statutes. Appendix F: External Technical References Page 3 Electric Power System, Markets and Reliabilty Study U.S. Department of Energy (0UO #! PRE-DECISIONAL DRAFT i NOT FOR DISTRIBUTION, Jane 28, 2017 List of Figures Figure 1.1. Timeline of Electric Generating Capacity Additions and Retirements, Tax Incentives, Orders and Regulations, Regional Market Prices, and Load... Figure 1.2. Electricity prices track natural gas prices... Figure 1.3 Baseload plant retirements vary by region... ‘a broader fuel mix. Figure 1.4. The grid has become more diverse. Figure 1.5. Regions used in this study... Figure 1.6, Approximate ERCOT supply curves for 2005, 2014 and 2015 ... Figure 2.1. Schematic of customer daily load curve showing base load... Figure 3.1. Map of baseload (coal, nuclear, gas thermal, hydro) retirements.. Figure 3.2. Net Generation Capacity Additions and Retirements. (Source: Q&R Updated Figure 1-4) ..31 Figure 3.3. Cumulative Retirements of Utility-Scale Electricity Generation Capacity January 2002~ ‘March 2037, and Announced Retirements April 2017 ~ December 2022... sieeBL Figure 3.4. Historic and Announced Annual Retirements of Coal, Natural Gas, Nuclear, Petroleum, and Other Generating Units, January 2002 through December 2022 .. 32 Figure 3.5. Generating Unit Retirements by Region, Unit Age, Ownership, and Retirement Year, January 2002—March 2017 33 Figure 3.6: Generating Unit Retirements by Region, Ownership, Capacity, and Fuel Type, January 2092 ~ March 2017 - 34 Figure 3.7: Power Plant Retirements by Retirement Pericd, January 2002 through March 2017 .. Figure 3.8: Operating Generation Capacity, Additions, Retirements, and Announced Retirements by Region, January 2002 — December 2022 ... Figure 3.9. Gross Domestic Product and Net Electricity Production, Historical (1950-2016) and Proj (2017-2027) {Source: EiA, QER 1-28 updated... _ sont Figure 3.10. Estimated U.S. Energy Savings from Structural Changes in the Economy and every Efficiency, 1980 to 2016. . se nnn Figure 3.14. ZIA anual electricity sales 2000-2016 f projections 2917-2030 sone vennnel Figure 3.12: Monthly average Henry Hub natural gas price ($/mmBtu)... al Figure 3.13. Wholesale day-ahead electricity prices vs, Henry Hub natural gas price (monthly average!42 Figure 3.14. U.S, Natural Gas Generation, 1950-2016. (Page 3-14}... 42 Figure 3.45: Costs of tnergy-Related Tax Preferences, by Type of Fuel or Technology, 1985 to 2016....44 Figure 3.16. Big picture of retirenents and contributing factors 6 Figure 2.17. Annual Genes March 2027... 1 Capacity of Wind and Solar, Total and by Region, January 2002 through aT ge4 Electric Power System, Markets and Rellabitty Stucy US, Department 14 5 116 17 118 119 120 121 122 123 124 125 126 127 128 129 130 131 132 133 134 135 136 137 138 139 140 141 142, 143 144 145 146 (UO 1! PRE-DECISIONAL DRAFT // NOT FOR DISTRIBUTION June 26, 2017 Figure 3.18. Monthly growth in net wind and solar energy... AB Figure 3.19. Wind generation growing... Figure 3.20. Renewable penetration not correlated with coal and nuclear plant retirements... Figure 3.21: Map of Nuclear Power Plant Closures and Announced Retirements Figure 3.22. Retiring nuclear plants and nuclear plant economies to scale igure 3.23. Nuclear plant retirements compared to NRC plant operating license terms. Figure 3.24, Location of coal plant retirements. Figure 3.25. US. utility-scale coal-fired electric generating capacity by it Figure 3.26. Coal unit capacity factors decline as units age. Figure 3.27: Location of Coal Retirements, January 2002 to March 2017 Figure 3,28. The coal plants that retired had low capacity factors... Figure 3.29. Most natural gas-fired generation built after 2000.. Figure 3.30. Natural gas fieet net generation and capacity factors. Figure 3.31. Natural gas-fired plants serve most of the Lower 48 states.. Figure 3.32: Location of Natural Gas Retirements, January 2002 to March 2017. Figure 4.1. Wind energy share of electric generation by state, 2016. Figure 4.2. High VRE levels means big changes for conventional gas, coal and nuclear plant wn.» Figure 4.3, Fuel Diversity. Figure 5.1: Annual Generation Capacity of Wind and Soler, Total and by Region, January 2002 through March 2017... Figure 5.2. State Renewable Energy Portfolio Standards... Figure 5.3. Corporate purchases of renewable energy. Figure 5.4, Falling Soler PV prices and rising installed capacity... Figure 5.5. Location of Utility-Scale Solar Generating Units, 2016 ween Figure 5.6. System Reliability Depends on Managing Multiple Event Speeds Note, BCS to remove Planning for Carbon Goals... 201 Figure 5.7, Daily average regulation up requirement has fallen as wind capacity grows in ERCOT weuu102 sence 106 Figure 6.1. The seven RTOs or 1SOs in the U.S. Figure 6.2. States and regions along the spectrum from traditional to fully restructured electric markets “ oo 107 Figure 6.3. Reference margins and anticipated reserve margins in select NERC regions, summer 2017 oll7 Page 5 Electric Power System, Markets and Refility Study U.S. Deparment of Energy 147 148 149 150 151 152 153 154 155 QUO i! PRE-DECISIONAL DRAFT II NOT FOR DISTRIBUTION June 28, 2017 List of Tables Table 3.1: Nuclear plant retirements and announced closures eso TT 183 ‘Table 3.2 Average nuclear costs by reactor type, 2016 Table 4.1. NERC region reserve margins for 2014 and 2016 .. Table 4.2. Characteristics of VRE power, grid integration challenges and Tabie 4.3. Renewable energy penetration levels achievable by region, per recert technical studies.....84 Table 4.6. U.S. uti 88 scale generating capacity, 2002 vs. 2016.. Pages Electic Power System, Markeis ang Reliability Study U.S, Depart 156 157 158 159 160 161 162 163 164 165 166 167 168 169 170 171 172 173 174 175 176 177 178 179 180 181 182 183 184 185 186 187 188 189 190 191 192 193 (0UO // PRE-DECISIONAL DRAFT // NOT FOR DISTRIBUTION June 26, 2017 1 Introduction Secretary Rick Perry issued a memorandum on April 14, 2017, directing preparation of a study that examines whether recent problems associated with baseload power plants may be putting the nation's energy security and reliability at risk The memo notes that many baseload plants have retired, and asks whether these retirements are premature and whether they reduce grid resilience. It asks why so ‘many baseload plants have closed, whether wholesale energy and capacity markets are adequately compensating important resilience and reliability attributes, how electric markets have evolved, and whether regulatory burdens, subsidies and mandates have forced premature retirements. The Secretary directs the Department to conduct rigorous analysis to answer these questions and to recommend sound policies to protect the nation’s electric grid. The Secretary's memo articulates several goals for the study and the power system as a whole: American families and businesses deserve a power system that Is affordable, supports national security through fuel diversity and fuel assurance, and is technologically advanced, resilient, reliable and second tonone, These goals will be discussed further below. The memo raises important and timely questions about the electric grid. Those questions can only be answered by recognizing that generators and the grid are part ofa larger electric power system, viewing the retirements story not just as a battle between generators, transmission owners and fuel sources, but also including customers and their options and preferences along with the supply side, Many of the technologies that we use to produce and consume electricity and energy have changed extensively over the past twenty years. These changes have caused great disruptions to the legacy resources and assumptions that formed the bulk power system we operate today, The questions here are as much about how to deal with and manage broad technological and economic change fora critical national infrastructure as they are about whether the erosion of baseload power plants threatens grid reliability. ‘The problems affecting baseload resources today reflect the broader challenge of how the eneray industry can constructively manage change as technologies and economic relationships evolve. Because the above goals may conflict and require delicate balancing by policymakers — for instance, high levels of reliability can become expensive, which works against affordability. Given growing levels of uncertainty and volatility from technology, finance, world threats, environment, etc, itis prudent to ‘compile diverse portfolios that can provide a variety of important attributes. Secretary Perry's memo essentially asks how we should go about building such portfolios, and directs us to understand the consequences for the nation’s electric resource portfolio options as significant amounts of coal and nuclear resources become unavailable to serve in current and future portfolios. ‘The stakes are high around these issues because electricity is so crucial to modern society and economic activity, and because of the magnitude of the industry and its capital and revenues. The United States has around 7,700 operating power plants? that generate electricity from a variety of primary energy sources; 707,000 miles of high-voltage transmission lines;? more than 4 million rooftep solar installations;? 55,800 substations,‘ 6.5 million miles of local distribution lines; and 3,354. "The Secretary's memo Is attached In Append. Page7 Electric Power System, Markets and Reliability Study U.S, Department of Energy 194 195 196 (0U0 / PRE-DECISIONAL DRAFT / NOT FOR DISTRIBUTION, June 28, 20¢7 distribution utilities® delivering electricity to 148.6 million customers.*7 The total amount of money paid by end users for electricity in 2015 was about $400 biltion# This drives an $18.6 trillion U.S. gross domestic product and significantly influences global economic activity totaling roughly $80 trillion? 1.4 Study Outline ‘Chapters 1 through 0 of this study provide the analytical framework, retevant data about the power system and generation retirements, and lay out the research and findings about baseload power, reliability, resilience and renewables. Secretary Perry asked for specific recommendations for how to address and resolve these Issues. Since there are many paths that could be taken from here, for many actors besides the federal government, Chapter 0 offers a comprehensive catalog of actions that could be undertaken. This section is intendes to inform and motivate further discussion and action within and across the electric stakeholder community. Outline here Chapter 0 recommends specific actions and measures that can be undertaken immediately toaddress the most pressing issues identified in this study. Some of these actions fall within the scope and authority of the Department of Energy. However, some recommendations point to broader solutions that the Department cannot enact alone. ‘The Appendices contain the following information: «Appendix A contains Secretary Parry's April 4 memorandum, ahich initiated this study. «Appendix B lists all of the power plants in the Energy Information Agency's database that hav retired in the United States since 2000. «Appendix C lists all of the major U.S, statutes and regulations that have affected electricity supply and demand, «Appendix D contains an extensive set of tables and graphics that support theinformation provided in the body of this report. © Appendix E lists ali of the technical reports and studies that the Department of Energy and its national laboratories have prepared since 2012 on topics relating to the issues addressed in this study. © Appendix F offers @ set of technical references for those who wish to learn more about the topies addressed in this study. * A“customer’ is defined as an entity that is consuring electricity at ene elect meter. Thus, a customer large factory, a commercial establishment, ora residance. A rough ve ef thumbs that ezch res'gential elect rieier serves 2.5 peoo! '3 millon now purchase electicty from s retail service providers, 120 percent ofall U.S. retall electic sales (megawiat-hours) and deliver by investor-owned distribution utiles in the 19 states and District of Columbia that ailcw retail cornpastion. Page 8 U.S, Department of Energy Electste Power System, Marke's and Reila (OUO i PRE-DECISIONAL DRAFT If NOT FOR DISTRIBUTION June 26, 2017 Excluded from this study. ‘Several topics ate riot addressed In this study, for the reasons expiainéd here. Gyber-security is the common potential failure mode that affects every part of the Ameriéan power system = every power plant, every transmission and distribution system, every user and many end use devices are at risk from existing and emerging cyber-secutity threats. Because the cyber-. ‘security problem ig ubiquitous, this study does not address cyber-securily because it does not have ‘any unique relevance or impact an baseload power plant retirements, renewables, and power system reliabiity. ; ‘Alaska & Hawali ~ The analyses that follow do not directly address the oil, coal and gas plants in Hawaii and Alaska ‘Those plants are small plants that fall below the size screens used in this study, and the Hawaii and Alaska power systems ere remota, vertically integrated systems with special needs and issues While the broad trends discussed in this study apply in Hawaii and Alaska as well 2s on the maintand United States, many of this study's economic observations do not directly apply to the specific situations in the Hawaii and Alaska power systems. Geothermal, oil and blomass steam generation — Geothermal, oll and biomass power planis are often operated as baseload plants, operating at a relatively stable level over a long period of time, Since these types plants are not as prevalent r widespread as gas, coal and nuclear plants, such are not examined In this study. 225 2s 1.2 Findings of this study 227 Based on an extensive review of electric power system evolution and events over the past thirty years, 228 and analysis of DOE and other data sources using basic supply and demand principles, this study 229 concludes that: 230 © Functionality, not technology — Baseload power plants should be defiried in terms of 231 functionality rather than fuel or technology. Baseload plants are those dispatched to serve 232 customers’ base (minimum) load, These plants are operated within a relatively fixed 233 ‘operational zone over an extended period of time (days or weeks), with limited cycling or 234 ramping capability. The generating technology types that meet this definition include coal, 235 nuclear, gas-fired steam and combined cycle plants. (See Section 2) 236 + Many baseload olant retirements are not premature. Since 2002, most baseload power plant 237 retirements have been the victims of overcapacity and relatively high operating costs that often 238 reflect the advanced age of the retiring plants. Many of these retired plants had already 239 complied with some of the environmental regulations implemented under statutes enacted 240 between 1970 and 2001, but had not yet complied with the later requirements imposed by 241 these regulations. Furthermore, the first tranche of fossil plant retirements occurred befare the 242 explosive growth of renewable generation over the past five years. Many of the on-going 243 stream of plant retirements have been driven by the combination of low natural gas price-based 244 electricity prices, low electric demand, environmental regulations, state policies, and 245 competition from renewables. In other words, many retirements are consistent with observed 246 market forces. (See Section 3) 247 © Some baseload plant retirements have been premature relative to their design life and 248 operational efficiency. Costly environmental regulations and subsidized renewable generation Page 9 Electric Power System, Markets and Reliability Study US. Depariment of Enoray (UO # PRE-DECISIONAL DRAFT NOT FOR DISTRIBUTION June 28, 2077 249 have exacerbated and accelerated baseload power plant retirements. However, those factors 250 played minor roles compared to the long-standing drop in electricity demand relative to 251 previous expectations and years of low electric p ven by high natural gas availabilty 252 (See Section 3.12) 253 «© Saseload history ~ Most baseload plants were built between the 1950s and 1990s under cost-of- 254 service regulation, where regulators approved the construction and on-going cost-pass-through 255 for “prudent” utility-recommended plants. Vertically integrated utlities buitt increasingly larger 256 coa! and nuclear plants using contemporaneous technologies to capture economies of scale and 257 efficiency, and marketed any excess power to their neighbors, After Congress committed the ration to allow new third-party generator entrants (PURPA, 1978) and to mandate open access to the transmission system (EPACT, 1992), FERC implemented regulations encouraging the formation of centrally-orgenized wholesale markets. IMany of the clder baseload plants were forced to compete in these open markets against lower-priced generators. While the owners of those assets enjoyed profits associated with high wholesale prices for several years, by 2005, ‘many of the older baseload plants had been sold to independent power producers and lost the protection of rate-based status and the opportunity to earn a specified rate of return. Many inefficient plants retired in those years. Even those plants still owned by integrated utllties are having to compete against third-party and market opportunities as state regulators and abundant low-cost power opportunities push utlitfes to acquire more cost-effective power portfolios. (See Section x} 2 Retirement history — The retirement of baseload power plants has accelerated since 2909. (Figure 1.2) Saseload retirements correlate closely to the fall in natural gas prices and the flattening of customer peak demand. 272 Add labels in graph in high white space above X axis (Capacity additions) and low: below 273 (capacity retirements) je 10 shrink middle right gerd so main, graphic gets more real estate Page 16 Electic Poner System, Markets and Relabilty Study LS. Depariment of Energy (QUO 1 PRE-DECISIONAL DRAFT / NOT FOR DISTRISUTION June 26, 2017 275 Figure 1.1. Timeline of Electric Generating Capacity Additions and Retirements, Tax incentives, 276 Orders and Regulations, Regional Market Prices, and Load*"” y — voce oe we a ve ab] Other = { Coat ge —fher., ae a. \ | Nara! ous a8 f f F i ~~ aren fg Laman WY Ast «Fase 3 ~ ee National Peak ‘Summer Load (GW) g on sso bs ho aos aha « (Top) Implemented federal legisiation and regulations are shown on timeline with national changes in electric generaling capacity and compared against (Middle) Regional market prices for the PJM region, and (Bottom) ‘Sunimer peak electric demand. The type and quantity of capacity additions and retiements heve changed no'ably Page 11 Electric Power System, Markets and Reliability Study U.S. Department of Energy 278 279 280 281 282 283 284 285 286 287 288 289 290 291 292 293 294 295 296 297 298 299 300 301 302 (QUO I! PRE-DECISIONAL DRAFT // NOT FOR DISTRIBUTION June 26,2017 + Growth of natural gas-fired generation~ While coal and nuclear power plants used to provide the bulk of America’s electricity, wholesale electricity prices have closely tracked natural gas prices for the past 15 years. (Figure 1.2) The fact that new, high-efficiency natural gas plants and the pipelines that serve them can be built quickly helped to grow gas-fired generation relative to coal and nuclear power. After unconventional production techniques for oil and gas entered the scene in 2007, natural gas prices began falling and have stayed low. Asa result, newer, more flexible gas-fired plants began driving down market-clearing electric prices in 2009, under-cutting the higher production costs of alder coal and nuclear generators. {See Section x) Figure 4.2. Elect ity prices track natural gas prices"! Regional wholesale day-ahead electricity prices vs. Henry Hub natural gas p! {rolling 6-month average) eeericty prices Natural gas price simwn sioanats nano $140 Po SM cue $120 j sz $100 $10 $80 ge NY QuBONYCZore J aida (PIM Western He) $60 $6 Midwest (MISO indiana Hub) od) se $4 __ercot t2ACcoT North Hiss) sod $2 caISO+ (CAO S715) i “Northwest (Mid-Colurabia) $0 ++ so ry Hub Natural Gas rice 2002 2003-2008 :«2008-«2010«2012.—« 20162016 * Renewables didn’t cause retirements, but they've exacerbated the oroblem ~ Baseload plant retirements due to age, inefficiency, and inability to compete began appearing in the early 2000s, well bafore any significant levels of wind and solar generation in any region of the country. But starting around 2007, variable renewable generation (YRE}~ particularly wind ard solar have grown quickly, accelerated by the favorabie effects of state Renewable Portfotio Standards (RPS) and the subsidizing effects of federal ‘ax credits, Because VREs are neither fly controllable nor predictable, but very low-cost, they have displaced other generation and forced 2 change in the way operators manage the grid, Current leveis of wind and solar penetration are reducing the ievel of net baseload generation and requiring affected regions to demand t all power plants operate with greater flexibility and provide essentia! reliability services such as frequency response, cycling and ramping, While baseload plants provide vaiuable inertia that heins with frequency regulation, most coal and nuclear plants are not capable of flexible ramping and cycling and cannot beak even operating at lower capacity factors. over the past decades, rarket cereguation. env ic events, eftciercy a he 39 feet (shown elsenhere), and attain, ‘cortibuted to the change in elactic generating capacty. Note: fis graphic doesnot quantify ‘and policies on electric generating capacity noun), fuel prices, tax incentives for various generating tecnnolagis. ty, weather and Page 12 Eleotfic Power System, Markets and Reliabilty Stucy U8, Department of Exergy 303 304 305 306 307 308 309 310 311 312 313 314 315 316 317 318 319 320 321 322 323 324 325 326 327 328 Figure (OUO // PRE:-DECISIONAL DRAFT // NOT FOR DISTRIBUTION June 26, 2017 Each retirement decision is unique to a particular situation. But every retirement decision reflects the owner's assessment of whether that plant will be produce enough energy, pald at high enough prices, to recover the costs ofits fuel, operations and capital requirements, including potential new capital investments. Over the past decade, many power plant owners have concluded that plants with higher heat rates, limited ability to operate flexibly, and that need capital improvements to meet environmental regulations, will not be able to earn adequate revenues in wholesale electric markets that select and dispatch resources based principally on short-run marginal costs. Many of the coal retirements in 2015 in particular were prompted by decisions about whether the costs of investing in plant to comply with MATS ‘regulations would ever be recovered given market prospects for continuing low demand and low prices, or ciose the plant to avoid that investment. Similarly, the timing of some nuclear retirement decisions appears to be related to nuclear relicensing and regulatory compliance schedules. Environmental regulatory requirements may have been the straw that broke a baseload camel's back ~ particularly for coal plants ~ but it appears that most baseload plants were already burdened by the effects of low natural gas prices, eroding customer demand, and lower capacity factors before the incremental burden of new regulations tipped the balance overto retirement. (See Section 3) Regional factors drive retirements ~ Coal and nuclear assets tend to be concentrated in a few regions of the country, as are wind and solar development. (Figure 1.3) Baseload plant retirements tend to be concentrated in areas that moved to wholesale and retail electric ‘competition earlier, and came later to regions that remained under vertical integration and full cost-of-service regulation. Therefore, the retirements challenge is concentrated in the Northeast and the Mid-Atlantic rather than nationwide, while the challenge of managing high penetrations of renewable generation is concentrated in Texas, California, the Southwest and Midwest. 4.3 Baseload plant retirements vary by region’? "8 4 ‘Generator units larger than 50 MW of net summer capacity, The Other category includes a combined 336 MW of biomass, wind, pt power pl Page 13 troleur coke, end syngas from petroleum coke. Retirements reflect regional fuel use an histori concentrations of ants ° Electric Power System, Markets and Reliability Study U.S, Department of Energy 669 670 671 672 673 674 675 676 677 678 679 680 581 582, 5383 584 585 586 587, 588, 589 590 591 592 (OUO if PRE-DECISIONAL DRAFT if NOT FOR DISTRIBUTION Jone 28, 2017 2 Assessing baseicad resources ‘The electric industry refers to baseload generation as the power plants that are used to meet base load ~ the minimum level of electricity that customers demand around the clock, as shown in Figure 2.1. Baseload plants have high capital and operating costs but — untll recently — have low fuel costs and good fuel efficiency. Although the output level of these plants can be changed, they are most economical vwhen operated at near-full capacity at all times. Large baseload units have longer start-up and shut- down times (cycling) and must move slowly between production levels (cycling) to avoid damaging plant components with thermal stress or metal fatigue. Large nuclear, coal-fired, natura! gas-fired steam and run-of river hydroelectric plants have historically been used for baseload generation. With the recent drop in natural gas prices, it has become more economical to use natural gas-fired combined cycle plants as baseload generation. Figure 2.1. Schematic of customer dally load curve showing base load Typical Daily Demand Curve Operating Reservas Load (MW) tom Sem ‘Sam Enerey (MWh) Intermediate or mic-merit alants ere use¢ to fellow load, meeting datly variations in demand, Natural gas combined cycle plants have traditionally been used for ioad-foliowing, Peaking generators (mostly gas turbines which are low-cost to build but have high heat rates} and customer-proviced demand response are dispatched infrequently to meet extreme spikes in demand. Appendx D contains D-1, @ description of the types of power plants, and D.2, a description of how generatcrs are selected {dispatched} to produce electricity. idy, DOE defines baseload generators as plants that are operated in the pattern of baseload ~ they were operated for many years to run at high, sustained output levels his definition includes most nuclear, at, coal-fired or gas-fired steam For this generation described abo: and high capacity factors with minima! cycling or ramping. While coal and gas-fired steam generators, It is not a given that generator isa baseload plant. Page 28 Electric Power System, Markets ans Reiiabilty Study U.S, Department of Energy 693 694 695 696 697 698 699 700 701 702 703 704 705 706 707 708 709 10 mL 12 113 714 ms 716 NT 118 19 720 TAA 722 723 724 (U0 // PRE-DECISIONAL DRAFT / NOT FOR DISTRIBUTION June 26, 2017 NERC draws @ distinction between baseload generation and the characteristics of generation providing reliable baseload power”: Coal and nuctear resources, by design, are designed for low cost C&M and continuous operation. However, itis not the @ccnomics nor the fuel type that make these resources attractive from 2 reliability perspective, Rather, these conventional steam-driven generation resources have low forced and maintenance outage hours traditionally and have low exposure to fuel supply chain issues. Therefore, “baseload” generation isnot a requirement; however, having a portion of a resource fleet with high relzbility characteristics, such as low forced and maintenance outage rates and low exposure to fuel supply chain issues, is one of the most fundamental necessities ofa reliable [bulk power system). Power plant cycling With increased variable renewable energy generation and lower electricity demand, all power plants have had less ability to run in a baseload generation pattern and have been asked to cycle and ramp more often. Plants that can’t cycle or ramp will operate less, earning less revenue and possibly becoming unprofitable. GE, a major power plant manufacturer, reports that cycling costs are one to seven percent of overall fossil plant construction cost and that the average fossil-fueled plant sees an O8M cost increase of $0.47 to $1.28 per MWh produced. GE observes that: © Wear-and-tear cycling costs can increase with the changing power portfolio or fuel prices. These costs are generator-specific, They can impact financial viabliity of generators. * Incorporating cycling costs into commitment and dispatch decisions can change these decisions. * Solar and wind have different impacts on cycling? * Operational and/or physical changes to coal/gas plants can increase flexibility. Retrofits have the potential to increase averall profitability. The cycling issues described above have similar impacts on gas-fired steam and older combined cycle generators. [also nuclear?) 2.1 Applying the baseload generation definition (UNDER CONSTRUCTION - NEW EIA MATERIAL] 2.2 Baseload generation — looking forward and next steps Page 29 Electric Power System, Markets and Reliability Study U.S. Department of Energy 725 726 21 78 729 730 Bl 732 733 734 735, 736 BI 738 739 740 74) 742 743 744 745 746 747 (QUO #/ PRE-DECISIONAL DRAFT / NOT FOR DISTRIBUTION, dune 28,2017 3 Baseload plant retirements — what retired and why As Figure 3.1 shows, the baseload retirements issue is essentially a regional issue ~ types of plants and capabilities vary by region, as do the magnitude and timing of retirements. This section opens with an overview of power plant retirements nationwide, then looks at the reasons why baseload plants are retiring — the causes are a stew of market-affecting factors including low natural gas prices, wholesale competition, the flattening of customer demand, cost increases relating to regulation, the growth of renewable generation devaluing baseload generation in favor of greater lexbbitity, and the decision- forcing effects of regulatory deadlines, Figure 3.1. Map of baseload (coal, nuclear, gas thermal, hydro) retirements Cwnarehie 2098 & Haremant { :azsar @ veu Location of Coe!, Natura! Gas, Nuclear, Petroleum, and Oz Ownership and Fue! Types, January 2002 ~ March 2017 3.1 Overview -- power plant retirements since 2000 Capacity additions of different generation technologies came in waves that were largely influenced by policy, fuel Costs, and technology development, The 1930s and 1940s fostered the development of hydropower; nuclear power was widely deployed in the 1970s after nuclear research for peaceful uses was allowed; natural gas additions peaked in the 2000s; and non-hydro renewables are quickly growing in the 21st century. Note that the deployment of these generation technologies followed Federat policies and technology development—e.g,, nuclear power reactors and natural gas combined-cycle turbines—by severai d2cades. Acronyms: Clean Air Act (CAA), Energy Policy Act of 1992 (EPAct 1992), Energy Policy Act of 2005 (EPAct 2005), investment Tax Credit (ITC), Production Tax Credit (PTC). Page 30 Electio Power System, Markets and Reliabilty Study U.S. Department of Energy 748 749 750 751 752 753 754 755 156 157 158 159 760 (0U0 # PRE-DECISIONAL DRAFT // NOT FOR DISTRIBUTION June 26, 2017 Figure 3,2. Net Generation Capacity Additions and Retirements.” (Source: QER Updated Figure 41) ‘Net Capacity Additions cc) 700 ‘Atomic PURPA & 60,000 | Energy Act ~—CleanAir Fuel Use Act ana “Act (CAA) ‘EPAct 0,900 2008 cARAmendments 40,000 | i 24) ITC for Soler 30,000 a 70,000 10,000 0 40,000 | 20900 CFP SF LS SM Coa eNawalGes —Pevoleun sm Bioass Nude sHydeelectic Wind Sder "Gootomal Oe Similar policies and developments that drove waves of power plant construction similarly drove retirements over the last two decades, with power plant age and technology vintage an important factor in plant retirement patterns. Power plant retirements are nothing new — significant generation retirements in the current age began 2002, and have accelerated since, as shown in Figures 3.3 and 3.4. Retirements have been due primarily to flattened demand and low electric prices and the inability to compete successfully due to plant age, inefficiency and capital needs rather than regulatory burdens. Retirements of baseload plants (gas thermal, coal, hydro and nuclear) have been going on for at least 15 years. Figure 3.3. Cumulative Retirements of Utility-Scale Electricity Generation Capacity January 2002 March 2017, and Announced Retirements April 2017 - December 2022" * Page 31 Electric Power System, Markets and Rellabilty Study U.S. Department of Energy 761 762 163 ‘QUO # PRE DECISIONAL ORAFTA NOT FOR DISTRIBUTION 1228, BET capacty iM) 150,000 125,000 00900 75,900 50,000 25,000 poor 2004 «2008-2008 OID. OI 2020 Retzemant Yeer MiCoal «= NGCC -SINGCT «-BINGST © ENucesr MOH Otter Figure 3.4. Historic and Announced Annual Retirements of Coal, Natural Gas, Nuclear, Petroleum, and Other Generating Units, January 2002 through December 2022" # Copa i) 20000 — = $8,000 — ‘0,000 —— ———— Ba Retirement Year Goat = NGCCINGCT «ANGST THNudear BCI Other Wy plants retire ‘A power plant owner decides whether to retire a plant based en rational expectations of whether the owner can recover sufficient revenues to justify continued operation. Add exptanation of the ei how many years time hor capital, operating, lake to execute a re sments of a decision whether to close a power plant — forward-looking, ‘on, Whether there’s exoected demand, anticipated ptices, expected uel cosis, your competitiveness ageinst other zesources. How long does it Page 32 'c Power System, Markeis and Relat! U.S. Cepartment of Exergy 1B 774 775 7716 m7 178 7719 780 781 782 783 784 785 786 787 788 789 790 791 792 793 794 (0U0 PRE-DECISIONAL DRAFT 1! NOT FOR DISTRIBUTION June 26,2017 rolicensing, nuclear relicensing, environmental compliance deadline) on when you start the analysis, when you make the decision and how long you keep running the plant. Regulators imposing IRP and pushing for least-cost resource portfolios (Midwest and some other vertically integrated states, Hawail) have been the cause of some recent VIEU abandonments for portfolio restructuring. A review of coal, nuclear and natural gas retirements to date (2002 through May 2017} shows that baseload plant retirements are a regional issue, reflecting regional patterns of generation development, affecting different regions in very different ways. Statement about region with most MW retired. Most of the power plants retired were 40 years old or older by their retirement date. And most retirements are concentrated in the East where more plants were bullt earlier, to serve larger populations (Figure 3.5). Figure 3.5. Generating Unit Retirements by Region, Unit Age, Ownership, and Retirement Year, January 2002 - March 201777 # Ne p= A . a, AdAa 4 1 ems A wo pp ge . @wa* coal | encor fy =e) censor hb el 4 fee ds : Tb 6 » & b Bw 6 © & © & be ‘Age at Time of Retirement Fuel Type Hj Coal NGCC NGCT Ginest i Nuclear go « Other Capacity (MN) ¢ 50 200 i 400 600 | 2 800 21,000, Omersip A Wecat —@ VIEU Figure 3.6 focuses on the year of power plant retirement. This is important because a variety of economic trends and regulatory events occurred in different periods over the 2002 through 2016 period. This figure shows that merchant plants made up the majority of the baseload plants that the 2002 through 2011 period, because those plants were more directly exposed to competitive wholesale market prices and more likely to exit the market quickly fa plant was losing money. Generators that have long-term bilateral PPAS or are utility-owned self supply (same T PPA contract) gets exposed to true market prices much later than merchant plants competing for only short- term bilateral contracts or In spot market: Page 33, Electic Power System, Markets and Reliability Study US, Department of Energy 195 796 97 98 (QUO /! PRE-DECISIONAL DRAFT 1 NOT FOR DISTRIBUTION June 28, 20:7 Figure 3.6: Generating Unit Retirements by Region, Ovmership, Capacity, and Fuel Type, January 2002 - March 20178 * NE Merchant a [ik ww chant ‘ aah A — ee Iaiatl Morehant a aw A aA Ae wey 2 8 Taste? Merchant ~ : Sea ve 2 2 i ma a@ @ens 20032005 Oi WB STF ecient Yea Fuol Type Bcc! NGC NGC ANGST MiNecear mG = Capacity (Ma) a ee ) 00 231,000 Ownership a Meicant Figure 3.7: Power Plant Retirements by Retirement Period, January 2002 through March 2017°**? Pageas Eiectrie Power System, Markets and Reliability Study U.S, Department of Energy 800 801 802 803 804 805 806 807 808 809 810 811 812 813 814 a5 816 817 818 819 820 821 822 823 824 825 826 827 828 (QUO// PRE-DECISIONAL DRAFT i! NOT FOR DISTRIBUTION June 26, 2017 ° | rn J \ ° > e@ a ° . =O capscy (89 ‘ “2 panei 0027008 28 {Rated 2007 2070 0 El Rotred 201112015 Q aco Oe EhRetred 2018 bach 2017 > 1500 o— & @viu ( Je2000 Figure 3.7 shows: © The 2002 through 2005 period was when the wholesale competition initiated in the late 1990s got underway, with forced utlity (called Vertically Integrated on these charts) power plant divestiture moving a number of power plants into merchant ownership in California, Texas, and the mid-Atlantic states in particular. Most of the retirements that occurred In this period were of smaller, older merchant power plants that were Inefficient and borderline uneconomic before a utility owner sold it to the new merchant owner. Most of these retirements occurred in centrally-organized markets, particularly PJM and ERCOT. ‘© The period from 2006 through 2021 saw some early environmental regulations begin to affect the coal fleet, the early growth of utility-scale wind generation, the economic recession from 2008 through 2011, and the start of the shale gas boom in 2008 with natural gas prices starting, a downward trend a decade ago. Old, inefficient natural gas-fired plants retired early in tis, period, but the fall in natural gas prices starting in 2009 began to force the shut-down of smaller, older coal plants and older oll plants in 2009 through 2012. At the same time it became clear that a portion of the customer electricity demand lost from the recession was not going to reappear, which meant that higher demands would not absorb more costly electric production at higher levels on the energy supply curve. ‘# Inthe period from 2012 through 2035, it beceme clear that low natural gas prices were probably a long-lasting trend rather than a short-term phenomenon. And this was the period when the compliance deadlines for a number of environmental regulations, initiated under several different statutes, all converged. This is the period with the must baseload plant retirements, with a marked increase in California, the mid-Atlantic, Midwest and Southeast. ‘Most of these plants were rendered uneconomic and uncompetitive low-priced natural gas- fired generation, in a significantly flattened supply curve meating 2 lower demand curve. The 2015 MATS compliance deadline was the last of these deadlines, so many of the retirements In this period were of plants whose owners chose to shut down a plant rather than invest inone. cor multiple costly environmental remediation measures, (See Section 3.6 on regulation) Page 35, Electric Power System, Markets and Reliability Study U.S. Department of Eneray 1 2 3 4 5 HOC MAD ‘QUO PRE-DECISIONAL DRAFT // NOT FOR DISTRIBUTION 28, 204 192016 and 2027, going forward, on-going power plant retirements are those that have been rendered uneconomic by sustained low electric prices. Figure 3.8 illustrates merchant and VIEU retirements from 2002 through 2016, announced retirements through 2022, generetion capacity that was operational prior to 2002 and is stil in operation, capacity that was added between 2002 and 2016, and demand response in 2016, Figure 3.8 shows generation capacity, additions, retirements, announced retirements, and demand response as 2 percentage of 2002 total installed capacity in each region. These graphics show that in every region, the proportion of retirements (in orange) is less than 20 percent of total capacity available, and that in those regions with 2 larger share of merchant generation, much more merchant capacity retired than vertically-owned utility plants. Figure 3.8: Operating Generation Capacity, Additions, Retirements, and Announced Retirements by Region, January 2002 - December 2022” * Merchert se Pes miso reas view - im . — 20,000 49,000 60,000 89,000 100,000 (28,000 ¥e3;690 10,000 180,000 ‘Sasachy (yy } Retioa Between 2002 to 2018 ‘Operating 2002% Present {1 Demand of 2016 T1PlerredSorRetiement Before 2022] Aces Be:neen 2002 0 2016 Other regional conclusions can be drawn from tne above data: «New England has not seen a high proportion of retirements. Their reliability concerns focus principatiy on gas-electric interdependence chalienges rather than ona shortfali of baseload generation, = ERCOT has experienced continued churn of its natural gas-fired generation fleet due to the combination of fierce wholesale competition, rock-bottom natural gas pricas, and easy entry and exit to the generation market. Texas has experienced strong growth of renewable generation {principally wind), with enough new transmission built to remove the transmission constraint that protected most of the region's generation from the low and negative price levels set by wind and gas-fired generation in West Texas. Page 38 Electic Power System, Markets and Retiality 3 y USS. Department of Exergy 852 853 854 855 856 "857 858 859 860 861 862 863 864 865 866 867 868 869 870 871 872 873 874 875 876 877 878 879 880 881 882 883 884 885 886 887 838 889 890 (QUO // PRE-DECISIONAL DRAFT !/ NOT FOR DISTRIBUTION June 26, 2017 Baseload retirements occurred later in the Southeast, Central, Midwest and West than they did nother regions. This is because those regions are dominated by vertically integrated utilities under traditional regulation, so the utilities could recover costs and capital returns on less economic plants for a longer period than merchant generators without ratebase protection and captive ratepayers. Regulators in many of these states also have utility-specific resource adequacy or reserve margin requirements, which would justify retaining a plant longer than its short-term economics might otherwise support. 3.2 Big picture — multiple causes compounded to force power plant retirements, changing the supply curve for electricity ‘There have been three statistical studies of the causes of baseload power plant retirements. ‘The Columbia University Center on Global Energy Policy Study, “Can Coal Make a Comeback,” (April 2017) found that 4956 of the collapse of the domestic coal industry has been due to increased competition from high volumes of low-cost natural gas, 26% from lower-than- expected electricity demand, and 18% due to the growth of renewable energy.®® ‘The draft Lawrence Berkeley National Lab study, “Power Plant Retirements: Trends and Possible Drivers,” (June 2017), found the strongest correlations to coal, nuclear and natural gas- fired plants lie with the diminishing load growth, high summer planning reserve margins (ie., over-capacity), coat plants using high S02 emissions rates (i. they needed more costly environmental upgrades), low natural gas prices, and advancing generator age. The Analysis Group study, “Markets, Reliability and the Evolving U.S. Power System,” (June 2017], looked at the decrease in prices per MWh in the PJM market (since that decrease would {go straight to a coal plant's bottom line) and concluded that of an almost $30/MWh price drop, $28.00 of the price decline was due to the decrease in natural gas prices, $1.00 was due to the drop in electric demand growth, and $0.39 would be due to new wind generation operating at full capacity. More broadly, the data reviewed-below indicate that retirements of nuclear, coal and natural gas power plants have occurred for several reasons, but have been driven principally by the effects of supply and demand upon old, inefficient power plants: Page37 Electric Power System, Markets and Reliability Study U.S. Department of Energy Reduction of demand growth (peak and energy) since late 1990s and flattening of demand since 2008 have reduced the toom for less competitive plants to make sales. ‘The coal and most of the natural gas baseload plants that have retired are old and inefficient units that were not recovering their operations and fuel costs, much less capital cost recovery. Retirement decisions are based upon forward-looking expectations about whether a plant will be able to recover its costs and make a profit; since electric prices have been low for years, and are going lower, many coal and nuciear plant owners see little likelihood of earning full cost recovery from power market revenues alone. (QUO /! PRE-DECISIONAL DRAFT i! NOT FOR DISTRIBUTION Sune 28, 2017 «Merchant generators began retiring noticeable quantities of old, inefficient natural gas thermel and coal plants (baseload capacity) in the early 2000s. Vertically integrated electric utilities (VIEUs) began retiring more of these units after 2010, and the number of plants and MW. retired has accelerated over recent years. Most of the retirements before 2013 were owned by merchant generators rather than vertically integrated electric utilities, and most of those retired plants were gas-fired. Merchant plants that ere directly exposed to market prices i without the protection of long-term self-supply arrangements or captive customers covering ‘capital and operating costs, would be the first to close if they were not competitive against other sources, Electric energy prices across North America have been dictated by natural gas prices for over a decade, After domestic and international natural gas prices began falling with the success of shale gas and unconventional driting, increased low-cost natural gas-fired generation began displacing inefficient coal and gas-thermal generation, i © A significant number of coal plant retirements occurred in 2015, the last year that a coal or plant needing to add pollution control equipment for MATS compliance could operate without i Investing in the required pollution control equipment. ‘* The growth in variable renewable generation after 2007 (earlier inside ERCOT) has exacerbated but did not cause the basetoad retirements problem. (This is obvious from the fact that the Southeast has seen significant retirements in recent years, but has almost no renewable generation.) As shown in the ERCOT supply curve discussion, the low marginal cost of renewable production lowers the supply curve and thereby the market-clearing price available to allsuppliers. At the same time, the variable output levels of renewable generators and the fact that they reduce night-time minimum load and change daytime peak and ramping requirements have reduced the opportunities for baseload plants to operate at sustained, high output levels. This leads to reduced dispatch of baseload units at lower prices, higher operating costs, and ultimately lower revenues insufficient to cover costs. 3.3 Cause -- electricity demand is lower than projected Between 1970 and 2005, total U.S. electricity generation grew steadily at a compound annwal growth rate (CAGR) of 2.7%, But since 2005, generation growth has stalled with @ CAGR of only 0.05% from 2005 to 2015, even as the nation’s gross domestic product grew by 1.3% per yaar over the same period [EtA].' As Figure 3.9 shows, although electricity demand used to rise in parallel with economic growth (as measured by Real Gross Domestic Product), demand end GDP begen decoupling around the year 2000. EIA attributes this fall in demand to a variety of factors including the impact of years of energy efficiency standards improving building and apottances and technology improvements in lighting and other end equipment, and broader economic factors such as a shift toward less electricit industries and slower population growth. [EIA AEO 2017] The factors affecting the slowdown in ene! demand are shown in Figure 3.10. The dip in both GD? and electricity use in 2008-09 reflects the US. unique to Bi or the Annual Energy Outlock. Virtually every prominent projeciian of electriciy demand included steady elecriety demand growth. Page 38 Electric Power System, Markets and Reilabity Study USS. Department of Erercy 930 931 932 933 934 935 936 937 938 939 940 941 942, 943 (QUO // PRE-DECISIONAL DRAFT i! NOT FOR DISTRIBUTION ‘June 28, 2017 recession, which lowered electricity usage enough to affect power plant economics and prompt some plant closures. Figure 3.8. Gross Domestic Product and Not Electricity Production, Historical (1960-2016) and Projected (2017-2027)* " # [Source: EIA, QER 1-28 updated} [Net Eletrcity Generation (Mion KAW) Real GOP (2009 SBilions) 6300 —— —_—_—— 21,000 540 ————-— - — - 450 $$$ 3,600 —_——— —_._-__ icky Generation wlion Mh 2700 se ——— 2,000 Real GO? 2009 Sons #,900 — 6.000 — ——— 3.000 — __ — ——o 9 _—___—_ —___ —_— — 1950 1960 1970 1980 4990 2000 2010 2020 Figure 3.10, Estimated U.S. Energy Savings from Structural Changes in the Economy and Eneray Efficiency, 1980 to 2016.40 41 [figure] itis dificult to forecast customer electric usage accurately. As shown in Figure 3.14, the recent history of the ElA’s Annual Energy Outlook customer electric use projections show that DOE's expert forecasters as most other energy experts — have consistently over-estimated actual U.S. electricity usage (see the blacked dotted line at the bottom ofthis figure). EIA and many other forecesters have ‘consistently over-estimated peak demand as well as energy over recent years.*! | Historically from the 1960's to 1990's, electricity consumption and economic growth (measured here by real gross domestic product) have rsen in parallel, Beginning in the 2000s, economic growth became decoupled from eTeanicty consumpton, as a resul of continued progress in improved eneray productivity across all economic «For instance, MJ Bradley & Associates’ “Load Forecast Analysis" (August 24, 2016) raviewed a number of ‘esiicty demand forecasts over ime and concluded that most forecasts overshot actual demand from 3 years out wt improved In recent years and as the horizon between forecast and actuel use year shortened. ley comsitesidefaullfles/MIBA LoadFor FINAL 0. ‘customer demand can have significant market impacts. During the 2000-2001 California electricty ccs. the electric utitios consisteny overstated the amount of electricity that they wanted to purchase fom the Califia Power Exchange, and then under-consumed from wiling seller the folowing day. More recanty, Page 39 ‘bh cut es soca Dathoantthee Shish US. Deoartment of Energy 944 945 946 U0 1 PREDEC! {ONAL DRAFT # NOT FOR DISTRIBUTION une 25, 26017 Figure 3.11. EIA annual electricity sales 2000-2016 (terawatts) and AEO reference case electricity sales projections 2017-2030" ® Bold up actual usage line and projections and axis numbers, cut off at 2025 12°87 forma a {BB AEO 2091-2005 Ss he9 zooeanc0 ae aets20:e ! BB pro anisaoie fea Sles | i . Currently, about $0 percent of U.S. residential electricity, 60 percent of commercia!, and 30 percent of industrial electricity consumption is used in appliances and equioment that are subject to Federal minimum efficiency standards imolemented—and periodically updated by—the Department of Energy (008). Between 2009 and 2030, these costeffective standards are projected to save consumers more than $545 billion in utility costs, reduce energy consumption by 40.8 quadrilion British thermal units, and reduce carbon dioxide (CO;) emissions by over 2.26 billion metric tons. There are two significant impacts of the growth in energy efficiency. First, the unexpected flattening of energy and peak demand has changed suppliers’ expactations and behavior relative to reasonable 87 markets began. In the 2000 to 2005 timeframe, investors and etchant developer Parda Energy has filed sult against EROOT the Texas gto ‘consistently high demand forecasts reuo:ienty overstated fe rego resouice scercty that naver materialized, Panda clan that 1b {$2.2 bizon gas plant on the basis of those ‘aise and misleading” forecasts (as did olher merckant developers) and when the h'gn demands never ‘rateraized, ERCOT had overcapacity that cove cow elect prises and arove tha Parca plant no barkcupiy ony X years aferit wert cn-ina, See, for instance, “PE Firm Puts Pia Into Ch. 11, Blames Texas Grd Rea lator Lk 980. Keith Goisberg, Lax860, Apa 18, 2017, and “Power company sues g7 cpecator ove: demand, susely prsjastons,” Jordan Blum, Houston Chronic, March 28, 206 that ERCOT's tric requirements, predicting "This figure demonstrates low changes in economic, market, and technological trends and in polices affecting ‘energy use in the U.S, can affect total electricity sales. The AEO Reference Case is a business-as-usual trend {estimate that assumes that laws and regulations in effect at the time are razen’ and continue throughout the fimeframe of the projection. tie goat is to projeci what might happen In the future if no new policies are enacted-—it does not attempt to forecast what will happen. Federal and slate policies, markei forces, and broader economia factors have had the net effect of owering electricity consumption compared to wha! was expected to ooourin absence of any change, as shown ay the comps electicity saies, in of historical AEO Reference Case projections to actual US Page 40 Electric Power System, Markets and Rellabalty Study nen. 957 958 959 960 961 962 963 964 965 966 967 968 969 970 on 972 973 974 975 976 977 978 979 * QUO / PRE-DECISIONAL DRAFT NOT FOR DISTRIBUTION June 26, 2017 plant operators would have reasonably expected that growing customer demand for electricity would have assured that new generation capacity could be sold profitably. 3.4 Cause -- falling natura! gas prices have reduced wholesale electricity prices Unconventional natural gas development, increasing in productivity between 2007 and 2009, has significantly expanded the availability of natural ‘gas and lowered its cost across the U.S. and the world. Before the widespread use of unconventional driling techniques In the past decade, natural gas prices in the US, approached $14/mmBtu in several periods (including in 2005 after Hurricanes Katrina and Rita reduced production and delivery from Gulf of Mexico sources). As fracking practices spread and made previously inaccessible gas sources economic, natural gas prices dropped to below one-third of their former levels (See Figure 3.12). Figure 3.12: Monthly average Henry Hub natural gas price (S!mmBtu) Monthly average Henry Hs tra gas rice [VNB 30 516 oe aap To) Bann eos Boos OT BOG T009 IIE 2017 IK a0i9 BW IIs 2016 2 ‘Although coal and nuclear generation produced more energy per year than ges-fired generation, electricity prices have tracked natural gas prices for more than 15 years, as shown In Figure 3.13, This is because gas-fired mid-merit and peaker power plants have been the marginal generators following load in many hours of the day (as discussed in Section —-), and thelr short-run marginal costs are driven by natural gas prices. Thus natural gas plants and gas prices have driven spot market electricity prices. Since spot market prices are used as 2 marker for setting prices for bilateral electric contracts, natural as prices also drive the price for most of the wholesale electricity sold across the nation.” although wholesale prices closely follow naturel gas prices and are now at historically low levels, etl electric pics remain Tolatvaly fat and have not sunkas low as wholesale ries, This cccurs for several reesons, including the nee fr rtal rates Tecollect the utility’ captal, operating and administrative costs for transmission and distribution, real sales, and many other progrers. Uti retall ates in vertically integrated states Include return af and on canal investments In utity-owned power lent (which s not protection aallabla to merchant generation) and the costs of the total energy acquisition portfofio. State legislators and regulators also Impose a variety of program requirements that may raise real electricity costs. Page 41 Electric Power System, Markets and Reliat ly Study USS, Department of Energy OUO /! PRE-DECISIONAL DRAFT NOT FOR DISTRIBUTION June 28,2017 380 Figure 3.45. Whotesate day-ahoad electricity prices vs. Henry Hub natural gas price (monthly 981 average)" Wholesale day-shesd electricity prices vs. Henry Hub natural gas price eee (monthly average) stasatge nice sae . Seige 500 so 4 i sa! _ Hl sieeeigee ponent) aecrteisoncznn Sietserskion tees twee esau Srensecrise sh em AS nha 3 ca Shee nS tiecionrte 182 2) ex ke Se ay ae se mo SH abe Eu uu aes Uw a) "83 Although natural gas is being blamed as the cause for major havoc within the power sector, the nation ! '84 has realized extraordinary economic benefit from the racking revolution, Since gas prices starting '85 falling in 2009, the increased supply and lowered cost of natural gas has delivered effective benefits of ‘86S trillions to the American economy. 87 Natural gas-fired generation has grown nearly continuously since the late 1980s. These plants have low 88 capital costs and gas pipelines can be built more quickly than electric transmission lines, soit was often 89 easier fora plant developer to build a new gas-fired plant near a large electric load than to build a 90 higher-cost coal plant farther avray and ship the coal by wire to large lad centers, 31 Figure 3.14. U.S. Natural Gas Generation, 1950-2016, [Page 3-14] TWh 4,600 1,490 600 400 200 4855 2960 1965 1970 1975 is82 L985 2990 2009 2005 2020 NGCC generators are very efficient, have unused capactty, and have significantly higher capacity Factors ‘than natura! gas combustion turbines (CTs), which contribute primarily to peak load and may only operate for a few hours a year. Untibrecentiy, most NGCC units were utilized for intermediate and peak 4oads, rather than baseload. Because natural gas prices have been low for a sustained period, and Rt Page 42 Electric Power Syetem, vent of Energy 997 998 999 1000 1001 1002 1003 1004 1005 1006 1007 1008 1009 1010 1011 1012 1013 1014 1015 1016 1017 1018 1019 1020 1021 1022 1023 1024 1025 1026 1027 1028 1029 1030 1031 1032 1033 1034 1035 1036 1037 (OUO /f PRE-DEGISIONAL DRAFT /! NOT FOR DISTRIBUTION June 28, 2017 because NGCC plants retain some of the flexible characteristics of CTs and operate at a higher efficiency and lower cost, these units are now often used for baseload power. ACT's short start-up times and fast ramp rates makes it essential for maintaining grid reliability, absent affordable grid-scale storage, given today’s resource mix. Capacity factors for CTsare quite low (generally below 40 percent), but when operating, they can be significant contributors to conventional air pollutants. Single-cycle natural gas turbines can go from cold start-up to 100 percent output in 7— 11 minutes; in contrast, coal-fired units ramp on the order of hours, and doing so incurs increased operations and maintenance costs. NGCC ramp rates fall somewhere in between, and some NGCC units can ramp to full rated power in less than 30 minutes.” This flexibility makes CTs useful in complementing variable generation, especially for solar, because this flexibility complements the high peaks associated with solar generation and allows for load following. Some states rely on CTs more regularly than other locations; most notably, Texas, Louisiana, Wyoming, New Hampshire, Maine, and Rhode Island all have CT capacity factors greater than 20 percent.# 3.5 Cause — subsidies A subsidy is a transfer payment of funds from one group of people to another — federal or state taxpayers to nuclear plant owners, a utility's electric ratepayers to its energy efficiency users, federal ‘taxpayers to renewable energy producers, and so onto lower the effective cost of the benefiting technology or fuel source. Subsidies are created to perform different functions and serve varying public policy goals, including developing technology, advancing reliability, supporting an infant industry, ‘creating or preserving local jobs, creating competitive international business advantage, or reducing power system pollution and emissions. All subsidies distort markets, but each affects different markets in different ways. Every form of energy and energy source present in modern electricity and energy service provision is subsidized or incented in one form or another, and most have been subsidized for many decades. The forms of subsidies and incentives in place today for energy resources include: «Tax policy (accelerated depreciation, depletion allowances, production tax credits, investment tax credits, etc.), + Regulatory requirements (safety and environmental requirements, renewable portfolio standards, ethanol use requirements, procurement mandates, efficiency standards), © R&D funding (research, development and demonstration), market purchases (particulary for federally-owned hydrdpower and transmission systems), © Government services (information and marketing, technology transfer, federal land and resource leases, provision of highways, ports and waterways) (the Congressional Budget Office estimates annual lost revenues due to low royalty rates for on-shore and off-shore oll, gas & coal resources at $2 billion/year. = Disbursements (direct grants and subsidies, as for oil tankers, nuclear insurance guarantees, or ARRA grants)" Not charging for externalities such as pollution or increased need for grid Integration services. ‘The MIS study, prepared for the Nuclear Energy Institute, [MIS 2016] shows over the past two decades the largest energy subsidy beneficiaries have been coal and renewables and that tax incentives have been the means for the largest subsidies. MIS estimates that, “the federal government's primary Page 43 Eloctic Power System, Markets and Reliability Study US Departmentof Energy 038. 039 040 oat 042 043 044 045 046 47 48 49 150 151 (0UO # PRE-DECISIONAL DRAFT !/ NOT FOR DISTRIBUTION ‘June 26, 2017 support for nuclear energy development has been in the form of research and development (R&D) programs, one of the more visible types of incentives identified. For the last 20 years, federal spending ‘on R&D for coal and for renewables has exceeded spending on nuclear energy R&D. Over the past six years, 2011 through 2016, renewable energy received more than three times as much help in federal incentives as oll, natural gas, coal, and nuclear combined, and 27 times as much as nuclear energy.” ‘The Congressional Budget Office has estimated the costs of energy-related tax preferences—a set of subsidies for a more limited period of time ~ over the period 1985 through 2016. As noted above, tax preferences include depletion allowances (oil and gas, geothermal), investment tax preferences (solar PV) and production tax credits (wind). Figure 3.18: Costs of Energy-Rolated Tax Preferences, by Type of Fuel or Technology, 1986 to 2018 Costs of Energy-Related Tax Preferences, by Type of Fuel or Technology, 1985 to 2015 ‘lone 2513 Dotae » Es i ‘| 5 er ee er ee ee Source: Congressional Brtget Clc, usta data hon Mot = Shoe, Enerey Tax Fay see! Perspectives a ‘Epes, Rear fr Congress R227 fCongrestoral esearch Serie May 2, Sexe; Jit Conant on Teraton stn of Fert Tar nplgaesa govsXBAS, stl f te cnt Corsten on Twat, Esiratd Bugt ects cDs.on@ of Aenea the Senate Arner 1to}.2, 2028 Rules Commitee Pot 1420), The ProtacngAreteans From Tax Has et of 2015," JCK M95 [Decenber 6, 201), hpgausa cet ‘8; Depart othe Treasury, Combined Stotemento Recep, Olas, and forces (December 206), pias. govhXKNS; and Oe a aragenentand Budget, Budget ofthe US. Government, PiclYeor 207: Aopendi Fabra 206 125, hp Ngouss 2vOKNR. Several states have established or are considering creation of subsidies such as New York's Zero Emissions Credit to fiow additional funds to nuclear power plants that are no longer cost-competitive.® Subsidies, in the form of federal R&D and federal tax credits, encouraged the development and spread of wind and solar generation ~ just as, in earlier decades, federai R&D and subsidies enabled the development and commercialization of civilian nuctear energy and the natural gas combustion turbine and the realization of hydraulic fracking techniques for ol! and gas development, Cleariy all of those contriouted to the current baseload problem, but no one can be biamed for it. Dil before the New: sons Crest provston would fund the seit sing ‘monigs collected Frome New York taxcayers for the operation ofthe NY Enevey Research & Demonstration bgency. Hf Init current form, this bill would essentioly pay forthe subsidies required to keep Rew York's nuclear power plants in peation, producing zero-carbon electricity, by suaplemersing siecticiy customers! energy and eapachy payments with taxeayer fund Page 44 Electric Power System, Markets and Reliability Stacy U.S. Department of Energy 1057 1058 1059 1060 1061 1062 1063 1064 1065 1066 1067 1068 1069 1070 1071 (OUO #/ PRE-DECISIONAL DRAFT // NOT FOR DISTRIBUTION June 28, 2017 If the goal isto eliminate subsidies to avoid picking winners and losers, or to avoid favoring one fuel or technology over another across electricity markets, the only way to do that would be to attempt to eradicate all forms of subsidies for all forms of electricity sources (including wind and solar ITC and PTC, low-cost coal leases, oil and gas depreciation allowances, nuclear loan guarantees, all energy R&D expenditures, all ethanol purchase requirements, energy efficiency furiding, and so on). Since most of these subsidies were created by statute and have deep political support, thorough and universal repeal of all energy-related subsidies would be difficult. 3.6 Cause —regulations Figure 3.16 shows electric capacity additions and retirements between 2002 and 2017, long with key regulations affecting electric generation, the price curves for natural gas and coal, and customer demand levels over that period. The graphs show a strong correlation between falling natural as prices and baseload retirements as well as flattening electric demand and retirements. It also shows many coal plants retiring in 2015 to avoid having to make new capital investments for environmental remediation ina time of low electricity prices. Page 45 lactis Power System, Markets and Reliability Study USS. Deparimant of Energy 072 073 wea Ka (QUO /! PRE-DECISIONAL DRAFT 1! NOT FOR DISTRIBUTION June 26, 20:7 Figure 3.16. Big picture of retirements and contributing factors? © {narrow price graph legend to make narrower so we can make charts wider; pop hairlines more} aoa! pect ates and eters (6) oka Pie (ano sth, $30, ong erage} 8 oo ss) 2cb0 as wie ase Timstine of Electric Generating Capacity Additions and Retirements, Tax incentives, Orders and Regulations, Regional Markei Prices, aiid Load cost estimates for regulatory impact — check EIA, EEI, NEL, EPSA, NERC, trade press, EPA, uaility 10ks and presentations — correlate to timing of impact and deadlines end inability of these *Vihovesale dey-ahead electicily market prices are for the PJM West Region, Delivered coal and natural pices are ‘agaregated monthly PUM regional fue! costs derived from FERC-423 and EIA 923 data fies. In addltion to the 7 states in PUM, EIA included power plant fuel costs for Commonwealth Edison, East Kentucky Pawer Cooperative, Dominion Power in North Caroiina, and Indiana-Michigan Power, E1A weighted the fuel receipts by total quently of fue! delivered to calculate a weighted average monthly cost, We converted the fuel prices from MMStu to Mh to account for diferent efficiencies c¥ power plants using e1 average heat rate of 10000 Btu&Wh for coal and 7200 Biv fos satura gas, Page 46 Siectric Power System, Markets and Reliab ty Stuy US. Department cf Enerov 1079 1080 1081 1082 1083 1084 1085, 1086 1087 1088 1089 1090 1091 (QUO 1/ PRE-DECISIONAL ORAFT/! NOT FOR DISTRIBUTION June 26, 2017 plants to zecover short-term operating costs much less capital cost recovery w/o additional environmental capital charges, 3.7. Cause — renewables Figure 3.17 shows the annual installations of wind and solar generation across the nation from 2002 though 2017 (to date). Figure 3.x shows the growth in monthly net electricity generated from wind and ‘solar sources since 2007. These graphs show that there was relatively little wind installed before 2007, and minimal solar capacity before 2013. Since over ~GW of coal and __ of natural gas generating Capacity retired between 2002 and 2007, and another ~ MW retired between 2008 and 2012, renewable generation could not have been the sole cause for these baseload retirements. Figure 3.17. Annual Generation Capacity of Wind and Solar, Total and by Region, January 2002 through March 20174 Wee Solar + Energy Information Administration (EIA), "Monthly Undate to AncualElecre Generator Report,” March 2037, hitos://vwwr ela govielectriciy/data/elaB6orn/ Page 47 Electric Power Systam, Markets and Reliability Study U.S. Department of Energy 92 B 4 6 Dd 8 MOU ROD ISIONAL DRAFT !/ NOT FOR DIST IBUTION sane 28,2017 Figure 3.18, Monthly growth in net wind and solar energy Monthly net electricity goneration from selected fuels (Jan 2007 -Mar 2017) share of oll electisity ganaraton 10% 8% 8% Bae March 2017 E shares of total 4% te 0% 2h 2) ie Bisa Solar} 2007 2008 2008 2010 2011 2012 2013 2014 215 2076 2017 ° cla (Source: EIA, “Today in Energy, Wind and solar in March accounted for 16: generation for the first time," June 14, 2017; note that EOA did not collect sm: 2012) f U.S. electricity scale PV data before Wind and solar generation combined reach their highest leveis in spring and fal, when customer energy demand is lower. This exacerbates the problem for baseload plants, in that since customer ioads ere already lower in spring and fall, having renewable energy peak in those seasons further erodes the size of the customer low load slice willing to buy coal, nuclear or natural gas-fired power. Wind ‘Wind turbines have contributed more than one-third of the nearly 200 Gut of utlity-scale generating capacity added since 2007, reflecting a combination of improved wind turbine technology and lower Costs, Increased access to transmission capacity, state-lavel RPS, and federal production tax credits and grants, More than half of U.S. wind capacity is iocated in five states: Texas, towa, Oklahoma, California and Kansas. (Figure x) In particuiarly windy hours, wind output has contributed as much as $0% of the alectricity generation mix, [add cites for SP, ERCOT| Page ss Electric Power System, Markets and Retibity Study U.S. Department of Energy ‘QUO 1! PRE-DECISIONAL DRAFT J/ NOT FOR DISTRIBUTION June 26, 2017 1108 Figure 3.19. Wind generation growing™ Distribution of wind power plants in the Lower 48 states (as of December 2016) capacity Onsuw O41 MW a fa 1109 éia 1110 Figure 3.20, Renewable penetration not correlated with coal and nuclear plant retirements™ Recent and Planned Coal and Nuclear Retirements and 2016 US. Renewable Energy* Share of Electricity Generation, by State bese (© >4conozeo racoumensoson © eon ated gente, webiomss inet ye ‘ovens amc mc Siabetnen asetCon ane 7 ocean wt lt Chomom | oseeim Totoatetss ois A savemama Morseman A somenm Aas Wl Page 49 Cignirie Bawver Svsiem. Markets and Reliability Study U.S. Department of Eneray 3 114 15 6 117 gs 19 21 22 23 24 25 26 27 28 29 30 i 32 8 we Ow Oo (QUO / PRE-DECISIONAL DRAFT / NOT FOR DISTRISUTION June 26, 2017 DUCK CURVE - explain impact. This a tegional impact that needs to be managed on 8 regional basis (see next chapter on reliability) GREATER NEED for cycling and ramping 3.8 Consequence -- nuclear plant retirements Arecent report observes that: There's an industrywide systemic economic and financial chalienge to operating nuclear power Plants in deregulated markets; * Given the confluence of market factors in combination with market structure in deregulated markets, a significant number of operating nuclear plants have negative cash flow positions today; * Given current trends, these market factors are unlikely to change significantly over the next 5 years; * Early retirement of nuclear plants is primarlly caused by lower revenue probler higher operating costs, as wholesale elact several years; * = The magnitude of the gap {between operating revenues and operating costs] is the range of $5 to 15 per MV/h, For a 1,000 MW nuclear unit, approximately every $5 per MW OF 9p represents about $40 milion in annual negative cash flow; * » Without action to enhance revenue (e.g,, New York ZEC payments), more nuclear plants face premature retirements in the future.3 Y rather than prices have precipitously falien over the last Overview of nuclear fleet FROM QER: The current operating nuclear power fleet consists of approximately 58 GW of generating in US. natural gas production due to the shale: ‘evolution has driven down prices and made coal increasingly ‘inodmpetitive in U S. electricity mirkets:- Coal has also faced growing ‘competition from renewable, energy, with solar costs falling 85% betiveen ‘2008 and 2016 aiid wind cdsts felling 36%. ° , Increased competition from sleap natutal ges is responsible for 499 of the decline » US goal Consumption Lovie tin expented demand is responsible for 26%, and thé grow in tenewable nergy i responsible for 18%. Environmental regulations haye played & role in the switch from coal fo nalwal gas and renewables in U.S. electricity supply by accelerating coal plist retigements, but vere a significantly smaller factor than recent natural gas and renewable energy cost reductions g = a Uke fossl units, many coal plants have retired or are at risk of retirement because thelr marginal cost of production Is greater than prevailing electric market prices. Asearty as 2012, coal plant owners were roming EIA that they expected to retire almost 27 GW of capacity from 175 coelfred gener otneen 2012 and 2016. The coal units that retired between 2009 and 2011 were small, with an sveraye size of only 59 MW and a low fuel conversion efficiency (heat rate); the units that hhave retired Since are younger and more fueFeffiient, but today they are being dispatched less often (see Figure x) because they are more costly than alternate energy sources. Figure 3.28. The coal plants that retired had low capacity Factors Average 3-year Capacity Factor yo -2units s Bunty 33 units 10 - a oan 30 an ‘AL units 20 g 10 ° yuo kt:—=0HDS MOI ORNS ONG 2007 Average three-yeer capacity factor for the coal piants retiring In each of the listed years Coals high cost challenge is evident even in coal country. In West Virginia, the leading utility has closed te cab iired plants and converted tio others to gs, lowering its coal dependence from 70% in 2012 to 61% last year, and the Kentucky Public Service Commission encourages its wiles to offer business Customers renewable energy packages’ And the Kentucky Coal Museum has installed 80 solar panels Page 65 ower Gvetem. Markets and Reliability Study USS. Department of Enaray 478 479 (OUO 1! PRE-DECISIONAL DRAFT // NOT FOR DISTRIBUTION June 28, 201 on IS roof to save money to save between $8,000 and $10,000 per year on electric bills that have been Funning about $2,100 every month? Coal plant closure considerations Source: “Coal Power Plant Post-Fotirement options,” O'Malley, Power, 9/1/16 Zhe primary recent davers of retirement announcements have been low natural gas prices and new environmental regulations—especially the Mercury and Air Toxics Standards (MATS), Cléan Water Act Section 316(b), and the Coal Combustion Residuals rule Other contributing factors have included more competitive markets and a vacety of regional and state-level polices involving renewables and carbon pricing. Most of the power plants being closed today were bull in the 1940s to 1960s, before the Clean Air Act was passed in 1970. Many have minimal ar polltion controls, use once-thraugh cooling water, and sluice wet coal ash to ponds. Scrubbers, closed-loop cooling, ad dry ash handling are current {eaulrenient or willbe phased in over the next Yew years. Because much ofthe older capacity fends to be smaller units under 300 Mw, which are not @conomical to retrofit, they are therefore retired. Many closures éoincided with the MATS deadlines in 2015 and 2016, at a tine when natural gas priges were at historic lows, Now that MATS deadlines have passed, additional closures are being announced by companies including Dynegy (5,000 MW) and DTE Energy (2,200 MW). Economics; renewable energy mandates, and reduced demand for electricity are driving these additional closures, Power piant closure activity began on the East and West Coasts in olfred plants, because of the bigh cost of fuel, Closures are now occurring inthe coal belts, the Upper Midwast, an the Southeast. there are even some coaHfred plant closures in western states (Table 1) Power plant decommissioning and redevelopment projects are all about risk, money, and who pays. When a power plant shuts dowa, revenue ceases but costs do nat. Some owners quantify their costs, which may be allocated over many cost centers, Best-Inclass comparies aka Getermine real estate valuations and ext strategy costs so they can mate informed decisions about ‘whether to redevelop, hold, or sell auhe pays’ has emerged as a very interesting question. n states that are stil reguieted, decommissioning costs could be passed through to ratepayers, subject to public service fommission approval. In deregulated states, shareholders would pay for decommissioning, subject to management approval. AS @ Genco, ifyou are in Regione! Greenhouse Gas initiative stare where you can recover the cost of closing plants through the rate bass, itis often wise to do so. In deregulated states, conversely, shareholders have to pay for those costs up-front, and more case ‘yplcaly be dona to secure board approval forthe $10 milion to $20 milion p 3.10 Consequence ~ natural gas-fired power plant retirements Elé reports on the U.S. gas-fired generator fleet:3? Page 63 Evectie Power Syster Merke's anc Reliabilty Study US. Denatimant of 1484 1485 1486 1487 1488 1489 1490 1491 1492 1493 1494 1495 1496 1497 1498 1499 1500 1501 1502 1503 1504 1505 1506 1507 1508 1509 1510 isi 1512 1513 (UO // PRE-DECISIONAL DRAFT i! NOT FOR DISTRIBUTION June 26, 2017 In2016, naturel gas-fired generators accounted for 42% ofthe operating electricity generating capacity in the United States, Natural gas provided 34% of total electricity generation in2016, surpassing coal to become the leading generation source, The increase in natural gas generation Since 2008 is primarily a result of the continued cost-competitiveness of natural gas relative to coal. Natural gas-fired combined-cycle units accounted for 53% ofthe 449 gigawatts (GW) of total tis natural gas-powered generator capacity in 2016. Combined-cycle generators have been a popular technology choice since the 1990s and made up a large share ofthe capacity added berween 2000 and 2005, Under current natural gas and coal market conditions In many regions crthe country, combined-cyle generating units are often used as baseload generation, whch operate throughout the day. . other types of natural gas-fired technology, such as combustion turbines (about 28% of total naturel gas-powered generator capacity) and steam turbines (17%), generally only run during hours wren electricity demand is high. The capacity-welghted average age of US. natural ges power plants is 22 years, whichis less than hydro (64 years), coal (38), and nuclear (36). Figure 3.29 shows the on-line dates forthe three types of natural gas-fired power plants. Figure 3.29. Most natural gas-fired generation built after 200% U.S. utilty-scale natural gas-fired electricity generators by technology type gigawatis 60 50 40 other (2%) 30 combustion 20 turbine (28%) combined 10 cycle (63% of total natural gas O- wet capacity) 4950 and 1960 1970» 1980, 1980, 20002010 a bofore cia’ Figure 3.20 shows total natural gas-fired net generation and how the capacity Factors of these plants vary by technology over the years 2011 through 2026. Although steam turbines were originally built principally for relatively stable baseload use, those plants are being displaced in the dispatch merit der by more efficient combined cycle plants and combustion turbines, both of which are designed for greater flexbity an are often located closer to loads than the large steam plants. This is shown in Figure 3.2. The states of California, Texas, New Vork and Frida all had more than 20/000 Nt of tural gasefired capacity at the end of 2016, NREL reports that the due to the fextliy, eicency and Cost competitiveness of natural gas combined cycle power plants, grid operators have been dispatching, NGCC plants more frequently as baseload generators. In consequence, the capacity factoy forall NGCC plants has grown from about 40% in 2008 to roughly $6% In 2036, surpassing that of coal’® Page 87 (OUOM PRE-DECISIONAL DRAFT // NOT FOR DISTRIBUTION June 28, 2017 514 Figure 3.30, Natural gas floot net generation and capacity factorst® Natural gas net generation Natural gas combined-cycle capacity factors million megawatthours percent 180 100% 16 : 90% 140 80% 120 708 combined cycle 190 8086 | 50% 80 40% 60 com 40 2 20 10% o 1 0% 1 201% 202 2913 ame 2015 2016 201 2012 2013 214 2015 2016 & 5 16 Figure 3.31. Natural gas-fired plants serve most of the Lower 48 states” ‘ ro “~~ . . % ® ° # sy apes © 3.629 a0W MW technology type ® combined cycle ® combustion turbine steam turbine © other oi Natural 2as plant retirements As noted above, Texas has been an inhospita Califorsia, where merchants bought the nvironme: ies’ old gas pl ¥ merchant gas plants, So has S during the early days of asset Page 68 Fractde Pawar Sintaae th 1522 1523 1524 1525 1526 1527 1528 1529 1530 1531 1532 1533 (UO I PRE-DECISIONAL DRAFT JI NOT FOR DISTRIBUTION dune 26,2017 divestitures and discovered that some of the gas-fired plants were better off retired. More broadly, because it's relatively easy to build a natural gas-fired power plant in most regions, volatile commodity prices along with an excess of gas capacity contributed to significant retirements of the older, less, efficient generators. EIA reported in 2011 that between 2000 and 2010, 33 GW of net summer capacity natural gas-fired generation retired (72% steam turbines), with an average age of 48 Years. in 2010, the average steam turbine operated at a heat rate of 2,000 Btu/kWh more than the average combined cycle plant.%* Figure 3.32: Location of Natural Gas Retirements, January 2002 to March 201799100 - \ a ° , & nace e faNect on ma Hinast 80 ownership (7) 1000 a Merce ( Jensc0 @ view Not all plant retirements are caused by the invisible hand ofthe electric market weeding ov old, inefficient power plants to improve system efficiency and costs for everyone, Sometimes thereisa regulatory or state policy forcing the retirement. 1e Custam, Markats and Reliability Study U.S. Department of Eneray 534 (QUO // PRE-DECISIONAL DRAFT / NOT FOR DISTRIBUTION June 28,2017 “Californians are paying billions for power they don’t need” Source: Ivan Penn & Ryan Menezes, LA Times, February x, 2017) Gils 200% launch, the Sutter Energy Center was halls! asthe nation’s cleanest power plant I Generated eleciiclty While using less water and natural gas than olde: designs. 2 pleat age, however, the $300-milion plant closed indefintey. just 18 years into an expected $0-t0 40-year Mespan. The power it prodkices is no longer needed — in large part because clots regulators approved the construction of a plait just 40 miles away in Colusa thet opefed @ 3010, 720 ather large and efficient power plans in California also are facing closure decades ahead of Schedule. Like Sutter, there is litle need for their electricity. Cate A has 2 big — and growing —dlut of power, an investigation by ths Los Angeles Times has 27 state's power plants are on tack to be able to produce at least 21% more elacticy thor heeds by 2020, based on oficial estimates. And that doesn't even count the soaring prockchon oe electricity by rooftop solar panels that has added to the surplus Go.cate; the expense of new plants whose pover isnt needed — Colusa, for example, has Prater fat below capacty since opening — Caifonians are paying a higher premiumn to eviich on [Bt ptt on electric stoves. In recent years, the gap between wht Calfortans pay venie he restof the country has nearly doubled to about 5035 Anis Manciates into a staggering bl Although California uses 2.6% 1s electricty annually from the power Arid now than in 2008, residential and business customers togetrer pay $3.8 bilion mors he Bowe than they did then. The added cost to customers wil total many biflgre of dlars over te Fox he decedes, because regulators have approved higher rates for years to come so utites can Tecgup the expense of buiiding and mainta'ning the new plants, tansmn'ss'on lines and related equipment, even iftheir power isnt needed, inept deéision-making by state utlty lecade about a looming power alut, Caserta regulators have for years alowed power companies to go ona buldng sp Srbarding the potential elsctricty supply in the state, Indeed, even as electnaly Comend hos tatan Sig he olny Celtel’ nev plants have boosted ts capacty enough to power all of the homes lew credeeine ne Les Angelos — sx times over. Asdtonal plants aperoved by regulators wil begin producing more electricity in the next few years, er St8PS of regulators have been compounded by the seitinterest of Calforiautltes,. ragrega tslesiy guaranteed arate of rerum of about 10.5% for tre Gost of eaah ew plant regardless of need. Tris creates a mjor incentive to keep constuction going: Utes cay cake Feta ey Pulling new plants than by buying and reseliing readily avalable elsottelty from ‘existing plants run by competitors Suter was built in 2001 by Houston-based Calpine, which owns 81 power plans in 18 states {ndependents Ike Calpine don't have a captive audience of residential custonors lhe regulated Laites do. Instead, they set their electiaty under contractor into the elentaty marker ode ake money only If they can find customers for their power, . {Th CEO of Caisine says,] Independent plants are clo: utiity companies ever other power piants. Sena! Caiforia utes ean fect the Bl for these plants, the ammount they are alowed by Tegulators to charge ratepayers has increased to $40 bilion annually Fox. $33.5 bition aos Gata fom the US. Energy Information Administration, This has tacked on an addtora) aeo per Haren fesidentia! poser bil, aajusted for infiatior, ... Tre average cost of eect In 3S Gke ICaitornial is now 15.42 cents @ kigwatt hour versus “3.41 conte for sare n tro mat ot EUS. The cate in California, adjusted for ination, has Increased 12% sine 20 have deckned nearly 3% elsewhere in the coun’ early ... Because regulators favor gto Page 70 Elect Poner System, Markets and US Denatmant af: 1535 1536 1537 1538 1539 1540 1541 1542 1543 1544 1545 1546 (QUO // PRE-DECISIONAL DRAFT /! NOT FOR DISTRIBUTION June 26, 2017 “Gas Apocalypse’ Looms Amid Power Plant Construction Boom” Naureen Malik, Bloomberg News, May 23, 2017) “The glut of cheap natural a fram single, gigantic, shale basin that straddles the Northeast amid: Muni did ividviest has sparked a massive construction boom of power plants Dozens have been built ih the pasttwo years alone. =>. wed “There's jist oné problem: There isr'tnetrly enough electricity demand to support all the new qapnety, And as wholesale eleocty prices plunge, industry experts are anticipating 2 fie ste of eee nt plans in the region. Many, in fact, have already been sold along the PJM Interconnection LLC grid, the nation’s largest, enicompassing 13 states from Virginia to linois. “Everything in fossil fuals is for Sale,” said Ted Brandt, chief executive ‘officer at Marathon Capital LLC, & mergers-arid-acquistions adviser in Chicago. “People are bleeding.” . Ee Diawing from abundant, cheap and nearby natural gas inthe country’s most prolife shale fel ihe rew plants are adding a gigantic amount of power generation ~ more than 20 gigawatls ~ toa raglon that arguably has more than itneeds. The new gas-fred plants are also coming ofine Sts Fea marker trmol, buffeted by Obama administration efficiency policies that have helped tamp own demand and by the Trump administration's determination to keep old egal-fred plants going ‘Spot wholosale prices at PJM's benchmark Western hub stunned to an average of $25 70 pet mogawatt-hour last year, fang by more than half since 2008 as the shale boom took held, Many players are.exting the market Ms . : Calpine Corp, —the highy levetaged Houston-based independent power producer wih avmere than $4 billon market value and 17 plants in the PJM grid ~ 1s exploring a sale of its factities, The seman nas attracted intrest from piivate-equly frm, Bloomberg reported this month sd Fienefey Corp. and American Electric Povier Co. took more than a combined $41 bition in 2016 charges for plants, They're exling production to focus on buying and distributing ‘electricity. Dynegy Inc. has also been reported as a takeover target. sits a gas-drven abocalypse inthe power market, said Taby Shea, a New York-based analyst at Moody's Investors Service. 3.11 Not a consequence — hydropower retirements ‘The EIA reports that conventional hydroelectric generation accounts for 79.6 GW or 7% oF the nation’s Sperating electricity generating capacity and 6-7% of ts energy production e2ch year." Half of Us hhydro capacity is located in Washington, California and Oregon. About half the US. hydroelectric fleet is ver 50 years old since many large dams were built between the 1940s and 1960s; the averege hydroelectric facity has been operating for 64 years."* However, with routine maintenance and refurbishment of turbines and electrical equipment, the expected life ofa hydropower facity fs kely to be 100 years or more. Hydroelectric plant operation is constrained by factors such as whether the plant has 2 storage reservoir ois rancof river, the avallablity of streamflow (which [sn turn affected by seasonal rainfall and Snowp2ck, and the water usage requirements of Irrigation, navigation, recreation and fisheries Page 71 US Department of Energy 547 548, 5 ‘OU0 # PRE-CECISIONAL DRAFT # NOT FCR DI STRIGUTION June 28, 2017 protection needs. A hydro plant's operation may vary widely between seasons~t factor of conventional hydroelectric generators was 40 percent 2 average capacity Hydro facilities can help to balance the output from variable generating resources, which they do in CAISO through local resources and the Energy imbalance Market. Hydro provides primary frequency. response, especially in the Western interconnection, Hydro facilities are often black-start facilities, ‘which energize the grid after a biackout. Finally, hydro facilities may provide ramping and reactive Power support, The degree to which any given facility can provide these services depends on a range of engineering, environmental, and economic factors. Pumped storage projects in particular can assist in the integration of renewable resources into the electrical grid by pumping water into storage during high renewable output periods and generating electricity in the hours when the renewable resource is unavailable. FERC regulates over 2,600 non-federal hydropower projects at over 2,500 dams, half of the U.S, hydropower capacity. Many hydro facilities are licensed by FERC for up to 50-year terms. it takes an average of 5 to 8 years to relicense an existing hydro project, with atleast 3 years of pre-flling activity and then at least another 2 years after the application is filed. New {extension) licenses can be for terms Between 30 and 50 years. Most of the hydro plants that are not regulated by FERC are owned by federal for state agencies such es BPA and the Federal Bureau of Reclamation, A few plants have not sought relicensing due to concerns over the cost of meeting mandatory environmental requirements imposed by federal and state resource agencies. Capital upgrade requirements can include capacity upgrades (initiated by the plant owner rather than a regulator), dam safety upgrades, or environmental improvements. FERC reports that most hydro plants are relicensed There has been some concern over whether some of these aging hydro plants are retiring, E1A public reports indicate that 1,376 MMW (of the total 79.6 GW of U.S. hydroelectric capacity) retired bet-veen 2002 and 2017. The EIA looked into the question whether these hydro plants have actualy retired in recent years. The agency found that most of the plants recorded as retired had not ceased operation, but rather have been modified with measures such as turbine replacement, creating a misleading Classification. Only 52 real hydroelectric plants retired, representing 273 MW of generation capacity, in ‘he sense that they have been decommissioned or wholly removed from the host site.25 3.12 Premature retirements ~ what's premature? Many of the retired and cetiring plants are unable to provide the services that are needad to matatain rellability on a more fast-moving, high-variability bulk power system. Even if they could provide more ramping ard cycling services without high cost to the plant, most ofthese legacy plants cost more per MWh than other market sources. Wie some of the nuclear units now closing are doing so because of either state policy pressure (as with California's Diablo Canyon and New York's indian Point), and some have damages that are too Costly to fix, most are closing or threatening closure kecause nuclear power has become unable to against low-cost gas-fired generation and renewab! low electric demand. The case can jade that well-functioning nuclear plants waich have made app-opriate investments to upgrade and refresh thelr facilities, received license extensions, and complied with al! environmental regulations ~ bet are now: being forced to retire anyway because market prices are so low ~ face premature ‘etirement, It's clear that nuclear energy offers benefits, particularly as a zero-emission eiergy source; Page 72 Eiectic Power System, Mi 1589 1590 1591 1592 1593 1594 1595 1596 1597 1598 1599 1600 1601 1602 1603 1604 1605 1606 1607 1608 1609 1610 1611 1612 1613 1614 1615 1616 i617 1618 1619 1620 1621 1622 1623 1624 1625 1626 1627 1628 1629 1630 1631 (QUO 1! PRE-DECISIONAL DRAFT i! NOT FOR DISTRIBUTION June 26, 2017 putas gas prices stay lat, renewables grow and demand stays flat It isnot clear yet whether the Subsidies that some states are willing to pay to keep these plants in operation will be sufficient to support a total revenue stream that covers each plants full cost over time, “The early coal plant retirements were smaller, inefficient units that retired because they could not compete against lower-priced coal, natural gas and nuclear generation. More recently, many ‘older coal plants becarne uneconomic as market electric prices dectined; they were being dispatched less frequently and could not earn enough revenues to recover operating costs, much less recover sunk capital costs or the prospective capital and operating costs required to comply with increasing cruironmentel regulations. Many of these now-retired plants would have already have been retired or scheduled for retirement or upgrades before now had natural gas prices not sunk, to drop effective gas prices per MWh below coal prices. Only afew cases, fike the new, highly efficient Navelo plant, appear vomerits claim that the plantis being forced to retire prematurely, whl stil has value to contribute to the grid. ‘There is no good definition yet for the term, “premature retirement.” When used with respect {0 Tegacy power plants, the term “premature retirement” often means, ithad to retire before ‘the owner ca vocate was ready to retire it... Amore analytical consideration ofthe term would Involve looking ‘nto questions such as: © Has the plant already operated past its design lifetime (possibly with modifications and upgrades)? + Had the owner of the plant already achieved full rate recovery for its capital costs (particularly for ViEU-owned, ratebased plants)? «eWhat's the cost of keeping an old plant going? ifthe plant is out of the money relative to other energy sources, how much additional investment wil t take to make iteffcient and competitive? Will or can that investment be recovered? «s Vihat are the opportunity costs of keeping an uneconomic generator from retiring? How much Jess would an electric utility's energy portfolio cost if t no longer had to supportand buy enerey from an out-of-the-money generator?” © What are the societal costs and benefits of retirement v. non-retirement? Whatare the non- monetary costs of keeping a plant open (e-., onsite nuclear storage absent a federal nuclear vaste repository, or pollution affecting communities near the plant)? What are the non monetary benefits of Keeping it open (eg, local voltage support, inertia for grid-stablliing frequency response, or zero-emissions pollution? «ifyou think a legacy plant should be forced to stay open rather than retire, ist appropriate to borden its shareholders by trying to keep the plant open through multiple years of tosses? +) ifyou think a legacy plant should be subsidized to stay open rather than retire, wil the tnagnttude of the subsidy contemplated be sufficient to overcame the revenue shortfall for Tong? Wil the benefits realized from keeping the plant open outweigh the societal costs of the transfer payment from a large group of taxpayers or electric customers to the power plant owners? «e[ethere a more effective way to attain the benefits sought from preventing power plant retirement than actually paying to keep it open? ifthe goal sought is clean energy, [s there 2 Cheaper way to get it than nuclear generation? Ifthe goal isto protect grid inertia, are there ther ways to maintain or improve inertia? Ifthe goal is to protect community jobs, can state regulators and utlityexecitves wrestle with this question constantly through integrated Resource Placing processes and utility rate cases, and they are the ones initiating many recent legacy plant retirements Page 73 ot Markate and Reliability Study U.S. Department of Energy 632 633 634 635 536 537 538 139 40 ial 42 43 44 45 46 47 48 49 50 bt 2 3 ss OOM AY (OUO// PRE-DECISIONAL DRAFT i NOT FOR DISTRIBUTION june 26, 2017 community economic development, job training progremsand community development grants Provide an effective community transition as effectively and cost-effectively as keeping a power plant open? 3.13 Baseload retirements — looking forward and next steps The role of baseload resources continues to evolve, and the financial strains on baseload coal, nuclear and natural gas plants are real and signficart. ifcurzent retirement trends continue, many more coal and nuciear plants could retire over the coming decade. Its certain that more natural gos 2nd renewable generation capacity can come on-line quickly (although much less certain that we heve Sufficient transmission to serve neve remote generation). And itis probable that our grid managers have sufficient tools and resources to manage this change without a loss of grid reliably in most other industries, the problem of over-supply and brutally low prices would be solved by the market pendulum swinging from over-capacity to under-capacity as sustained low market-clearing brices érive all ofthe inefficient competitors out of business. In such a circumstance, scarcity would create Ngh prices, which would eventually lure more competitors back into the market, and the cycle ‘would continue, But this is electricity, not a commodity market, and our society cannot afford to risk grid reliability and affordability. Uniike commodity markets, electri utilities cannot react quickly —in part because their regulatory institutions don’t allow them to do so. Thus, as the Secretary directs, we should look for ways (o manage this difficult transition to assure that we protect grid reliability and cushion the ‘communities and customers affected by these changes, Several issues relating to baseload retirements deserve further research: * Whatis the value of retaining nuclear power plants to maintain some minimum leva of system inertia and emissions-free energy? * Nuclear plants in the French fleet routinely cycle, while U.S. nuclear plants don’t. Are there ‘modifications we can make to U.S. plants to make them more flexible? ‘Are there ways to lower the marginal operating costs of nuclear and coal plants without compromising sustainability and safety goals? 3.14 Regional Profiles ‘This section will contain nine regional profiles with information on retirements, diversity, an ‘more, with commentary on the trends and conditions partictlar to each region, The page that follows is en example of the information coming in each regional profile Page 74 EBleciic Power System, Markets and Rellability Study 118 Dangytment | i (QUO // PRE-DEGISIONAL DRAFT // NOT FOR DISTRIBUTION June 26, 2017 Mid-Atientic Regional Profile ETRE Retramentstnthe MidAtante Regin by Ownership an Fuel Type, 2902 rough 2047. i ‘i Gtenocaresne TS =| nan 2 » ena = = Mine Not weegee or a ee 1665 etcerniopetr » oR 1666 Jighilty Study US. Department of Energy OU0 // PRE-DECISIONAL DRAFT #/ NOT. FOR dune 26, 2017 eat yee teen czecty Watuitsctecpcy elie a ae p é y G < a m0 20s easy salen 2 é Mn we 2s as _ potent ng mm — tevin —_ Ta saat betnssy, | ame hcrs em al fs a nes la oe ie mn | ae ol ce Simones | Rees a “| = 3 i is] Ey q ~ | ie ke. 2am ee | age78 Electic Power System, Markets and Reliability Study 1668 1669 1670 1671 1672 1673 1674 1675 1676 1677 1678 1679 1680 1681 1682 1683 1684 1685 1686 1687 1688 1689 1690 1691 0UO // PRE-DECISIONAL DRAFT 1! NOT FOR DISTRIBUTION June 28, 207 4 Reliability and resiliency [UNDER CONSTRUCTION} Most of the common metres for grid reliability suggest that the grid is in good shape despite the metiement of many baseload power plants. Table 4.1 compares NERC-calculated reserve margins for Jott and 2036 forall of the NERC regians, and shows that in most cases, reserve margins are stil comfortably above each region's target margin. ‘Table 4.4. NERC region reserve margins for 2011 and 2016" FRCC 24.2% 24.3% MISO 23.1% 18.7% NPCC-New England 16.9% 20.4% INPCC-New York 33.1% 23.2% PJM 23.8% 28.9% SERC-E 25.8%: 18.9% SERC-N 29.3% 18.7% ‘SERC-SE 22.7% 32.6% ‘SPP 26.7% 27.2% TRE-ERCOT 16.9% 14.5% ‘WECC 39.7% 26.8% “These reserve margin estimates reflect 2016 conditions and forecasts of peak loads, generation, demand side and transmission-enabled imported resources avaliable at peak, and othet factors. In fevery region but ERCOT, reserve margins remain (as ofthe 2036 calculation) comfortably or Significantly higher than the levels which would raise a resource adequacy flag or signal potential relfobity problems. However, even ifthe reserve margin is within a couple points ofthe target, avng those recources does not guarantee reliability. Problems occur (hot weather, wind, drought, attacks), so the grids always at risk. Since power plant retirements continue — as do additions of new capacity from natural gas and renewable plants and energy efficiency and demand response — the 2016 figures Homot accurately deseribe 2017 conditions. We also don’t know conditions five years out although we an be confident that older, inefficient power plants will continue to retire. There i also @ risk that planned povser plants will not be built or willbe delayed. NERC and North America’s reliability cpordinators conduct on-going analyses to assess resource adequacy as system conditions change over time. NERC’s 2026 Long-Term Reliability Assessment and the 2017 State of Reliability Report offer some common, positive findings: «There were no severe grid events on the bulk power system in 2016. margins, which rel fess relevant as technolo 1 a set ofcapacity-besed region-specific f ‘and economics and the grawth of variable renewable " These ae Ni assumptions that are becoming toward a more energy-based system, laning res Page 77 on Martate and Refability Study USS. Department of Energy (U0! PRE-DECIS:ONAL DRAFT // NOT FOR DISTRIBUTION June 28, 2017 ° Significant causes of system problems, including protection system mis-operations, are declining and have been declining for four years. ® Frequency response has been improving actoss all four interconnections, but still needs attention to assure that frequency s stabilized during system disturbances, ‘+ Transmission outages arer’t getting any worse, * System resiliency to severe weather continues to improve. © The gas-lectric interface anc our growing dependence on natural ges with the potenti fora single point of extensive disruption remain a cause for concern 2 According to the North American Electric Reliability Corporation, current bulk power system reliability is an issue of management, In testimony to FERC on June 22, 2017, NERC CEO Gerry Cauley touched on both reliability and resiliency, commenting: Arecent DOE paper summarized the standards and regulations pertaining to pox {tis essentia! to continually identify and address emerging risks and their potential to Significantly impact BPS reliability, Risk Policy and regulatory developments occurring with respect to renewable energy development, storage, conservation, demand response, and micro-grids have the potential to significantly affect BPS reliability. ‘Market structures and developments also are impacting fuel supply, generation and Wransmission infrastructure planning, operations, and investment decisions. Given the ‘apidiy changing generation resource mix, and related new technologies, itis critical to understand impacts on essentiatreltability services (ERS) - specifically frequency response, voltage support, end ramping capability. Its also important to appreciate the Operating characteristics of new technology at the interface of the BPS, Substantial progress has been made in the last five years to improve coordination between natural gas pipelines, gas distribution companies, and electric industries, NERC {has] recommended incorporating fuel availability into national and regional assessments, Untit recently, natural gas interdepandency challenges were more often experienced Federal tax policy has had a significant effect on wind capacity development (rou oe, Undated GER Figure 3-4. Relationship between the Production Tex Cred avn Annual Wind Capacity Additions‘) a 8 PTC Extension prc 50 Expiration nd 40 lExtensions *o i 20 10 a ° o tte tS Hl PEEEEEL LEE POLS SIS gS oS (eras Anus] US Wind Capacity (GW) Cumulative US Wind Cepaity (GW) PTC Expiration arid y Cumulative Capacity (6W) sxe Yawn Annual Capacity Additions (GW) (== State energy policies affecting at least two-thirds ofthe nation’s electricity users have already madea tong:-term commitment to encourage renewable energy use, These state meacures include establishing fenewable portfolio standards (see Figure 5.x), establishing state subsidies (investment or Production {or credits, setting up a renewable energy credit program to make renewable energy more fungible, or setting up greenhouse gas programs (emissions targets, carbon pricing and carbon ered trading) that favor low-emissions renewable generation. [DSIRE 2017, CZES 2016]. Several states have policies to use public benefit funds for energy efficiency and renewable energy acquisitions, IC2Es, Public Benefit Page 94 Electric Power System, Markets and Reliabilty Study = 1934 1935 1936 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1954 1955 1956 i957 1958 i958 1960 1961 1962 1963 1964 1965 1966 1967 1968 (UG /! PRE-DECISIONAL DRAFT ff NOT FOR DISTRIBUTION June 28, 2017 Lower CF contribution 5.3 Integrating renewable energy to maintain reliability [UNDER CONSTRUCTION} LBNL, NERC IVGTF, ete Ability of VRES to provide ERS 5.4 Renewable energy growth will continue [UNDER CONSTRUCTION) Will removing renewables Subsidies and RPS make renewable generation go away (and presumably put less pressure on coat and nuclear plants)? No. «Current federal PIC for wind ends soon, faderai TCs for soiar PY and energy eficlency ended in eee rorty percent of current wind capacity does not receive PTC. [Rob Gramlich s Gastand price forecasts for domestic and global nat gas and renevebles production prices alt show continuing long-term downward trends ER: Desttning costs for wind and solar have been spurred by industry innovation 2% well asa variety of vaderal and state polices that accelerate deployment. Techrotogy improvements ia vind tarbines— including taller turbines, longer blades, and advanced turbine designs — Nave enabled substantiat cost rr juctiens for wind power. Power purchase agreements for wind have fallen from rates 28 as7 emts/kvh in 2008 to around 2 cents/kWh inclusive of the Production Tax Credit {P7C) in 2015, driven by wind deployment in excellant resource locations in the interior regions of the country. Regulatory policies accelerating wind development include the renewable eneray 12x credits et the Federal fevel end the renewable portfolio standards (RPSs) at the state level. atthe Federal level, the Investment Tax Credit (7¢) and PTC estabished under the Energy Polly Act of aaa are nwo key Federal tax incentives that have been instrumental n accelerating the construction of venewable electricity projects, (See Figure 5.x) Both of these incentives are deslaned for use by entities that pay Federal taxes and are subject to strict treatment under both the Internal Revenue Code and generaly accepted accounting princisles. These attributes have maior implications for who wilizes the peteatives and how projects are developed. The federa Protuction Tax Crect (PTC), enacted first in vy eirectly affected wind project deploymen:~- between 2000 and 2915. cumulative wind capacity Zraw from under 5 GW to over 60 GW, directly tracking the PTC expiration and extension schedule. Merete and Relability Study U.S. Department of Energy 1985 1986 1987 1988 1989 1990 1991 1992, 1993, 1994 1995 (QUO /! PRE-DECISIONAL DRAFT // NOT FOR DISTRIBUTION June 28, 2017 Figuro 6.2. State Renewable Energy Portfolio Standards*** —— Eat seggueraer Q@ENERGY Boece Renewable Portfolio Standard Policies | February 2017 a ry 29 States + Washington Us, Jegttories DC#9 terrltorieshavea tones ow by RenewablePortiolio. Standard (@ states and 1 tertories have {enenable port goes) [Brereton sntacd 2 een cred roar or ountmer sed renebin Fejrecralepertotoged ds encreate lore owes some electricity customers have establishes a strong preference for renewable energy. Inteasing mumbers of businesses have made commitments to use renewable energy, either through direct investments inits production (as by Walmart, Amazon and Google) or by buying renewable ener through utility or third-party retail electric provider green tariffs or through direct contacts with Fenewables producers. [World Resources Institute 5/2017, WRI2 5/17, Bloomberg New Enerey Finance 10/25/16, Corporate Eco Forum & WWF, 10/16] (See Figure 5.x) As of late 2026, corporate purchases of power purchase agreements directly with renewable energy producers have bee doubling every year since 2012, both to execute their susteinablity commitments and by the benefits of reducing and vrabiling energy costs with predictable, fat renewable energy purchases. Page 95 Elaetie Power System. Markets and Reliability Study U.S, Department of Energy (GUO i! PRE-DECISIONAL DRAFT /! NOT FOR DISTRIBUTION June 26, 2017 996 Figure 6.3. Corporate purchases of ranewabio enargy"™ Corporate Renewable Deals 2012 ~ 2017 1: Beane 9 * mecserers miouiperoadovense enscsscesucs At ihe residential level, x of customers are buying renewable energy through some sort of green tan 2nd customer surveys indicate a strong preference fr solar, wind and natural gas-fueled power, [SolerCity 3/15] And the number of customers instaling solar photovo'tacs is growing every year~ at the end of 2016, there were ~,C00 residential rooftop PY installations representing -AWW, with thes growth rate increasing by ~7s every year as PV prices drop. get these numbers and a good graphic from SEIA website] Polar photovoltaics prices continue to fall (Figure 5.4}, and therefore pose a continuing threat to the level of customer energy and peak usage avalable for supply-side generation to serve. The Solar Energy Industry Association reports that solar prices have dropped 67% since 2011, and that solar developers sayin Sining povier purchase agreements for utlty-scale plants at prices between $0.03 to $0.08 per KWA. [need someone to cali SEIA to find out whether thisis before o after IC) although PV. generation 'svarlable and subjact tothe avalibiity of sunshine, these prices are so lov: that most power Purchasers view PV at these rates asa valuable component of an electricity portfale, BUN OW 1 Page 96 Electric Power System, Markets and R ibility Study U.S. Decarimant of Enerm: 2012 2013 2014 2015 2016 2017 2018 2019 (0U0 /! PRE-DECISIONAL DRAFT // NOT FOR DISTRIBUTION June 26, 2017 ure 5.4, Falling Solar PV prices and rising installed capacity’? aso aso stalled solr Px Capt -D0) i i i | i -EEEEETES m0 ams solar PY tastalatons eserves LUutty-scale PV installed capacity Is distributed unevenly across the United States. As Figure 5.5 shows, Californie comprises over 40 percent of the installed utiity-scale PV capacity in the country, followed by North carolina, and the Southwest af the United States with Arizona Nevada, and Utah. Figure 6.6. Location of Utilty-Seale Solar Generating Units, 2016" Ss oN 2 a2, 3 , Le Total Capac () copes (0) : “Top 568 ‘ , : Ccotoie 7.727 Tomas 1.658 1 zon 1888 a0 2 Nota 1515 500 Not Conn 1002 Energy information Administration (A), "Monthly Upéateto Annual iectie Generator Repo March 2017, futps://wnwor ela gov/electricity/data/elaB60m/ Page 87 U.S Department of Energy 2020 2021 2022 1023 1024 025 026 027 028 029 330 331 x2 133 B4 35 36 37 (OU0 1! PRE-DECISIONAL DRAFT // NOT FOR DISTRISUTION dane 26, 2017 Utities ar also restructuring their purchase patterns and resource portfolios to acquire or ov much cote able energy. At the une 2027 Esison Electric Industry conference, two utility CEOs explained their moves to increase renewables: DTE EnerBy CEO Gerry Anderson sald his utility's move away from coal and toward flganes sources of power was guides largely by economics. When the Michiges utility began preparing fer the Clean Power Plan ~ an Obamavera emissions ule — ottioa found they “could deeply decarbonize DTE Energy and we could do ft in way that's affordable.” Thot Berspective is one shared by both the broader industry and PAIN, said (Pat Vincents Gollan [incoming E€l Chair and PAM Resources CEO}. “if you look at winere we are ath natural gas prices, cenevables prices, it's changed dramaticaly” she said "So those Trarke' force lead us to different corelusions because we do Want to produce power at the lowest possible cost." ‘ Freres 2016 projections for continued downward prices for new uty scele solar end wind capacity (use NREL instead?) Llustration— Utility Dive, “Updated: Tueson Electric Power signs solar ~ torage PPA for ‘less than 4.ScckWh”, 5/23/17 — competitive with peaker plant prices AEP, largest coal user in the East, sees cleaner energy demand Source: USA Today, interview with AEP CEO, 6/3/17 Net Akins, tie CEO of American Electic Power. one of the largest utities i the U S., says the prclorence fo: gas, renewables ard energy effitency, will only gro in reaps trom shareholders and customers for cleaner eneray, regardless of charokc hears nal energy poi With 84 mien customers in 1% states, AEP plans to spend $1.5 bition on renewabh energy fron 2017 Sroust 2046) and $13 bilion on transmission and distabution impravemene, including new ‘smart ‘echnolegies tat will make the grid more restiont and effciers, AZ? caye™ eaagontses coal making a comeback at AEP or other utes? No, | don hink so. You orld mace @ decision (9 build a coa! power piant at th’s point because ite & avily capta\intersive, deny oeehent 9 germ process and rek bull, And. of couse, you can add ouch ee d operator Me! gas that's efficient nd much less expensive and aay, torms of corcncton and operation PeZouplan to close any more coal-powered plants egon? | suspect well soe seme more canara the future, and as we progress towards that cleaner enarey economy ond creer the Pappa O'S Of ur customers and sharehoiders for us to mitigate risk joulicontestoseg toe fand | want o make sure there's an understanding that coa! wil remain @ part of the 6 & 2 lesser degree because of these cther resources that ara avalabie ty ue near that weren't avaliable to us just a few years ago. The availability of nex transmission to interconaect utiity-se: ‘ables to the grid has been ‘ed development of VRES in resource-rich regions. Starting with Texas" example in the early 2000s, many states identified rene wa! nergy development as an economic Fevelonment and job creation opportunlty, and encouraged grid planners ard transmta n utilities 40 buld new transmission to open up those areas. FERC fostered this effort with the addition of wind- Pago 98 Electric Power System, Markets and Reliabllty Study. ‘ 2043 2044 2045 2046 2047 2048 2049 2050 2051 (QUO // PRE-DECISIONAL DRAFT /I NOT FOR DISTRIBUTION June 26, 2017 specific provisions for the Open Access Transmission Tarif (cite) in 2003 and the end to panceked transmiscion rates in 200x. Several years later, FERC adopted Order 1000, requiring regional system planning ard coordination, which facilitated development of more ‘backbone transmission for increased trade and deliverability. Battery storage role Source: “Battery étorage: The next disruptive technology in the power sector.” David Frankel & Amy Wagner, McKinsey & Co ‘blog, June -, 2047: 7 ‘Storage prices are dropping much fésier than anyone expected, due to the routs imiarketfor * Storage Pr slectronics and demand for élettic veliles (EVs).Mejor players in Asia, Europe, ahd. © the Unitéd States are all scalifig Up fithium-ion manufacturing to serve EV and other power applications. No surprise, thien, that battery-pack costs are ‘down to less than $230 per kilowatt- ‘hour in 2016, compared with. almost $1,000 per ‘Kijowatt-hour ‘in 2010. McKinsey research has found that storage 1s already economical for many commercial ; aacreamors to reduce their peak consurnption levels, At today's Iguer prices, Storage. © starting to? play a broader role in energy markets, moving ‘from hiche uses Such as gfid balancing to broader ao recs replacing conventional power gerteralors for relabilly, {providing povier (ually 4 services, and supporting renewables integration. Further, given regulatory changes to pare biack incentives for Solar in many matkets; the idea of Coming solar with storage to enable households to make and consume their own pin oh Gemnand, Instead of exporting power to the gid, is beginning to be an atractive ‘opportunity for demand gometmes referted to as patial grid defection) We believe these markets Wi are expand, creating a signfcant challenge fot ules faced with fat or deci an) conte grand Eventvaly, corning solar with storege and a small eleckcal eneror {crown 2s full gnd defection) wi‘ make economic sense—tn a matter of Years, not decades, for! ‘some customers in high-cost markets. Page 92 teabate-and Dofatitity Sh U.S. Department of Energy 052 053 os4, 955 256 057 158 59 160 ‘i 62 63 64 65 56 37 58 59 0 " 2 3 4 i 6 7 8 > ) i (OUO 1/ PRE-DECISIONAL DRAFT | NOT FOR DISTRIBUTION June 28,2017 5.5 Reliability and resilience {UNDER CONSTRUCTION] Som QER: ‘The reliability of the electricity system underpins virtually every sector ofthe modern US. economy, Reliability of the grid is a growing and essential component of national security, standard definitions of ‘elbilty have focused on the frequency, duration, and extent of power outages, With the adver ce more two-way flows of information and electricity, communication across the entire system from generation t end use, controllable loads, more variable generation, and new technologies such as Storabe and advanced meters, reliability needs are changing, and reliability definitions and metrics must evolve accordingly. Increased computing power and more sophisticated telecommunication and metering equipment has pushed the time scale for balancing electric systems to shift from dally to hourly, minute to minute, second to second, or milisecond to milisecond at the cistribution end ofthe supply chain with events at the distribution level potentially affecting system frequency and transmission conditions The Gemands of the modern electricity system have required, and will increasingly regu, innewation in fechnologies (eg, inverters), markets (e.g, capacity markets) and system operations (eg, balancing authorities) Electricity outages disproportinately stem from disruptions on the distribution system (over 90 percent of electric power interruptions), both in terms of the duration and frequency of outages; this is largely Gue to weather-related events. Damage to the transmission system, while Infrequent can result ‘more ‘widespread major power outages that affect large numbers of customers with significant economre consequences. {he leading cause of power outages in the United States is extreme weather, including heat waves, biizzards, thunderstorms, and hurricanes. Events with severe consequences ore becoming more frequent and intense, due to climate change, and hava been the principal contributors terme observed nereass in the frequency and duration of power outages in the United States, Grid owners and operators are required to manage risks from a brood and growing cange of threats, These threats can impact almost any part of the grid (eg. physical attacks), but seme vary by Seographic location and time of year. Near-term and long-term risk management is increasingly critical to the ongoing reliability of the electricity system, Demand response (OR) technologies and programs offer a particularly flexbie grid resource that i cabable of improving system reliabity, reducing the need for capital investments to meee peak demand, reducing electricity market prices, and improving the integration of variable renewable energy rep Uices. DR can be used for load reduction, load shaping, and management of consumption to hi ip rif operators mitigate the impact of variable and distributed generation on the TRO systema, Maintaining power system reliability involves working to coordinate assets and ideas at multiple time scales, from tong-term planning over decades down to operations occurring in real tne at fractions of a secon, Copacity markets, day-ahead scheduling, and hour-shead dispatch are well-understood tools for managing supply variabilty (mid-righi als). Beyond capacity contracts traditional transmission ond Gisteibution (F@&D) system long-term planning methods work to map and price Investment requirements *o ensure grid reliability (right end of axis). However, the widespread integration of variable energy Page 100 Electie Power Sy 1. Markets and Reliabilty Study 11 Thomectnene 2094 2095 2096 2097 2098 2099 2100 2101 2102 2103 2104 2105 2106 2107 2108 2109 2110 iL 2112 2113 2114 2115 2116 27 (QUO 1/ PRE-DECISIONAL DRAFT NOT FOR DISTRIBUTION June 26,2017 resources significantly expands the time dimensions in which grid operators must function, ranging from hourly to minute to second intervals (mid-left axis). And, in @ world of sub-second decision making (Le, Inertia! response, one alternating current (AC) cycle, and protective relay operations], dispatch a rjoctiveness wil require the integration of automated grid management (left end of axis). Figure 5.6, System Reliability Depends on Managing Multiple Event Speeds" Note, BCS to remave Planning for Carbon Goals onesc — Freauers Service Restoration (rom Ostages) Variable Energy Protective Rel Resource HourAhead | Day-Ahead Capadty planning for Operations Scheduling Markets Carbon Goals Planning | 10° seconds millisecond ay year dead Supply variability fs an important part of system operations, where balancing authorities must ensure that eke of unexpected loss or variability of supplies are hedged by having some Powe! plants immediately available (spinning reserves) and other plants able to supply power with short-term notifications of need (non-spinning reserves). 5.6 High levels of wind penetration can be integrated into the grid without harming reliability UNDER CONSTRUCTION] ‘Wing integration costs don’t always go higher Within ERCOT, as wind generating capacity grew from xx ro xx MW and the share of energy rose from vox to yi per year, they have found that the amount of fast-acting frequency regulation reserve has ren eather than grown, as shown in Figure 5.7. This sn part because ERCOT no longer has to provide Contingency reserves to replace the sudden loss of the interconnection’ largest generator (a nuclear power plant). Within ERCOT, contingency reserves cost about $0. "76/monthly electric billin the 2007 to pott period; after the ISO revised its contingency reserves to reflect the higher renewables penetration, the increased cost was only $0.04 ccents/bill more. Page 101 atintiliny Study U.S. Department of Energy So QUO /) PRE-DECISIONAL DRAFT // NOT FOR DISTRIBUTION June 26, 2017 Figure §.7. Daily average regulation up requirement has fallen as wind capacity grows in ERCOT' : z 12000 z = 900 & E pI tom § 2 2 B 800 +000 gj 3 5 091 9000 # Z 7004 — Regulation-Up Requirement a & — Total ving Capaciy insiates | gqqg 2 q B 600 rome 2 6000 3 S| ome & ao Léoao * 20728082000 2 a8 ate Western Wind and Solar Integration Study Phase 3 * “With good system planning, sound engineering practices, and comme! tect ly available ologies, the Western Interconnection can withstand the crucial first minute after severe arid disturbances with high penetrations of wind and solar on the grid.” * “Adequate frequency response inthe Western Interconnection was maintained for the corditions studied.” * "Selected nontraditional frequency-responstve controls on wind and soler powerplants and energy storage were examined and could Improve frequency response.” * “The transient stability of the system isnot fundamentally changed by high wind and solar er rctation, This does not mean that the system behaves identically. There is, however, nothing to indicate that the system dynamics have changed so fundamentally that radically diferent means to ensure stability are required.” NREL Rote of Wind Powes in Primary Frequency Response (2036) “The ability of wind power plants to provide PFR i synthetic system.” imary Frequency respense]—and a combination of rial response and PFR—-significantly improved the frequency response performance ofthe Powering into the Future: Renewables and Grid Relfablty (MU Bradley, 2017} “Renewable generators also can provide frequency contral, Many new wind and solar fatities have components alied ‘active power controls’ which alow their output to be increased cr decreases to tain reliabitity. These controls allow rer response that Is simiiar to that of the autom: Page 102, Eiectie Power System, Mari 'watie generators to provice primary frequency ic governors on con tional power piants, Using these cd Reliablty Stuy 2142 2143 2144 2145 2146 2147 2148 2149 2150 215L 2152 2153 2154 2155 2156 2157 2158 2159 2160 2161 2162 2163 (0U0 /I PRE-DECISIONAL DRAFT /! NOT FOR DISTRIBUTION June 26, 2017 components, they can quickly and automatically adjust their output to help stabilize eié frequency.” smthese technologies can respond to automatic generation contro signals every few seconds to rapidly increase or decrease output to help balance the system. They con also follow detailed, five-minute cchedules that are shared with the central grid operator ahead of time, meaning that the dispatcher can count on acertain level of output on a short-term basis.” powering into the Future: Renewables and Grid Reliability (Wi Bradley, 2017) syaiso needed almost no additional fast-acting power reserves to back up 20,000-plus MW of wind power on the system.” ERCOT needs only about 50 MW on average of fast-acting stand-by reserves to reliably integrate 10,000 MW of wind into the grid.” pia found that a 30 percent regional variable renewable penetration level adding over 100,000 mw sf renewalble power-—requires no additions in operating reserves, and only 2,500 MW (ar 2.5 percent of enewable capacity) of quick-ramping regulation generators such as flexible natural gas generation.” Large geographic size also helps to improve the collective capacity value of renewable generators (and reduces the need for other balancing services).” Update to Analysis of Wind Generation Impact on ERCOT Ancilary Services Requirements (2013) -Aithough addtional regulation is necessary with increasing wind penetration, the main driver ts stil load variance rather than wind variance.” 5.7 Reliability and resiliency — looking forward and next steps [UNDER CONSTRUCTION] US. Departmentof Energy 2164 2165 2166 2167 168 1169 170 171 172 173 74 (OU 11 PRE-DECISIONAL DRAFT NOT FOR DISTRIBUTION une 26,2017 6 Power markets [UNDER CONSTRUCTION] 6.1 Wholesale Electricity Markets This section has two subsections: 4) A review of the factors and events that have shaped the evolution of wholesale electricity markets; and 2). Aciscussion of the maj issues in these markets today. 6.2 Evolution of U.S. Wholesale Electricity Markets {nthe latter 1970s and ‘80s, the US. electricity Industry was in a baseload capacity building boom. However, high inflation became particulary troublesome for utilties’ high capital cost projects. Many ‘arge utilities were building nuclear plants, and all to frequently these projects became subject to ames ath an delays anc cost overruns. Similar dificulties, although at a smaller scale, curred at times with the construction of large new coal-fired plants. Many state offcis and eventually a malority ofthe U.S. Congress, concluded that if nev: generation capacity was neaded in agiven ares, non-uiility companies might well be able to provide that capacity at lower coe than Investor-owned Utilities, to the benefit of electricity consumers, in 1078, Congress passed the Public Usities Regulatory Policies Act (PURPA), which was an effort to Caro the electricity industry's reliance on (at that time) high-cost natural gas and oll? PURPA provided for “increased conservation of electric energy, increased efficiency in the use of faclities and resources by electric tities, and equitable retal rates for electric consumers,” as well asthe development of new generation resources~—specificlly renewable energy and cogeneration facil Te Energy Policy Act of 1952 included provisions authorizing FERC to aporove “exempt wholesale generators allowing any company, using any fuel and any generation technology, to go into the generation business and sell electricity at competitive prices, The act also gave FAC the authority Under section 722 to order transmission owners to provide transmission sevice as requived by transmission customers. CIO E 107 the Power lant andingusta ue! use Act prohibited") the use of eater! ya roe powerplant and (2 lary energy source.” Sou PPFUR Wes 87, which sat the stage fr a dramatic increase in ne se of satura gus orn industrial wwwrn.eiagoviel gasinatural gasianclysls publiations?namaluslog/rensal Page 104 Electric Power Sysiom, Markets and Reliabilty Study ‘ 2193 2194 2195 2196 2197 2198 2199 2200 201 2202 2203 2204 2205 2206 2207 2208 2209 2210 2211 2212 2213 2214 2215 2216 2217 2218 2219 2220 2221 2222 2223 (QUO // PRE-DECISIONAL DRAFT !/ NOT FOR DISTRIBUTION June 26,2017 In 1996, FERC used this transmission authority to mandate that public utilities provide open access ‘transmission to the interstate transmission grid, through its landmark Order No. 888. FERC required public utlities under its jurisdiction to make non-discriminatory transmission service available to all parties, meaning charging all parties the same rate that the public utility would charge itself for the use Pits transmission facilities. This action by FERC greatly assisted the development of competition among wholesale power producers because it meant’ that utilities would find it difficult to limit access to thelr transmission facilities as a means of protecting their generation assets from competitors. Electriity restructuring took holdin both the wholesale and retasecors.t “allowed both non-utility generators to sel electricity to utlties~ displacing the utlity generation function = ‘and/or “retall Service providers” to buy electricity from generator’ and sell to end-use customers“ displacing the ttilty procurement and billing functions." Between 1998 and 2006, 23 states sought to bolster competition among bulk power supplies by requiring their vertically integrated investor-owned electric ntlities to divest some or all of thelr generating assets. Divestiture was pursued most aggressively by the states with high retail electricity prices (most of New England, New York, the ‘Atlantic states, are California) Generating units that had been operating under costof-service regulation welt sold to independent power producers (IPPs) or transferred to non-regulated investor-owned utility affiiates. However, the wave of restructuring did not sweep over the entire nation. in large areas—particularly the Southeastern states and the West apart from California—the industry stil consists of vertically- integrated utilties under castof service regulation by state commissions oF local regulatory bodies.* ths a rasut, two broad organizational structures exist atthe wholesale level in the US; today: «Traditional or bilateral markets ~ These feature regional bilateral trading, primary between vrrtcaly integrated utilities and utilities with independent generators. The Southeaster verrns and the non California West do not Fave organized markets and so trade principally through bilateral contracts, However, many utilities in Western states already participate in— tor plan to join—the Energy Imbalance Market (EIN) set up by the California Independent System Operator (CAISO).c€126 Within the organized market areas, 2 large amount of the chesgy traded moves under bilateral contracts and self-supply, with these arrangements often benchmarked to organized market prices. And «Organized or centralized markets These feature regional and multlateral bid-based optimization. Organized markets run by the independent system operators ({50s) and regional aesnamission organizations (RTOs) are located in New England, New York, the Mid-Atantic se The Federal Power Act defines publicly’ at [uty dafinton (sonRCOT ower é810Us ard coops wine Frey for eample, nor 2RCOT Ivertorowned ute are "pubic ties” under the FPA Someone confusingly, publicly: Set a lfessich as munis owned ets, as cle public power, re rt ‘pubic utiles” ‘under the FPA. sa pecause the bulk power systems the focus ofthis report we do sot adress eta restructuring in deta sein mostot these states, there was tronginterestin waking both wholesale and real elestrty markets compat M8 ce Pobrng dow high tall electry rate, and 18 tates embeced tall competition some dea. Calfornia tried it eae ee torad aftr eck of adequate lfastucture combined with major laws ther marke estan eo blackouts and ‘market abuse. 4 there also exist many pully owned ues the majority of which rent verily integrated, woe ore ‘cooperatively owned utes aso exist, none of which aa vertlealy integrated. Both Nees 9 regulated by local elected or ceed governing boards though a tate public bly commision may have some uteietonn some ss wether ills are not full members of CABO but can paripat In and beef from ts eam wrelesis energy market carrera lcee Notably, te EIM allows for greater ety n accommodating ih levels of renewable enerky tegration. Page 105 U.S, Department of Energy 2224 2225 2226 1227 1 PRE-DECISIONAL DRAFT i NOT FOR DISTRIBUTION June 25,2017 States, parts of the Midwest and Southwest, California, and Texas, In these areas (Figure 6.1), the RTOs and ISOs perform short-term unit commitment and economic dispatch based on bids from suppliers and load-serving entities." Figure 6.1. The seven RTOs or ISOs in the U.S," Shectrum of Wholesale Power Marke i's useful to look at the spectrum of wholesale power markets through the perspective o e each ‘market region stands along the path from fully vertically integrated electric utiities with minimal fparket organization to fully restructured, using an extensive centralized wholesale marker he pricing and dispatch. (Figure 6.2) Other issues include the degree of centralized planning and mechanisms for [eoutee adequacy, as welt as the degree of retalicormpetition in a market. The two attributes of ciegree of restructuring and types of resource adequacy constructs used form a usefat framewor’ for analyzing market differences and underscore the diversity of approaches to electricity policy amongst the states. Sold up text in graphic, labet wnat middie horizontal section's about, Rep! “Hybrid” with, both vertically integrated utilities and centralized market, Sixgraphic so ituses marker region terms we don't have to explain Why wouls WECC Fed & WECC other be special cases? Move them under traditional witha * for Not state-regulated, or treats, a significant amouct of energy cance stabtity hedging, etc, would be nice to have 3nd we com's have @ good figure an this. ts that crue? $9 ‘hase regions is unger here ofthe Page 103 Electic Powst System Markets and Retabity Stuy eonbice 2243 2244 2245 2246 2247 2248 2249 2250 2251 2252 2253 2254 2255 2256 2257 2258 2259 2260 2261 2262 2263 2264 2265 2266 2267 2268 2269 2270 2271 2272 (QUOI PRE-DECISIONAL, DRAFT // NOT FOR DISTRIBUTION June 26,207 Figure 6.2. States and regions along the spectrum from traditional to fully restructured electric markets fos Cora eo eer re canzly Catal, figezes | orgies coer mete | erargy mack Une megacty rats nats ‘Aska race Hava traditional” markets such as the Southeast are dominated by vertically integrated IOUs that operate cinder a regulated costof service model, serving customers ina defined ‘franchise area. Public power sind rural cooperative utilities also have a significant presence in some regions, and their utility asset a vnerchip models can vary ftom vertically integrated to distribution-only. IPPs operate within these ronions, but the majority of power is produced and delivered Py ‘the integrated utilities. power purchases between these various entities are generally limited to bilateral trades. These can be reade te take advantage of price discrepancies or cover shortfalls in ‘supply. These bilateral transactions represent a small portion of the total generation in traditional markets and are typically in the formn of Jong-term power purchase agreements rather than short-term trades. For example, in 2025 FERC cathnated that short-term trades called spot transactions inthe ‘Southeast region accounted for less than one percent of overall supply." in centrally organized wholesale energy markets, generators bid on @ day-ahead basis the price they are wiling to produce power at, based on an assessment oftheir operating costs, fuel costs and return expectations. The market and system operator (the local RTO oF 150) then pools these bids into a single supply curve or bid stack and determines a clearing price that matches supply to predicted demand, ae congestion forecasts forthe day or hour ahead. This velds a set of ‘market-clearing prices for each trnur and location or geographic/electrical zone in the region and market time horizon. Each generator tac id ator below that market clearing price in that time period wil be paid that price for generation vrsivered in that period, even if their bid prices were significantly ower than the market price. Most of the markets maintain price caps that limit what cen be charged in any particular hour, to stem potential ‘market manipulation. in ERCOTand New York, which moved to full etal and wholesale competition, state restructuring policy required the utilities to sell their power generation assets ‘and keep only the “wires” component path business, all non-nuclear generation assets were sold to IPPs which Manske and build new generation based on expected market earnings. The IPP ‘owners seek to sell power under bilateral aerate 10 utfties or other off-takers, such as industrial users, oF F contracts aren't available, sell their power into dally and day-ahead wholesale energy markets. Page 107 wile ULS. Department of Energy OUO I! PRE-DECISIONAL ORAFT / NOT FOR DISTRIBUTION June 26, 2017 273 274 275 276 7 78 Resource adequacy is “the ablity ofthe electric system to supply the aggregate electrical demand and 170 energy requirements of the end-use customers at all times, taking into eecene scheduled and i 80 reasonably expected unscheduled outages of system elements,” Planning for adequate investment in 81 generation and transmission capacity to ensure resource ‘adequacy isa critical component of ensuring a 82 reliable electricity system, 83 Traditional, vertically integrated regions and some ut 84 resource planning process to plan for necessary transmission and capacity investments (both for new 85 generation and demand response). Some centrally organized markets here implemented capacity 36 markets as a mechanism for ensuring future resource adequacy. Ia these markets, the system operator 37 conducts an auction process, and retall service providers procure resources (y luding generation, 38 energy efficiency, demand response, and transmission-enabled inporte resources} to meet the 39° electricity demands of their customers. These markets can be mandatory (PJM Interconnection and ISO "0 New England); voluntary, where utilities can choose to operate under an integrated resource planning V5 Bfocess (Midcontinent ISO); or voluntary backstopped by a mandatory procece (New York 180), Other ‘2 regions (California ISO and the Southusest Power Pool) have ‘capacity obligations where market trough fedulte utlities to procure necessary generation reserves, ether th-ough ownership or trough contracts with thie-party providers. California and other states have intervened ta require utilities to build or subsidize specific power plants outside the compet capacity market processes, Using the rationale thatthe intervention is necessary to assure resource adequacy ausw FACOT uses an energy-only market and does not have formal requirements or markets for capacity. in ths approach, market scarcity pricing (relatively high energy prices during high demand periods reflecting the lack of ample additional resources), provides necessary financial incentives for investment in generation capacity. Allof the RTOs and 150s perform five basic functions#: 1) Real-time management (dispatch for secure operation) ofthe transmission system within its footprint; 2), Ensuring non-discriminatory access to the area's transmission system by wholesale buyers and sellars; 3) Dispatch of generation assets in Its footprint to keep supply and demand in balance, and to Gperate the generation fleet as economically as possibie white observing security constraints; 4), Managing regional planning to mest future requirements for gene capacity; and ion and transmission 4, and Pitv’s Svolving Resox 2 Mand System Reilly, March 30,2017, . 6. Page 103 Electric Power System, Markets and Rafiahtiiy Stays 2311 2312 2313 2314 2315 2316 2317 2318 2319 2320 2321 2322 2323 2324 2325 2326 2327 2328 2329 2330 2331 2332 2333 2334 2335 2336 2337 2338 2339 2340 2341 2342 2343 2344 2345 2346 (0U0 1! PRE-DECISIONAL DRAFT !/ NOT FOR DISTRIBUTION June 26, 2017 5) Coordinating provision of essential relabity services (ERSS) such as frequency response, voltage control, ramp capabilites, etc. ‘lof the market operators operate two markets for bulk electric energy to ends ‘that enough generation capacity willbe on ine to meet the energy demand expected over the next 24 hours. The egy anead” market determines, on the bass of resource bids, which gencrosir™ ‘will operate during each hour of the following day and at what level of output. In the ‘“hour-ahead” or “real-time” market, the RTO makes any needed adjustments to resources’ operating schedules to accommodate unexpected changes in demand or the avalabilty of indvidual generation units!” Wholesale electricity prices in the RTO areas are “locational marginal prices” (LPs) which reflect the tue of electric energy at different locations, taking into account the shifting patter of load, generation supply, and the physical limits of the transmission system {transmission “congestion”)* The eas are recalculated every five minutes to reflect changing market conditions. Generators and other resources (such as storage, demand response and out-of-egion imports) are ‘selected in merit order ‘farting with the least-cost resource and then adding the next lowest-costrespure until supply meets mand. All generators designated torun ata given time are paid the uniform market-clearing price— the LM? at that moment—regardiess of their respective bids, which often vary widely among different technology types as shown in Figure YY. Figure YY: Representative supply stack and merit order with clearing price “LMP* [add graph.] TOs and ISOs consistently deliver efficlency benefits and savings that far exceed their costs! For example, in 2015, MISO estimated its benefits at between $2.4 and $3.3 bition, compared to $267 milion in costs.27. Such estimates likely understate benefits cone tcrably, as they do not fully account for ovtages and extreme system conditions. 28 Strong net benefits accrue in MISO 2s wells CAISO and SPP, despite belng comprised predominantly of regulated utlities. Regulated utilities generally poss their organized rrarket revenues and operating costs through to ratepayers, and their resource rracctmonts must be approved by state regulators to receive enst recovery, This vores the incentive to follow market signals, closely manage risk and costs, and 0 innovate. favorable value propositions have helped forge RTO/ISO expansion, as the trend of niles joining RTO/ISOs has increased since the 2000s. In 2023, MISO integrated ttlties spanning most of Arkansas, Louisiana, Mississippi and some of Texas. caiso expanded outside of California in 2014, while SPP has also grovin recently. A recent stuay of CAISO's fll transformation nto 2 multstate entity estimates the benefits to a avfamnia ratepayers alone will be $55 milion. year in 2020, escalating to S110 $45 billion per year by 2030. Po ttosi ' See httos/ | Hartman: ht: Page 109 U.S, Department of Eneroy DECISIONAL DRa TH NOT FOR DISTRIBUTION June 28, 267 {Further highlight benefits to consumers generally.) fenues an owner can receive, through administratively- ities to earn an authorized return on investment. However, COS regulation also provides high assurance thatthe variable and long-run fined costs ce a generating unit ‘willbe recovered (unless the utility was found to have acted imprudentty, in which case associated costs may be disallowed) The shift to competitive wholesate markets created major risks for the affected generation owners, The Sew financial arrangements put in place as part ofthe divestiture of nuclear ene other generating unit sometimes provided special cost recovery mechanisms for a limited period of time, particularly for units Considered “stranded assets” that would have diffivity succeeding ina Competitive market. Many of the newly independent generating units, including coal and nuclear Plants, were highly profitable for a time in the new competitive markets (particularly those which were receiving a stranded cost recovery subsidy for their capital costs, which meant they couid succeed by. recovering only marginal costs). Eetveen 2005 and 2008, variable renewable generation had barely begun ta Penetrate the bulk power ster? and national natural ges prices were over $8 per MMBtu, helping to drive Lubna high tevels and obscuring the fact that ISO/RTO markets were not designed to guarantee cast recovery. issing Money,” Reliability Standards, and Caaa: ‘Market Formation Inthe 0s, the inability of many generation owners to recover sufficient fixed costs through the RTOs’ energy-only markets became knovin asthe missing money problem.” One of the earliest uses of {ne term “missing money” in the power generation business, primerly in the lerchant-owned sector, \was in 2005," when It became clear that prices to merchant generetors consistently fel below the average total cost of power supply, ‘Missing money is stif'a problem. Merchant piant owners have: ~ sed the term for more than a decade to refer to the fact that wholesale elect iy fnarkets have price caps (mostly betiv2en $1,000 and $10,000 per Mh) thet constrain how much seller ean make wien supply i tight, Without that cextrel income, sent aioFs afgue, it may not be profitable to build new capacity, extend the life of existing capacity, that is needed to meet demand. ‘More recently, the [label] of missing money has been expanded to include the Price impacts of subsidized or (state renewable pnrtfciio standard] mandated renewables genération. In California, New York and many other states, wind and solar are pus Gown wholesale prices and making cortinued operation of some nuclear ana fossil generation unprofitable.™” 8 fuel ‘Wilare W. Hogan, Harvard Unwersity, 2 2605, hes: fAun hs > Hakevich, tay 2618, mae Biot Borenstein, “ectricy tackets and Missing Money’, Post, The Enorgy Collecive, Ape’ 4, 2017 ‘itovivwa theenergycollective.comvseverindcrensteini240167 lel years Pege 110 ‘cttic Power System, Marcets snd Reliabilty Study 2383 2384 2385 2386 2387 2388 2389 2390 2391 2392 2393 2394 2395 2396 2397 2398 2399 2400 2401 2402 2403 2404 2405 2406 2407 2408 2409 2410 2411 2412 2413 2414 (QUO / PRE-DECISIONAL DRAFT // NOT FOR DISTRIBUTION June 26, 2017 ue to the “missing money” issue, merchant generation owners, particularly in the eastern centrally: organized markets, s2w the problemas a threat tothe economic viability of their investments in existing generating capacity as well asa barier tothe financing of nev? ‘generation. The RTO/ISOs were cepcemed about resource adequacy and the need to ensure that generators would invest in upgrades of tpisting plants or in new plants when needed to assure reliability. They acted on these concerns to reste pseudo-markets for electric capacity, using a forecast of future ‘demand that assumes customers’ willingness to pay for electri reliability in a way that closely parallels 2 vertically integrated utility world’s assumed reliability reserve requirement. Capacity markets operate in parallel with energy-only markets, The basic premise of a capacity market ihat an owner of generating capacity or a demand-side resource shoulé be compensated for making 2 aamitmnent that ft wl build or malntain a elven amount of capacity avaiable ne specific location for a Specified future period asa source of reliable wholesale electichy, regardless of the extent to which that capacity s tapped to serve the energy-only market, Four RTO/ISOs operate capacity markets," Using annual auctions in which bidders compete by submitting offers {in terms of $/MWh) at which they are prepared to make capacity commitments, PIM and ISO-NEhold ‘mandatory annual capacity auctions ie free. year advance commitments; NYISO (mandatory in some zones) and ‘iso's hold annual voluntary capacity auctions for one-year commitments. Capacity markets are very controversial. Some analysts assert thatthe missing money problem results largely from the unwillingness of regulators and the RTO managers to allow real-time energy prices to are their natura levels in periods when generation capacity isin short supply, because regulators rs want to expose retail customers to the rsk of extreme price spikes. Searcy pr advocates tefieve that without scerity pricing, the energy market is inefficient and that inefficiency creates the eed for the capacity market.* Scarcity pricing is needed, in this view, to allow owners of existing Capacity to recover thelr fixed costs, and to provide signals to resoure® providers when it would be aaevomicaly rational to invest in additional capacity. ERCOT, for example, ‘considered but rejected coo vnan ofa capacity market; instead, its real-time energy prices are allowed rise to limit of '$6,000/MWh, as compared to price cepsin PIM and ISO-NE of '$2,000/MWh. Crities argue that formal Capacity markets are an inadequate substitute for scarcity pri ig because they are administrative caeetricte with predetermined capacity demand curves and short time horizons “The PJM and iSO-NE capacity markets have also been attacked by state regulators ‘and consumer groups ps expensive handouts to existing generation owners ~ thats, they have not led to the construction of mew capacity in areas that are generation-short,nor to desired performance in times of system stress. mERCOT has recenlly modified ts energy prices to include areal fe reserve pie! eA, linked to an oer ee ci-dotermined “operating reserve demand curve (ORDC). Arguably. Wie ‘amounts to building an Sepik capacty component into ts energy marke, making ERCOT's resource ‘adequacy approach similar to that of PJM and ISO-NE. ceyiliam WW. Hogan, Harverd University, oral remarks, , 454, ransorbt of FERC Technical Conference to Discuss seiitery es ard Wholesale Markets Operated by iSO New Enalan inc, New Yor Independent System Operator, sea ra ald ierconnaction, LLC. (Oacket No. ADT7-11-000) Washingt. DG, May 1-2, 2017), tps www. ee OalendarPies/20170530122085- Transcript 3k20May%202, 4202017 at Page 111 U.S. Department of Energy Naw 7 8 > ) ouou PRES ECISIONAL DRAFT JINOT FOR DISTRIBUTION June 26, 2017 And these capacity markets do not incorporate necessary non-market Considerations that matter to state policy-makers,¥% » shift towards more merchant generation and reliance solely on market revenues may indicate J movement avray from planning and policy decisions that take into account critical [factors such as fuel diversity, environmental policies, and econamic Gevelopment{emphasis added]. This is not a desirable trend nor is itan indicator of successful markets.” [he variety of problems that arose during the “polar vortex” severe cold-westher events in January 2014 (e6. frozen coal pites, equipment malfunctions, and the unavailability of significant amounts of Generation capzcty due to gas-deliverycurtalments)® caused PIM and ISO.NE to amrony their capacity morkets by establishing strong penalties for non-performance by generators that are receiving capacity payments. Capacity markets asa market method for achieving resource adequacy remain Works in progress. After several years of experience, merchant and now VIEU generators are not ea, Consinus to debate new ideas for both improving the functionality of the markets vc producing additional revenues for the generation owners. Note, for example, the revent attention given to using {he capacity markets as mechanisms for procuring and ensuring the delivery of “essential reliability Sarueos’ (ERS), Such a the provision of voltage suppor, frequency response, and ramp capability.” ‘ADD A DIRECT QUOTE TO BACK THIS LAST STATEMENT UP 6.3 Challenges in Today’s Electricity Markets [UNDER CONSTRUCTION] In more recent years, the economic chalienges faced by many existing generation units ~ especially in Heaauated areas and toa lesser extent in cost-oFservice areas have become much more apparent forseveral reasons, including: 4} Lower demand than expected. Electricity demand growth has stalled due tot economic Govunturn, increased efficiency in household and business use, as wel! ae growth in self. generation from distributed resources, 2) Increased nuclear costs, The nuclear accident at Fukushima in 2011 induced by earthquakes and tsunainis, not operational errors ~ revealed that an inability to deliver the power needed ‘See written statements and oral discussion of state regulatoss ‘May 1-2, 2627 Technical Confer “See Polar Vortex Rewew, NERC, Segtemie "FERC, Vay 1-2 Technical Conference, op at 2446 2487 2448 2449 2450 2451 2452 2453 2454 2455 2456 2457 2458 2459 2460 2461 2462 2463 2464 2465 2466 2467 2468 2469 2470 2471 2472 2473 2474 2475 2476 2477 2478 2479 2480 2481 2482 ‘0UO 1/ PRE-DECISIONAL DRAFT 1! NOT FOR DISTRIBUTION June 26, 2017 onsite for effective reactor cooling could have devastating impacts. This has led to the stationing cr additional backup equipment and other precautionary measures at many US. nuclear plants, thus increasing their costs. 3) Increased coal costs. Owners of coal-fired plants have had to either make major invest ments at any plants or retire them in order to comply with new environmenta! requirements such as ‘Those intially set forth in 2011 by EPAn its Mercury and Air Toxies (MATS) rule 44) Inexpensive natural ges. New technology for the development of shale B25 resources hasted toa major expansion in the availablity of natural gas at very low prices. AS result, natural gas-fired plants now set the market-clearing prices during many hours in the ATO markets, and LMPs have drifted lower and lower. 5) Growth inwind and solar power. The wide adoption of state-level renewable portfolio standards (RPSs) created an administrative demand for wind, soar, and other renewable energy: In ilition to the support provided by the RPSs, developers of wind and solar generation sources te been aided by two kinds of federal subsidies, a production tax erat (PTC) for wind generation” and an investment tax credit (70) for sotar. Further, over the last decade, the eepacty cost for onshore wind and utiity-scale solar have dropped by large percentages {to xx% capntiy cout in 2007), The combined impact of favorable policies and falling costs has been rapid growth in wind and solar generation. “These economic challenges have driven many coal, nuclear, and even some gas-fired generation pants into retirement, and the economic viability of many baseload plants still operating 2FPt%e questionable. The growth of wind and solar generation has contributed to erosion of the revenues aammed by existing baseload plants because the oviners ofthe wind and solar facilities are able to operate at near-zero variable cost. RTO/SO energy markets dispatch units ‘based on incremental operating costs. As result, bidders with near-zero operating cost can under-bid those using other technologies. Wind and solar owners frequently offer zero or negative bids hess bids will almost always be accepted by the RTOs whenever these units are able to produce electricity. At the same time, because IMPs are being set in many hours by gas-fired plants, these owners know that they will probably ear enough overall to cover thelr relatively high fxed costs. Some wind generators are able erevarn y return even when LMIPS go negative, as long asthe negative price I less nan the per- MWh value of the PTC and other benefits. iM notes the effects of tax preferences on its market: “Toxand subsidy policies have had an impact on the economics of certain types of generation. specially, the wind and solar production tax credits have had the most significant impact on uelear generation. Nuclear and wind generation are competing to clear in the market during sit peak hours when wind resources are the strongest and loads reduced. In those off-peak hours the production tax credit hes created an incentive for renewable resources 10 bid negative prices as they must run in order to receive their payment from the federal treasury." Since sn See htpss/ Policy Safety-and.Securty/Fukushima- Response = Wind developers had the option under the American Recovery and Reinvestment Act of 2005 to. chease bamnaen ere and aan equivalent IFC sev aga real of recent federal legslaton, the production tx cra has been converted into a direct Payment of cash option to efec tat the market fr tax credits has been reduce is recent years. Page 113, U.S. Department of Eneray 2483 2484 485 ‘486 487 488 489) 490 491 492 493 194 195 196 97 98 99 00 Ol 02 B 4 5 (OUO 1 FRE-DECISIONAL DRAFT Jf NOT FOR DISTRIBUTION, une 28, 2017 2014, PAM has seen prices go negative at nuclear unit buses in approximately 2,176 hours te Senne 4.3% of al off-peak hours (Source of the block quote is Plti’s May $" letter to the Secretary regarding his memo,} Among the existing, unretired plants now serving baseload needs, nuclear units seem to have been hit Sspecialy hardin recent years. According to one recent analysis 34 ofthe nation’s 61 nucle plants are losing money, and this group Includes almost all of the remaining merchant nuclear capacity. The report says that these plants receive $20-830/hWh for electricity that costs an average of $35/MWh to roclice, and are losing an estimated $2.9 bilion per year, Coab-based generation is also at risk, Possible changes in environmental regulations may slow but vill not arrest this trend, abort substantial increase in the price of natural gas and a reversal of trends across many states to increase their commitment to renewable energy. The prospects ofthe loss of large amounts of nuclear capacity, the continued growth of gasired capecky, and environmental and employment concerns have caused 2 number of states te consider or adopt “outofmarket” measures, such asthe laws recently enacted in New York andlinols te grant [Zero emission credits” (ZECs) to the oviners of certain threatened nuciear units, Massachusne has issued a solicitation for Canaan hydro and offshore wind as required by 2 new state lav."(Several other states ate now considering similar legislation.) Owners of merchant non-nucleas boeken rabaelty have reacted strongly, arguing that subsidies aimed at specifi large faites amount ro Bross interventions in federally-reguiated wholesale power'merkets, and that FERC should reject them SUmmoriivas being inconsistent with the "just and reasonable" requirements of the Federal Power Acta Some commenters have noted that “subsidies beget subsidies” and point out that if the ZECs approach 's allowed to stand, many of the non-nuclear capacity owners wiho are alse under heaw economic stress Will seek relief from ail possible sources. The cumulative resuit, they continue, could be major damage holesale markets, higher capital costs for many new grid-related investments, and higher costs for consumers. Zhe recent trends in these markets have highlighted a condition that has long been characteristic of the electricity industry - that is, the dominant generation technologies have had high capital costs and low Ceatating costs. According to one recent analysis (Gifford etal“) this condition has keen particularly Problematic in the merchant generation sector, winereit has induced periodic boom-bust cycles that have driven many merchant companies into baateuptey. Now, they se, itis threatening to do so again. Recently the CEO of one merchant firm (NRG) announced that his firm tad lost almoct $900 mition in 3 on the harca impact of subsites, ts analysis ean be ts More Than Hal of Amerce's full BNEE reports ava 1's Slverstan From FERC May 2 transcript or witten statement, ~ciffors, Raymond, eta, “The Breakdown 2017 he Mare Page 114 Electric Power System, Markets and Reablity Stucy J 3, Meretecnr or 2si5 2516 2517 2518 2519 2520 2521 2522 2523 2524 2525 2526 2527 2528 2529 2530 2531 2532 2533 2534 2535 2536 2537 2538 2539 2540 2541 2542 2543 2544 2545 2546 2547 2548 2549 (0UO 1! PRE-DECISIONAL DRAFT /! NOT FOR DISTRIBUTION June 26,2017 2016, and added that ".. the competitive power sector isin 2 period of unprecedented disruption. believe the IPP model is now obsolete and unable to create value over the long term." rurther, Gifford etal ergue that the problem goes beyond the viability of the existing merchant gas- fired units: «the construction ofa new merchant CCGT does not pencil out to cover fixed costs ofthese Generators, Policy makers should pause when markets count on planned merchant generation sere rannot recover ther fixed costs under current market conditions. The stark economics facing these plants makesiitseem that either these planned additions will nt be able to attract the capita tobe built, or that the developers are beiting on sustained and significant increases in prices to attract capital. Policy makers, regulators end customers lose under either scenario. In contrast, the 2016 PIM Market Monitor's report paints a less ominous pictures It finds that RTO markets can provide adequate revenue to support some existing capacity, but the outlook varies widely by technology, fuel choice, time interval, and location: ‘analysis ofthe total unt revenues of theoretical new entrant CTs and CCS for three representative locations shows that units that entered the PIM markets In 2007 have not aaeeed their total costs, including the return on and of capital, ona cumulative basis ‘through sever the analysis also shows tht theoretical new entrant CTs and CCs that entered the Pil! aeprkets in 2012 have covered thelr total costs on a cumulative bass in the easter" PSS and BGE ones but have not covered total costs in the western ComEd Zone, Energy market reverie vane not sufiient to cover total costs in ay scenario except the new entrant CC unit that went into operation in 2012 in BGE, which demonstrates the critical role of capacity market revenue in covering total costs. “The MMU's 2016 report also says that sufficient net revenues are provided by capacity, CneTEY and ancillary services markets to support new entry for CTs and CCGTS in some but not all PIM zones: © In 2016, 2 new CT would have received sufficient net revenue to cover levelized total costs in 13 of the 20 zones. The zones in which a new CT would not have recovered levelized costs were cesta zones in which lower capacity prices were not offset by changes in energy net revenues. «12026, a new CC would have received sufficient net revenue to cover levelized total costs in rine of the 20 zonesand more than 90 percent of leveled total costs in an additional five zones. 4 1n2026, a new {coal plant] would not have recelved sufficient net revenue to cover levalized ‘total costs in any zone, Results in the PIM footprint for new wind and solar resources in 2016 were heavily dependent on revenues from state renewable energy credits: + in 2016, net revenues covered more than 33 percent ofthe annual fevelized tote costs ofanew crntrant wind installation in ComEd, 49 percent of the annual levelized total costs ofanew «=e "NAG CEO: Independent power producer model obsolete,” Utity Dive, Marc 2017, thew ume utltvdive com/rens/nx-ceoindsosncent-power-sraducetamads-obsolte 1371501 8 Giford, 9.6. sm 216 soe ofthe Moret Reportfor PIM, pages 279-280. "As ar ofthe review of market performance, Ne Mu analyzed Tr oee teenuzsaarmed by combustion trbne (C7), combines cyte CO), coal plan (CF, ese (PS ‘nuclear (NU), solar, and wind generating units.” Page 115 wiatein Onayar System Markats and Reliability Study U.S. Department of Energy 2550 2551 1552 1553 554 555 556 537 558 559 560 561 162 63 UO W PRE: ECISIONAL DRAFT // NOT FOR DISTRIBUTION Jane 29,2017 entrant wind installation in PENELEC and 198 percent ofthe annual levelzed total casts of a pew entrant solar installation in PSEG, Renewable energy credits accounted for three percent of the Similarly, the market monitors lavelized cost analyses indicate that revenues from PIMA markets are sufficient to support most existing resources, but that substantial amounts of existing coal and CT capacity is at risk of retirement: * 182026, most units did not achieve full recovery of avoidable costs through net revenue from Energy markets alone, illustrating the critical role ofthe PIM Capacity Market in providing incentives for continued operation and investment. In 2016, RPM capacity revenues wens sufficient to cover the shortfall between energy revenues and avoidable costs for most wonits and technology types in Pim, with the exception of some coal units, * The actual nat revenue results show that 9§ units with 14,500 MW of capacity in PNM are at risk cf retirement in addition to the units that are currently planning to retire, Of che 96 units, 55 are GTS and account for 1,408 MW and 25 are coal units and account for 11,282 Mw." More generally, Figure 6.3 below shows that capacity reserve margins in most of the nation’s regions as defined by NERC canteen Adequate to reliably serve load. A sustained pattern of additional retiements could significant change ths picture, but note: A wave of merchant bankruptcies, iit occurs, would not pecessarly translate into a wave of plant retirements. A portion of the capacity owned by the bankrupt firms, particularty newer units, would presumably be sold to new owners ata discount, this reducing tha buyers’ fixed costs and better enabling them to operate the plants at a profit. Thus i ‘appears that reliability per se may not be the prablem ahead ~ rather, the greater concern may be to ensure that the ortfolio of resources in each region remains @ balanced portfolio with which to efficiently meet the range of public policy goals and customer expectations. MAM cepor.9. 9 Page 116 Evzctic Power Syst Markets and Relablity Study 2576 2577 2578 2879 2580 2581 2582 2583, 2584 2585 2586 2587 2588 2589 2590 2591 2592 2593 2594 2595 2596 2597 2598 2599 2600 2601 2602 (QUO /! PRE-DECISIONAL DRAFT // NOT FOR DISTRIBUTION June 28, 2017 Figure 6.3. Reference margins and anticipated reserve margins n select NERC regions, summer 2017 Reference margins and anticipated reserve margins in select NERC regions, summer 2017 Midcontinent 180 6 180 Nex OOO [Blyth cron a5 18 - Oe New York sO 2 iLt2] 3 2B e Patt interconnection a 25 45 fer SERC Reliability anticipated ma Corporation rence margin a i 6 Florida Reliability a Coordinating Councit cia source: U.S. Energy information Administration, besed on North American Etectie Reliality Corporation, 2017 Suramor Reliability Assessment. “The end result is that there are pressures for major changes in the wholesale markets, particularly the three eastern RTOs and California, with generators seeking more predictable revenue stcorh8 from all Souress (capacity, ancilary services and energy} with fewer interventions by the RTOs in those markets to adjust prices through bid mitigation and uplift charges. Recent discussions have centered on price formation in energy markets {cite Trade Association Principles and May 1-2 FERC transcript). FERC has also undertaken a series of inquiries and rulemakings t0 ~.- 6.4 Negative pricing [UNDER CONSTRUCTION] Negative pricing from renewables harming baseload plants isnot yeta huge issue «inmost areas and cases, there's alow % of time when negative bids occur, so they don't pose spajor loss burden on baseload plants (which need high average prices end high peak prices more than they need non-negative off-peak prices) bneoload plants have bid negative to protect min load operation long before wind or Pvdrove over-generation «nail hours when wind is doing “over-generation”, hydro, coal and nuctear were hitting min toad production, soit was their infledble generation pattern that forced wind fo bid negative «many utlity baseload plants do not bid into organized spot markets but are self-scheduled by \VIEU, so they aren't taking MCP in hours when MCP <= LBNL paper Page 117 Ai US. Department of Energy 2603 2604 2605 606 607 508 509) 5 s { 12 cuoWPRE. ECISIONAL DRAFT i! NOT FOR DISTRIBUTION dune 25, 2017 Wilson research with market monitors logic 6.5 Market distortions, price formation and price suppression (UNDER CONSTRUCTION] Everything distorts markets 6.6. Markets — looking forward and next steps iUNDER CONSTRUCTION} larkets and Rajah 2613 2614 2615 2616 2617 2618 2619 2620 2621 2622 2623 2624 2625 2626 2627 2628 2629 2630 2631 2632 2633 2634 2635 2636 2637 2638 2639 2640 2641 2642 ‘OUO /! PRE-DECISIONAL DRAFT / NOT FOR DISTRIBUTION June 28,2017 7 Affordability [UNDER CONSTRUCTION] secretary Perry's memo asks whethet the [ss of coal, natural gas, nuclear and hydroelectric baseload power making the grid less affordable. As discussed in Section 3, coal and nuce=t pete have become reve costly while natural gas has become much less so. Wind and solar generation have high capital nore put their marginal cat is nearly 2e70 (ignoring the value ofthe PTC). efforts to retain many of the high-cost baseload plants that are now retiring may end up raising rather than lower ot the average ier sf wholesale electricity for many customers. [tis not yt clear what impact all ofthe recent tase toad plant retirements will have on customer il, nor how the contining trend of retirements will affect grid costs and bills. ‘Although many people have a sense of what the term “affordable” means, there ls ne formal metric for aevctfordable” pid or an “affordable” electric, The meaning of “affordable” Is often contextual, dependent upon the sizeof one’s budget and how much one values the good sought — the percelved aera clecerict is much ower toa comfortably housed family ona spring day than Its to 2 senior citizen living in a high-rise apartment in Chicago on an August afternoon. “There have been several studies of the impacts of RPS growth on regions of the country LBNL study caevmarizes those and concludes that the overall effect of a state evel RPS can affect customer rates from a decrease of 4% up to an increase of 1-2%. ne of the benefits of renewable energy is that it con serve asa hedge for more volatile fossilfueled generation. Many customers seek a steady bill payment because I's ‘easier to budget for and manage than bill tat veries by month. To the degree that renewable energy stablizes the cost of an overall energy portfolio (or even justa customer’ bill), that affects percelved affordability. 7.1. Affordability -- Looking forward and next steps «Develop a clear understanding of what electric affordability means «Determine the costs of current power plant retirement levels = petermine the impact of renewable energy an grid-connected customer bill «Determine the costs of likely on-going retirements for grid customers. U.S. Department of Energy 543, 54a a5 46 (QUO i PRE-DECISIONAL DRAFT // NOT FOR DISTRIBUTION dure 26, 2017 8 Values and extra-market considerations [UNDER CONSTRUCTION) Looking forward and next steps Coal power plant brings good jobs Homce: “America’s biggest greenhouse-gas polluter, and the place that relies oni," Elizabeth Hernandez & Eric Chaney, The Center for Public Integrity, June 6, 2017 aps fiir and-placo-relie: oot thrusutm_medium=email&utm_campaign=Newsletters<20Weekly’20Roun upie20Utiity %20Dive%2006-10-2017&utm_term=Utlty 2.20Dive%s20Weckondes seg games H. Miler Electric Generating Plant. is one of Alabama Power's coatouming somsoyees puting out encugh elects to povuer about a mifion homes. Ienever stone running — and never stops producing carbon dioxide and other greenhouse gasses Miles 2 Source of gcod-paying jobs, a means io raise a tama in dn area where économie sopertunties are thin... According to Alabama Power, salaries at tre plant range fom oecnd $35,000 to about $120,009 a year, or about $74,000 on average. .. Miler emplcye seers sas Fark cane gen have as many as 1,600 contractors on site during planned malrtananee outsges, The plant pays about $12 milion a year in property taxes Page 120, Electic Power System, Markets and Reta ty Stucy 1S Sarlarteneae me es 2649 2650 2651 2652 2653 2654 2655 2656 2657 2658 2659 2660 2661 2662 2663 2664 2665 2666 2667 2668 2669 2670 2671 2672 2673 2674 2675 2676 2677 2678 2679 2680 (0UO /! PRE-DECISIONAL DRAFT // NOT FOR DISTRIBUTION June26, 2017 9 Solution Options “There are a numberof solutions that could be pursued to address the issues presented in this report. ‘Thi section presents an extensive and varied listof possible solutions shat is not exhaustive or ordered by priority but reflects the views of many stakeholders. This Ist ‘of solutions does present options that ae epncting, which s necessary for a thorough catalogue. Inclusion in tis list does not indicate an official Us. Department of Energy position with respect to any ofthese solutions. Below are some important core criteria that readers and decision-makers should consider when evaluating solution options: +L. Reliability including Flexblfty: The system including the customer, has sufficient capacity to balance generation with demand over operational, planning and investment timelines. The system has sufficient flexblty to match changes in next load over all operation time-scales, 25 ‘well as changes in available generation due to outages. >, nesifence and Security, The grid can survive and recover from disruptive events at sufficient speeds to prevent interruptions to critical services and minimize disruptions to the nation and its critical infrastructures. 3, Affordobtity: Al customers have access to service at 2 reasonable cost inclusive ofall customer ‘expenditures, enabling downstream job creation and growth of GDP- Service providers within fhe system receive revenues sufficient to incentivize adequate Investment £2 meet reliability and resilience needs. «4, Environmental Considerations ond Public Heath: The costs associated with operations of the system ceflect the existence and impacts of public health and ‘environmental quality sacernalities, such asa pollution emissions, land vse, and water quality. 5, Competition Sufficient competitive conditions exist within the system, such as low barriers to cntry, dispersed market power, and accurate and timely information, so that grid services and Infrastructure can be obtained through market and non-market structures Ht supporta variety trbusiness models. These market structures property balance short-run efficiency with long term private and public sector investment, while flfiling the criteria above 6. innovation: The entire system, including the grid, markets and institutions, is designed to iyoleome new technologles or practices that enhance the above criteria, 1. Customer Options: Customers, states, and other entities have the ability to obtain desired attributes not included in the criteria above, reer aciltate flexible energy storage projects across the eri ‘allow long-term contracts for energy storage services. » llow storage to be compenssted for al the reliability services it provides, & Remove restrictive storage regulatory asset classifications. J Enable cistributiondevel power relabiity through power electronics, smart inverters, and integrated building controls. «pursue 88D on flexible energy solutions and corresponding power electronics capabilities Page 121 LS Deoartment of Energy | Allow power plant | approvals, | # impiement R&D portfoto targeting efficiency immprovements across the generation feet | |. 7 Protide regulatory certainty for units who wish to reduce fuelconsumption or improve | Accelerate investment and deployment in power Syston t6 adress ral ‘ability énd affordability concerns throug 1 © Streamtining transmission investment and deployment Process to reduce generation and | i transmission constraints | } * reforming energy infrastructure siting and permitting to expedite development | + Updating transmission backstop siting authority © Simplifying toan guarantees for large scale energy proj =__Modifying resource adequacy standards to have a longer time horizon Accelerate licensing and relicensing and reduce costs, OF nuclear, hydro, geothermal, andnew |__| generatio | performance | * Accelerate improved efficiency of transmission and distribution system to improve | i it } Lt reliability and affordability. “ i} i | | 18 i | es in federal and regional rates and pricing ___* Research and encourage ways to implément policy preferences that least distort ugh non-technology spe 8 Clarify 8. Adopt carbon Fesources | Redesign energy and an | Remove restrictions that fimit technology participation + Better reward performance | + Incentivize needed capacity : * Support long-term capital investment i * Build balanced, forward-looking resource portfolios 2 Ensure essential reliability services are included and valued apy * Enforce against out-ofmarket measures wpe te-- Aust markets to bring state policies into them a 8. " Redesign wholesale energy markets to reduce the impacts oF preferential features: * Negative pricing and production tax cradits and market ce ‘Scarcity mechanisms * Role of storage and customer side resources (efifency, demand response, mi rogtids, | solar photovottai ric vehicles, combined heat and power) * Exante price readjustments ‘+ Develes both compret © and user friendly anaiytic tools supporting energy market redesign and decision-making Address up! D onal 70 flower emission power soureésinp - 40." Support i operator, and consumer efforts to enhance re! - age t22 Electric Power Syetam Mareate ang) ms (0U0 // PRE-DECISIONAL DRAFT J/ NOT FOR DISTRIBUTION June 26,2047 2 strengthen capabilities for state and federal support for reliability and resiliency measures and activities « Taelitate distributed and grid-edge technologies to support system stability re! iL 37 Improve analytical tools for system planning and portfolio analysis ity, ___andresiiency _ _ _ -| esarainate slecrcty and natural as systems when dealing with capacity expansion, market | rules and products, operational concerns, and regional needs. 72.1 Develop mechanisms to compensate or require essential energy services (eg, reliability, | | resilience, security) that are necessary to operate the grid and reflect product attributes desired | | by consumers (e.g., ow-emissions, clean, flexible), a assess potentially under recognized contributions from baseload plants + Develop new methods (market mechanisms, interconnection requirements, contracts, technology) that enhance reliability and resilience a Mitigate fuel avallabilty concerns through 2 ful suite of operational, contractual, and «Expand the use of power puichase agreements as a way to stabilize markets and | reliability mechanisms “s_ Ensure new bulk power and distributed resources have capability and incentive so ! | | technology alternatives \ provide essential energy and reliability services Enable utility participation in developing i ei tomerside resourees (efficiency, demand response, microgrids, solar photovaltale, | create vehicles, combined heat and power) to enhance customer options and reduce i integration challenges _ _ — Expand use of innovative and flexible resources~such as energy stored, demand response, nergy efficiency and fast ramping generetion- to contsbute to grid stability, resifences and | i | reliability within the bulk power and distribution systems. \ I ‘© Remove market restrictions ‘+ Redefine reliability products and compensation schemes © Continue RD&D on storage and other technologies that contribute to: improve fle» and reliability __# _ Develop technologies to improve 74. Expand regional market ‘and operations bc * reliability services and assets |e Market implications of regional integration i | 2 strengthen the connections within and between transmission systems i _s_ Mitigate market and operational seams between Ora snized and bilater i 3. Build portfolios of diverse resources that balance and improve reliability, res while respecting state and societal preferences i © Continue RD&O on technologies and methods to meet broader societal and state ____preferences _ ee . 46. Eliminate all subsidies, incentives, payments, tax ben¢ ene ces, = a —— 17. Compensate demand-side resources ‘fo meet customer needs in ways that, support the grid «Update net metering policies to reflect total grid system costs and maturing nature of DER technologies. i © Manage DER (including curtailments} to support the broader stability, security, and ‘ reliability of the power grid, 4 ity {0 truly ievel the playing field for alt U.S. Deparimentof Enersy 81 32 33 ‘OVO j] PRE-DECISIONAL DRAFT // NOT FOR DISTRIBUTION June 28, 2007 1"18.[ Uilize existing federal authorities unde | of-market operations for baseload and oth pace and final redol lution of regulatory and policy agency decisions |__limarkets, reliability and other poly sa | 20.| Develop safeguards, training, and direct ass. |__ from the devastating impacts of energy market shifts. _ | 21.) Expand electrification of multiple end-uses (vehicles, industrial processes, heating) to better ues | match electric generation variability and needs and provide reliability services ‘+ Fast-tracking electric vehicle charging station * Encouraging industrial process electrification ig early-stage R&D to increas ion of outcome-based ra © Conduct \courage adopt | allowed by statute | Reduce use of preseri Page 126 Electric Power Syst . Markets and Realty Study -gulations for public safety and e | r reliability and equipment protection J industry options Lt ulations at the state and federal evel itive regulations where markets can be enabled * Avoid picking winners and losers + Use market incentives and/or penalties for non-performance, + Reserve use of prescriptive re US Dore: Federal Power Act (202c) to direct emergency aut] ler grid assets to ensure the reliability of the power stance to protect workers, jabs, and communtiies | is, wherever astru re, i deployment at national highway rest stops i j | not regulations | gency conditions or — | UO // PRE-DECISIONAL DRAFT /! NOT FOR DISTRIBUTION June 28, 2017 vee 10 Recommendations 2687 TBD Page 125, Morkate end Reliability Study U.S, Department of Energy (OUD // PRE-DECISIONAL DRAFT JI NOT FOR DISTRIBUTION June 26, 20¢7 as Glossary of Key Terms and 2689 Concepts 2690 Affordability: 2691 Anciiary services: 692 Balancing authority: The responsible entity thet integretad resource Plans ahead cf time, maintains 693 _load-interchange-generation balance within balancing ares, and supports interconnection frequency in 694 realtime, Currently 65 BAS manage the bulk power system in the lone, 48 states, 695 Base load or minimum load: In a given geographic area, the minimum amount of electric power (MW) 696 typicaliy required by consumers over a given period at a constant rata, 597 Beseioad ower giant: Baseload generation has historically been power plants that run almost 598 Continuously to serve 2 base level of demand thats typlcaly present on he system due to everyday 599 needs. Most often, nuctear plants, large thermal units, or hydroelectrle, plants are considered baseload 100 generation. This type of generation is usualy large with respect to size and output, and operates within [Ot a steady range of production, Baseload units have low operating costeand have been operated to ‘02 maximize the plant's mechanical and thermal eficieney and minimize system operating costs. 03 Bilateral contract: Bilateral wansactions for electrcty occur between to Parties without going through 04 an RTO's organized market. They can be arranged through « negotiated long-term contract or for a OS short-term exchange (hourly or monthly) through a voice broker or an elect ome brokerage platform, 06 Bilateral contract prices are often linked to the arices set in centrally organized markets. G7 Bulk power system, or BPS: Statutory definition from EPAct 2005, “{1) The term ‘butk-power system’ 38 means— “(A) facilities and conteol systems necessary for operating en interconnected electric energy 29° transmission network (or any portion thereof); and “"B) elecere energy from generation facilities 10 eeeded to maintain tnsmission system reliability. The term does not inciade facilities used in the local UI distribution of etectric energy.” More broadly, the BPS is used to include utilty-scale generation and 2 storage as well as transmission and system contcol ard communteations ties. Copacity: A measurement of the maximum output that generating equipment can supply toa system {02d commoniy expressed in megawatts Differs from the term “generation ” which measures the actus! electricity produced, aliowing for equipment down ti Capacity factor. The ratio ofthe electrical energy produced by a generating unit over a given period of ‘ime, relative to the electrical energy that could have been produced at continuous full power operation over the same time period. For example, a 10 Mw generating unit running continuously would produce: 385 daysx 26 hours x 10 MW = 87,600 megawatt-hours of electricity Centraly ofgonteed markets: Regional Transmission Operators and Independent System Operators saage Contes organized electricity markets serving two-thirds ofthe nation. Allofthese markcte oes Gey-shead markets, which schedule electricity production and consumption before the Operating day, (or balancing) market reconcies differences between the day-2head merket se 34 subject to factors such as reliably, asset outages ard transmission linite. These energy buyers’ offers to set market-ciearing prices faiso called Locational arg Electic Powe: System, Mertets and Releblity Skady Ubi Pemnevexcauasr. 2726 2727 2728 2729 2730 2731 2732 2733 2734 2735 2736 2737 2738 2739 2740 2741 2742 2743 2744 2745 2746 2747 2748 2749 2750 2751 2752 2753 2754 2755 2756 2787 2758 2759 2760 2761 2762 2763, 2764 2765 (0U0 /! PREDECISIONAL DRAFT !/ NOT FOR DISTRIBUTION June 26, 2017 Prices) that are pald to al sellers forall electricity consumed as often as every five minutes. Most RTOsand ISOs also run markets for ancillary services and some run capacity markets. Demands the rate at which electric enereyis delivered to or bya systemor partofa system, generally expressed in Wlowatts or megawatts, ata given instant or averaged over any designated interval of time, ‘Economic corrying capacity: the idea that limits to renewable energy penetration are limited by economics Aither than engineering, driven by factors that include transmission and the flexblity of the power eid fo balance supply and demand. Economie carrying capacity is the point at which variable renewable energy is no longer economically competitive or desirable to the grid or society , Economic dispatch: The practice by balancing authorities of operating thelr area's generation flet and demand response resources so that the lowest-cost resources are used firs, followed when needed by more expensive resources and bids. In practice, economic dispatch is modified to reflect system rellsilty requirements and transmission operating limits so it becomes security constrained economic dispatch. Essential reltablty services (EAS): Services that must be available to grid operators when needed to enable the reliable transfer of electricity from generation sites to consumers. They include frequency response (including regulation, contingency reserve and load following), reactive power and vole Support, and ramping capability. ERSs were formerly known as “ancillary services,” but have been Tenamed to more fully recognize their functional importance. Various ERSs may be provided by generation, storage and demand-side resources. Facility: aset of electrical equipment that operates as@ single element (e-. a line, a generator, a shunt compensator, transformer, etc.) Hlexibilty: The ablity ofa resource—whether itis 2 component or a collection of components of the power system—to respond to the scheduled or unscheduled changes of power system conditions at various operational timescales. Frequency response: the ability ofa system or elements of the system to reactor respond toa change in System frequency. In North America, system frequency is maintained ator very close to 60 cycles per second. Fuel security: Ina given area, the extent to which, in 2 given area, the APS depends on fuels or fuel qourees that are readily accessible and sufficient to enable operation in the event of @ fuel supply disruption Generotion/fuel diversity: The extent to which, in a glven area, customer electricity is generated from diverse fuels and technologies. Generation diversity is enhanced by energy efficiency, which reduces customers’ need for generation. Independent System Operator: Interconnection: a geographic area in which the operation of bulk power system components is synchronized such thatthe failure of one or more of such components may adversely affect the ality of the operators of other components within the system to maintain reliable operation ofthe facies within their control Load: An end-use device or customer that receives power from the electric system. Collectively, load refers to all customers’ electricity use, whether for energy (MWh) or capacity (MW). Page 127 Clockie Bayer System. Markets and Reliability Study US. Department of Energy 2766 1767 1768 769 770 771 772 773 174 q75 176 77 78 19 '80 (QUO 1! PRE-DECISIONAL DRAFT if NOT FOR D'STRIBUTION June 26, 2017 Peaking copecity: Generation units that ere normally used only during the hours of highest daly, weekly, or seasonal loads. These units are designed to be turned on or off at short notice as needed and ‘typically have relatively low capital costs and high operating costs, Bamping: the ability ofa generator to inerease or decrease real power (megawatts) n response to changes in system load, interchange schedules or generator output, inorder to maintain gr reliability and compliance with applicable NERC standards Reactive Power: the portion of electricity that establishes and sustains the electric and magnetic fields of alternating current equipment, Regional Transmission Operator (RTO) Aellobilty Standard: A requirement approved by FERC to provide for reliable operation ofthe bulk fower system. The term includes requirements for operating existing bulk power system facilities and {or planning or modiying facilities to assure the reiabe operation ofthe bulk power system, Reliability Standards include cybersecurity and physical security requirements, but they not include any equirement to enlarge or build new transmission or generation capacity, Rellabilty: The ability ofthe system to continue operation while some lines or generators are out of Service. To be reliable, the BPS must satisfy two fundamental requirements simultaneously: 2) Adequacy ~the system must have the physical capacity (ie. generation, transmission, and ‘elated assets) to supply the aggregate electric power and energy requirements of electricity Consumers at all times, taking into account scheduled and reasonably expected unscheduled outages of system components; and 2) Operations = the ability of the BPS to remain functional despite sudden disturbances to system stability or unanticipated loss of system components, Reliable operation: operating the elements of the bulicpower system within equipment and electric system thermal, voltage, and stability limits so that instability, uncontrolied separation, or cascading failures of such system will not occur asa result ofa sudden disturbance, including a cybersecurity Incident, or unanticipated failure of system elements, Resilien: Resource adequacy: the ability to provide adequate supply during pea’ load and generation outage conditions, which inciudes both supply-side and demand-side resources as contributors to meeting ageregate electrical demand (Including losses)" while accountng for “scheduled ard reasonably expected unscheduled outages of system elements," Security: Sustainability: Yoriable renewable energy (VRE): Renewable energy generated from variable sources such as wind and Sols as distinc from renewable sources such as geothermal or biomass which have relatively predictable evalability), VRE, especially at relatively high penetrations ina grid, can pose several challenges to the grid, including variability, uncertainty, locati iffcity, non-synchronous §erration, and low capacity factors; most or allof these challenges can be mitigated, Voltage Contra Page 123, e ic Power System, Markets and Relia 2806 2807 2808 2809 2810 2811 2812 2813 2814 2815 2816 2817 2818 2819 2820 2821 2822 2823 2824 2825 2826 2827 2828 2829 2830 2831 2832 2833 2834 2835 2836 2837 2838 2839 2840 2841 2842 2843 (OU 1! PRE-DECISIONAL DRAFT !/ NOT FOR DISTRIBUTION June 26, 2017 Appendix A: Memo from Secretary Perry April 14, 2017 MEMORANDUM TO THE CHIEF OF STAFF FROM: Rick Perry ‘SECRETARY OF ENERGY . ‘SUBJECT: STUDY EXAMINING ELECTRICITY MARKETS AND RELIABILITY [nt the most recent G7 Energy Ministerial, my colleagues discussed the need for an energy ‘transition utilizing greater efficiency and fuel diversity. There was also notable concern about how certain policies re affecting, and potentially putting at risk, energy security and reliability It Impressed upon rie that the United states should take heed of the policy choices our allies have made, and take stock of their consequences. reliable and resilient electric system is essential to protecting public health and fostering economic growth and job creation. The US. electric systems the most sophisticated and technologically a yanced in the world. Consumers utllze heating, air conditioning, computers, and appliances with few disruptions, Nonetheless, there are significant changes occurring within the electric system) that could profoundly affect the economy and even national security, and as such, these changes require further study and investigation. Baseload power is necessary to-a well-functioning electric grid. We are blessed as a nation to have an sbundance of domestic energy resources, such as coal, natural gas, nuclear, and hydroelectric allof vthieh provide affordable base load power and contribute toastabe, reliable, and silent ‘id, Over aoa few years, however, grid experts have expressed concerns about the erosion of crtca baseload resources. Spectfcaly, many have questioned the manner in which baseload power Is dispatched and compensated, Still others have highlighted the diminishing diversity of our nation’s electric generation tax, and what that could mean for baseload power and grid resilence, This has resulted in part from fegulatory burdens introduced by previous administrations that were designed to decrease coalfired power generation. Such policies have destroyed jobs and economic growth, and they threaten to ae orat the performanes ofthe gr wel into the future, Finally, analysts have thoroughly Gocurnented the market-cistortng effects of federal subsidies that boost one form of energy 2 the cxpense of others. Those subsidies create acute and chronic problems for maintaining adequate baseload generation and have impacted reliable generators of al types. ach of these and other related issues must be rigorously studied and analyzed, and! the Department of nergy is uniquely qualified for the task. The results ofthis analysis wil help the federal government Fennate sound policies to protect the nations electric grid. In establishing these policies, ene Trump refimintstration wil be guided by the principles of reliably, resiency, affordability and fuel assurance: principles that underpin a thriving economy. Page 129 USS, Department of Energy (QUO 1/ PRE-DECISIONAL DRAFT # NOT FOR DISTRIBUTION June 28, 2047 {am directing you today to initiate a study to explore critical issues central to protecting the long:term reliably of the electric grid, using the full resources and relationships avallable to the Department By trecnesday, April 9, 2037, present ta me an implementation plan to compete this study 60 days from that date, that will explore the following issues: * The evolution of wholesale electricity markets, Including the extent to which federal policy interventions and the changing nature ofthe electricity fuel mix are challenging the original policy assumptions that shaped the creation of those markets; * Whether wholesale energy and capacity markets are adequately compensating attributes such as on-site fuel supply and other factors that strengthen grid resillence and, # not, the extent to ich this coutd affect grid reliability and resilience in the future; and * The extent to which continued regulatory burdens, as well as mandates and tax and subsidy Policies, are responsible for forcing the premature retirement of baseload power plants { have committed tothe President that this report will not only enalyze problems but also provide ‘concrete policy recommendations and solutions. | also committed to the President that f will do. everything within my legal authority to ensure that we provide American families and businesses an electric power system that is technologically ‘edvanced, resilient, reliable, and second to none. Page 139 Electric Power System, Markers and Revibiity Stidy sn 2862 2863 Atomic Energy Act ‘Price a peed { | i i 1 Anderson Act, (OUO i PRE-DECISIONAL DRAFT #/ NOT FOR DISTRIBUTION June 26, 2017 Year Tost" 1957 ‘Established the Federal Power Commission (now the Federal Energy Regulatory Commission) to regulate the Interstate activites ofthe clectric power and natural gas industries, and to coordinate national» hydropower activities ‘Amendments in 1995 expanded the Commission's jurisdiction to | Arede allintestate electricity transmission and wholesale electricity | sales \ Eqiabished Federal regulatory authority over civilan uses of nuciear materials and facilities exercised through the Nuclear Regulatory Commission Delineated Federalstate jurisdiction for nuclear material and facilites: ficensing of nuclear plant construction and operetion as woll as waste isposal are oxctusively in the Federal domain. States resin oversight of generation planning by vertically intagrated utes (e.¢., questions Gtwhother or nol to construct nuclear faclties in the first place), -faclitated the development of nuclear-powered generating capacily by eacetessing a program for covering claims of members of he public if ! major accident occurred at @ nuclear power plant and providing | ‘eeling on the total amount of lability for nuclear accidents \ i Glean Atr Act Amendments Environment al Policy Act Page 131 “7870, 4977, and 4990) 4970 ~ Requires Federal agencies to review the environmer ‘Ruthorized comprehensive Federal and state regulation of stationary | pollution sources, Including power plants Created the National Ambient Air Quality Standards (NAAQS), State Impiementation Plans (SIPs), New Source Performance Standards (NSPS, and National Emission Staridards for Hazardous Ar Pollutants (NESHAP).22 9 Requires states to decide what pollution reductions willbe required from particular sourees and to submit a State Implementation Plan. The 1990 CAA Amendments direct the creation of an acid rain program (ARP) and created new regulatory authorities, including an emissions cap-and-trade system to reduce air pollution." The 1980 CAA arrendments also require EPA to regulate 189 specified hazardous air pollutants!” and set up specific procedures to determine whether the air pllson regulations would apply to power plants that run on fossil fuels! sequences cof a proposed project before granting approval.t Agencies prepare ‘Slatements on the environmental impact of a proposed project (Environmental impact Statement of Environmental Assessment), Considering the views of the public and of other Federal, stato, and local agencies, and make the report publicly available.” ae US Department of Energy (QUO PRE-DECISIONAL DRAFT / NOT FOR DISTRIBUTION lune 28, 2017 «flan Water’ 778728 | «“Auiorized regulation fo polact dacharge aoagh Act | | Netional Pollutase Discharge Blninarion System (NPDES) program, whic | \ i | regs potig sources o obtain a peat authoring polluson upto a | | | specified limit, | | | «Reg 4 pollurents include thermal pollution (heat), conventionel pollutants | | | (eg, dissolved solids and bacteria), end toxic pollutants! ! ! * Regulated wastewater discharges from the power sector ixlude cooling wate, { | ‘wastewater from coal esh handling, wastewater fom pollution control _ _cavipment, aud other wastewater strsans _ Energy Policy | 7875 "5 Set est pn ion trgets(Sllowed by Standards Flargels are = [cy acai oe to ses | Conservation | + Authorized establishment of Sutegic Pecroleum Reserve Act (EPCA) | | Resource [+ "Provides BPA with the authority to rege Conservation | amended and Recovery | 1984, Act (RCRA) | 1986 Nationai—) 7073 Energy Act | | | | | I | National 1987, Appliance | amended Energy | in 1988 Conservation ‘Act (NAECA) Energy Policy i883 Act "5 che Clean Wt 8 amended in 2872, Parts | manegement of power sector wasie, sich as + Directs the EPA to study promising waste and solid waste from mining Was scen as a threat to nationel. tion included five statutes: 1) Natural Gas Policy Act of 1978—granted FERC authority over intrastete end interstate nature! gas production; set rules for nana gas pri ceilings, how to allocate costs, end emergency say 2) Public Uiility Regulatory Policies Act (PURPA) implement; promoted renewab'e enced practice of customers ta i usage, allowed some deregulat | 3). Energy Tax Act—enacted tex cre i geceration 4) Powerplaar and Industrial Fuel Use Act—resmrieted use i ‘g2s for power generation, promoted cvel, nuclear, end i fuels; repeated in 1987 for sore disuibuted renewable sand schedule for DOB to conduct rik © Amended in 1988 to add flucrescen: ballasts + Provided FERC greare: authority to buyers in proouing wholese 4 Inciuded a wide verity of energy. energy efficiency standards, equipment reotor standards), measures that encourage ands: ates 2nd fining port industrial energy Federal i energy ec the fist re tricity pe ll gs, and other renewable sources. he legisation have been changed many times since, ites// 132 Electric Pawer System, Pagi (UO J PRE-DECISIONAL DRAFT / NOT FOR DISTRIBUTION June 26, 2017 | ps { {Energy Polley | 2005 | Act | I i | 1 { | Energy 3007 Independence eand Security Act {EISA) ‘American 2008 Recovery and Reinvestment Act (ARRA) American 2012 Enorgy Page 133 | coverage to certain commercial and industrial ‘3 Amended BPCA i equipment | 4s Amended the Federal Power Act to expand FERC’s jurisdiction to include clectricity system reliability and certain power plent sales Directed DOE to conduct a five-year program on technologies to increase the Tecoversblity of éomestic ol resources through R&D on ofl shale extraction wee vonversien, and expansion ofthe recoverable natural gas resource base | Directed EPA to promulgate public health and safety standards governing | eleazes fom radioactive materials in the Yucea Mountain repository, and | “Tested DOE to developed a five-year eivilian nuclear program, and t9 conduct ‘a five-year technical and financial assistance program 0 ‘encourage the | ‘evelopusent end submission fr certification of advanced light water eactor designs - ‘Gave FERC responsibilty for mandatory reliability standards and | tllowed the agency to certify an electric reli ization to Gevelop and enforce those standards. PERC then designated the North! ‘American electic Reliabllty Corporation (NERC) as the designated electric reliability organization. Established an investment tax credit for solar energy and advanced coal tlectrcity generating systems, a production tax credt for hydropower Gnd advanced nuclear power systems, and eneray efficiency tax credits Removed regulations on natural gas prodiced by hydraulic fracturing under the Safe Drinking Water Act Set standards and schedule for DOE to conduct appliance standard rulemakings ‘Amended PURPA to require electric utities to make net metering and ‘mart metering available upon consumer request, and to terminate mandatory purchase and sale requirements pertaining to cogeneration and small power production utilities «Modified federal leasing and roylly rules to facitate and encourage the development of coal deposits on federal lands Provided incentives for the natural gas industry, such as reduced royalty tutes for select natural gas producers, accelerated depreciation for hratural gas distibution and gathering lines, and preferential tax ‘reatnent for natural gas production Set appliance, lighting, and industial elecric motor eficiency standards, and added stand-by power and 6-year-look back provision ‘Added Section 1705 to the loan guarantee program, allowing subsidized loans to commercial facilities ‘+ Called for coordination to develop a framework for smart grid interoperability standards Increased funding for the R&D and jarge-scale demonstration projects of carbon capture and storage systems 1s Provided 831 bilion in funding for DOE's energy efficiency, renewable energy, fossil energy, and electricity delivery an¢ energy reliability program offices, 28 well as Tite XVII loan guarantees for innovative Frean energy technologies; investments in energy infrastructure, {ncluding transmission and smart grid technologies; and other major investments in eneray administered by DOE. 4. Established a temporary program for the rapid deployment of renewable energy and electric power transmission projects. =” Kaded appliance standards coverage back for certain products! otter types of motors and 6-year look- sm Markets and Reliability Study U.S. Department of Enerey (UO /! PRE-DECISIONAL DRAFT l/ NOT FOR CISTRIBUTION Manufact. gand Technical Corrections | Act | (AEMTCA) | 65, 66 ‘Year | Year(s) Finalized’ Implemente | ! | National Ambient | Air Quality | | ! | schedule Standards setin 1974 | depends (NAAQS) i Sores Most | somatisinnent | recent | | | feesions | auaiment of | ! | 2915 ozmne | 2010(S0z | NAAQSoy | &NO2), | 2020-2037 | 2013 (PM), | | | and 2015 | ; | (ozone) “Steam Electtie ~~ “e7a, abs aie wet Effluent Limitations | upcates in| stayes while Guidelines (ELG)'" 7977, EPA reviews | ne Now Soiiee a Performance . t ‘Standards for Coal- i Fired Power Plants, "9 Research and aevelsement tax incentives are not included 40 CER 23 ) Gleam Ai Act (197) '"Detes shows here rfc: the date of pubicatin in the Federal Register, - Reguetions Only andercs are set at levels “vesuiste to orote: ntuing arotection agains: cecreased vis) ry standard cares -o Seaciine for eta’ this reason, only poy Page 124 Electic Power System, Merkets and Reliability Study bile heath” Secor: ‘and sarage to an J never 5900 the suble standards are rciuses 9 tls tabie, ary sa Jone 26,2017 Poe Baccamieenceicn Major Provisions, Ag Act (CAA) directs EPA to review QS every 5 "SO; NAAQS wore revised in 1996 and 2026;: | NAAQS were revised ions on the disdharge oF tox ‘ad other chemical pollutants and thereat sscharges trom existing and ney ste elec: ower plants, as well as pretreatment standards + 2015 update ses frst federal tims cr: levels of ‘oxic mers that can be discharged sions fe rule governing suifiw dioxide en tion on new coal a is provide cub) ops, vegetation, ara weitere \ FERC Order Restructuring of FERG Order 688" Promoting Wholesale Competition ‘Through Open ‘Access Non- discriminatory | Transmission ) Services by Public i | | | Uiilties; Recovery of | | Stranded Costs by Public Utilities and Transmitting Utities | NOx Budget — | Trading Program © Cooling Water Intake Rule’ Giean Air intersta! Rule (CAIR) Page 135 jional Haze Rule 1889 Pipeline Services" i | i Reid Ran Program 1303 Phase Clean AE Implementatio | Act (1990) | | | | 8 | 2004 (phase 1), 2003 i (revised | phase 1) 2014 (phase Il) ~ 2007 ‘2° Required pipeline companies to provide open access transportation services that are equal in quality whether the gos is purchased directly fo the pizeline company or elsewhere «Included provisions designed to increase access increase the quality of transportation services an provisions to promote competition among ges suppliers _ j | [© Created the world’s first large-scale emission ca | and-trade system to reduce air pollution. 1 ‘Effectively superseded by Cross-State Air | _ Rolain Rae It 4 | | | xn: 1995-2000 | Tonleentatio 4 Bxablished a tightening ennual SO: emissions € | for power plants fired by coal, oil and gas. ‘+ Applies individual NOx emission rates on certs! | coal-fired boilers. i J" Mandates non-discriminaiory oper | electricity transmission grid ' + Allows utlities that own transmission servic to recoup costs «Allowed Independent System Operators te form and facilitated economic dispatch of electricity across a larger geographic area 8 2000-2010 4506 20 c ~ Exiablished a market-based cap and trade Program Act | program to reduce NOx emissions from pc ended: 2008 | plants and other sources to help states re | the 1997 ozone NAAQS. Trading program applied to 20 states plus Washington, D.C. 01-2018" Clean Ar Requires Act strategies including enforceable measure improve visibility in 186 national parks an wilderness areas. Aims at returning visibilty to natural cond within 60 years. | Ciéan « Promuigated under 316(b) of the Clean V Water Act ‘Act New sources regulated under Phase existing sources regulated under Phase | began 2003 + Promulgated to reduce mortality to fish @ other aquatic organisms. NOx program “Clean Air +” Required 27 eastem states + Washingte began in Act to limit power sector emissions of nitroge 2008 and ‘oxides and sulfur dioxide to address reg SOx program U.S. Department of Energy (0U0 / PRE-DECISIONAL DRAFT NOT FOR DISTRISUTION June 28,2017 ~ Transport that contrbules fo the Tormation o fine particulate matter and ozone, ‘The NOx program replated the NOx Budge Trading Program, and the S02 program wa designed to continue reductions belo ARP permanent cap. Both programs use ‘cap-and-trade systems, Ended January 1, 2016. | } Rule | Superseded | in 2014. | |. Cross-State Air Phase Pollution Rule 2015 (CSAPR) and Phase CSAPR Update 22017 FERC Order 100% - 2074 Traramission | Planning andj Cost { Allocation i 2012 Coal Combustion” Residuals (CCR) Rule" \ Carbon Pollution” | 2018 | Standards and 1 1 Clean Power i Plants 1 Page 136 Electic Power System, Markets and Relabilty Study “2015-2578 Under review san Ait Clean Air Act (1980) Resource Conservatio rand Act (1976) Clean air Ack FERC jurisdictional ta The Cross-State Air Polition Rule replaced the Clean Air interstate Rule starting on January 1, 2018, and requires states to red owes plant emissions of S02 and NOx ‘hat ‘contribute to ozone emissions and fine part! olution in other states. ‘Aligns compliance withthe July 2018 attainment date for the 2008 ozone NAAQS Moderate area attalriment date, 3s regional afd Interregional ission planning: mandates that the planning pracess consider transmission nee riven by public policy requirements Requires regional and interregional cast allocation methods that satisy six allocatior principles Eliminates the Federal right of frst refuse! i d agreeren's? iblishes emissions lini for mercury rseni, acid gases, and other toxic pollutar # oll-fired power plan's. = Utities had until Apri 2018 to comply with t standards—through the deployment of wide avallabie and eccnomicaly ‘easible technologies, practices, end strategies —vut many plants receiving a one-year extension risks fro ined fanafi Addresses groundwater co » “coal ast”) disposa! in unt ww and exist CCR surfec ion Standards established carbon dioxide emission stendards for new fossil fuel-fired generators under Clean Air, seation 111) The Clear: Power Pian, proms 11) 0 ated under CAA, estabiishes 2867 2868 2869 2870 (QUO PRE-DECISIONAL DRAFT (! NOT FOR DISTRIBUTION | Intervals and | Shortage Pricing in |, Markets Operated | by Regional ‘Transmission | Organizations and Independent ‘Systom Operators | FERC O% ei B26 Settioment | | | | | I (FERC Order No. 2018 | 927 Reactive | Power ' Requirements for i Non-Synchronous | | + Generation i | 2016 2016 FERC Order 828 Requirements | for Frequency and Voltage Ride Through Capability | of Small Generating | Facilities FERC Order No. 834 Offer Caps in Markets Operated by Regional Transmission Organizations and Independent ‘System Operators = National Ainbient Air Guaiity Standards do not direct) | | | |. FERC stated that “these requirements wil | | June 26, 2017 standards for ~ greenhouse gas emiss| existing power plants. Established settlement interval and shor pricing requirements. Makes final reforms in these two areas proposed in a September 2015 Notice of Proposed Rulemaking. help ensure that rates for energy and operating reserves are just and reasonable ‘and will align prices with resource dispatch instructions and operating needs, provide ‘appropriate incentives for resource performance and maintain reliably." ‘Aiinewiy necting non-synchronous generators will be required to provide react power at the high-side of the generator ‘substation as a condition of interconnectiot ‘set forth in their Large Generator Interconnection Agreement (LGIA) or Sma Generator Interconnection Agreement (SC a of the effective date of the Final Rule. Requirements for Frequency and Voltage Through Capability of Small Generating Faclities, issued July 21, 2016. The Commission revised the SGIA to require generators no larger than 20 MV to have voltage and frequency ride through capabilties. ined an existing $1,000/MVh price c energy offered in day-ahead and real-tim: markets + Also allows prices, forthe purpose of calculating locational marginal prices, tot $2,000/MWh, provided offers are based « verified costs, «FERC stated that itfound that “during the iy iinpack power plants or impose ary comp 2013-14 "Polar Vortex’ led to a slonificar in the price of natural gas that may have caused some resources with must-run requirements to operate at 2 loss becaus their short-run marginal costs exceeded $1,000/MWh offer cap in place at the tir costs on power plants. Instead, NAAQS establish national air quality standards, and states are responsible for developing State Implementation Plans for NOz, SO2, and Os are included here because power plants ar (GiPs) for meeting air quality standards. NAAQS 2 major Sources of NOz and SOz non There are many more FEACdackets related ta this study fo: specific companies or regional operators. The broader non entity specific orders celevant to this study are listed above. Page 137 U.S. Department of Energy 871 872 873 874 (QUO if PRE-DECISIONAL DRAFT // NOT FOR EYSTRIBUTION June 28, 2017 ‘emissions, and because NOz reacts in the at systems on power plants is one possib'e compliance Page 138 Electic Power System, Markeis josphere to form Os, The installation of polation control too! that states may chcose to achieve the NAAQS, | | i i [ i} | | i 2875 2876 (QUO! PRE-DECISIONAL DRAFT !! NOT FOR DISTRIBUTION ‘June 26, 2017 Appendix C. Key Environmental Regulations and Statutes"™ ‘Year Date of Enacted if Exists Expiration ‘Major Provisions Tatangibie 1976, | | yTaxpayers may elect to currently Drilling amended | Revenue | decuct intangible arling costs (IDCs) | Expenses 1954 | Code of 1954 | paldor incurred wit respect to tre / | | development ofan cllergas property | 1 | Tocated in the United States. 10Cs | 1 | include wages, machinery used for | | | | grading and driling, and unsalvageable _ fo ||__materials used in developing wells. __) j Depletion “4926, | i Currently, percentage depletion is | Allowance | amended allowed for independent producers at a | | 1992, | 1 rate of 15% for oil and gas and 10% for | { | 1954, coal, Percentage depletion is allowed | | 1969, | fon production up to 4,000 barrels of | | 1975, average dally production of ol (orits | j | 49788 ‘equivalent for natural gas). The | 1 | 2008 depletion allowance cannot exceed | | 100% of taxable income fromthe | | | property (60% for coal) of 65% of the | | | producers taxable income from all | | sources, Percentage Depletion for | et ho ee! thermal was authorized in 1978.*"”_ Characterizing } Titel i Royalty : Revenue Code , contract may be treated as a capital gain Payments as 1954 | rather than ordinary income. | Capital Gains | | 7578, ‘Out ‘and gas royalty obligations Royalty Relief | amended Continental | may be granted to increase production or to | 1995, | Shelf Lands ‘encourage development on certain | 2005 | ‘Act 1978 ‘TaxExempt | 1880 | Windfall Profit Intereston | Tax Actof | tax-exempt bonds forthe development of Industriat i 1980 facilites producing fuel from solid Development | ' waste. Bonds t 3002, ‘WindatlBrot Proved inc ordi for production o Credits for Tax Actof, nonconventional fuels including, coal Production from 1980 seams, coal-based synthetic fuels Unconventional ronconventional gas and gas from Fuels biomass." 7° som Research and development taxincentives are not Included Page 132 U.S. Department of Energy U9 W PRE-DEK SIONAL DRAFT #! NOT FOR CISTRISUTION June 26, 2017 zd solar fess (no: claiming he ITC) i that commenced constriction po 92017, ‘+ L.2p/Wh for open-loop biomass, landfil] | 5, mun‘'pl sod wase, quaifes hyctoeletrie, and marine and hycrokinetic esergy reronoes ttt commen? carsrtetion pio 2017 he PTC is currently only avaitable to new t wind feces, andthe value of he ced i will step down ennually before being phased out emmpletly 2000 (ve. nen j facies wil se receive 10 years of ex my if placed in service before 2022), EPAct 2005. » Provides amertzation allowance for certain certfied ais poltton contol publicly | 1887 Omnibus ‘tata publicly Gaded { traded | Budget | parmership is taxed as a conporaton isnot | | partnerships | | | Reconciliation | applicable if 90% of gross income is | | treated as | j Actofi9e7 | intrest, dividends, real property res, oF corporations for | i i certain other types of qualifying income; | taxpurposes | 1 | Other types of qualifying income includes | | (Secs. 704 & | | income asd gins fom cert sive 854) I { with respect to natural resources. | Renewable 1952, 1 llowatt-hour tax credit Electricity | amended | for electicity generated by qualified ecergy | : Production Tax | 2005, | i | ling for 10 years om the a | ! Cre | 2008, and | | is placed in service. | 2018 | | le generated fom | | | wind, gothermal, closeé-loap biomass, | ! | | | | | |e Depreciation tor | | Pollution | | facities used ir connecton with an Controt | Slscttic generation plant that is Equipment | ! | primarly coal fired and that was placed | | i : in service after 1975 i 3505, Varies by“ EPACE005 "A tax credit. the ini Credit (ITC) amenied technol investment for select systems that inzoa, sy generate ity at a residence, 2008, and commercial building, or utility scale 2015 ‘The expiration date and value of tie ITC varies by technology. rhe cred was previously available for residential fuel celis, geothermal neat pumps, and sma ind-energy systems prior to 2077, + For comirercia! credit is available electric sys Foge 140 Electric Power System, Markets and Ravahi (0UO // PRE-DECISIONAL DRAFT / NOT FOR DISTRIBUTION June 26, 2017 2050; and 8 30% credits curently wailable for a varlety of solar electric and heating technologies, with the | annually to 10% in 2022 and thereafter. | ‘A.20% tax credits available for power i generation projects that use integrated | ‘gasification combined cycle (ICC) or | value ofthe credit stepping down | certain other advanced coal-based electricity generation technologies | ‘Rdvanced 2008 + Production tax oreditof 1.8 cents | | Nuclear per klowatthour of electicity | Production Tax produced by new nuclear power | ! Credit plants. Limited to 6,000MW and | i the fret years the plantis in| i! service, Plants must be in service | | before 12/31/2000. | i | 2008, BAe EPAck2005. [+ Aresidential tax credit is available for) | Commercial | amended | | energy improvements to existing | | Energy | 2008 (for homes. | | Efficiency Tax | residential | # A tax deduction is available for certain | | Credits jon) 1 commercial buildings ‘Amortization of | 2005 = Olland gas companies can amortize geological and geophysical expenditures expenses related to geological and =| geophysical surveys over two years | (Independent producers) orseven | years (large integrated producers | (Cather than over the lifetime of the | | i Tf | i | | qualifying systeris and energy-efficient | | project) | | ” Garbon Dioxide | 2008 f improvement | = Gredit for the sequestration of industrial Sequestration, 75,000,00 and | source carbon dioxide produced at: Credit 450 } | Qmetric | Extension Act ‘qualified U.S. facilities which may tonsof | of2008 =| _include coal and gas plants. Captured | qualified | carkon dioxide can be reinjected as | carbon | partof enhanced olf and natural gas! | dioxide | | recavary process. | 1 have 1 | captured ; in ! accordan | ce with the 2877 ~ 2878 Page 141 Mortate and Reliability Study U.S. Department of Energy QUO 1! PRE-DECISIONAL DRAFT i/ NOT FOR DISTRIUTION June 28, 2017 sw» Appendix F: External Technical 880 References 881 (Draft as of June 26, 2017) 382 383 Reliability and Essential Reliability Services 384 * The Brattle Group, Reliability Risks Due to Coa! Reticement ot ERCOT, by ta Shavel, Vingxa Yang, Roger Lueken, and Colin Nicintyre, (December 2016), http://www.}£20R sks320D ues2010%20Coal%420Retirement’é2 Gat#2QERCOTS:20FINAL20REPORT#206%420Dec%202016.0df, accessed June 21, 2017 * Carnegie Melion University, Scott institute for Energy innovation, Managing Voriable Energy 89 Resources to Increase Renewable Electricity’s Contribution to the Grid, 90 btto://voww.cmu,edu/ epo/policy-brieis/briafs/34anazing-variable-enerey-resources.odf 91 accessed June 21, 2017. 92 * Christensen Associates Energy Consulting LLC, Ensuring Adequate Power Suoplies for 93 Tomorrow's Electricity Needs, by Mathew J. Morey, Laurence D. Kitsch, 8. Kelly Eakin, and 94 Robert J. Camfield, (Madison, Wi: June 2014), 95 bttns://sww_hks harvard ed.w/heps/Papers/2014/Ensuring%<20Adequatess20Power%20Sunplies 36 3¢20Fors20EMREX20Finalpdf, accessed june 21, 2017 7 * Electric Power Research Insitute (EPRI), Capacity and Energy in tne Integrated Grid, #8 (Washington, DC: July 2015), 9 |itps:// June 21, 2017. 0 * Electric Power Research Institute ‘EPR, Contributions of Sur ” Required Poiver System Reliability Services, (Washington, DC: May 2015}, 2 bttps://, accessed une 21, 2017. 8 * Electric Power Research Institute (EPRI), The Evolution of Anctilary Services to Facilitate 4 integration of Voriable Renewable and Distributed Energy Resources: ASuriey of Some Changes 5 to the Ancllicry Services and Anctliary Service Markets, (Washington, DC: December 201 6 httos:/'ict/000000003002008587/, accessed June 21, 2017 7 * Electric Power Research institute (EPRI), Metrics for Quantifying in Power System Planning, 8 (Washington, DC: July 2014), 9 L 3 3 ' ply and Dezrand Resources to bitpsi//wwnw er com/#/pages/product/000600002002006692/accessed June 21, 2017. ° Electric Power Research Institute (EPRI), Thinking about Generation Diversity: Electric Power Plant Asset Por‘folio Valuation and Risk, (Washington, DC: December 2023}, hetpsi//, accessed jiune 21, 2017 * Glectric Power Research Institute (EPRI), Thinking about Generation Diversity: Port : Electric Power Plant Asset Portjotio Valuation and Rist, (Washington, DC: March 2015), hitos://www, accessed J A + Federa! 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Markets and Reliability Study USS, Department of Eneray asa 152 153 154 155 156 157 158 159) (60 (6) 63 64 65 66 7 68 69 70 71 4 6 ~NNS vBw NR OO (OUO ii PRE-DECISIONAL DRAFT // NOT FOR DISTRIBUTION ‘June 28, 2017 Rational Renewable Energy Laboratory (NREL), Renewcble Electricity Futures Study, (Golden, CO: 2012), htto://wwrw,nrel gov/analysis/re futures/, accessed lune 21, 2017, ational Renewable Energy Laboratory (NREL) and U.S. Department of Energy, The Role of Advancements in Solar PV Efficiency, (Golden, CO: May 2016), btpi//srevw.ncel gov/docs/fy160sti/65872.d¥, accessed June 21, 2017, National Renewable Energy Leboratory (NREL), Eastern Renewable Generotion Integration Study (Golden, CO: August 2016), hit:/Awww.nrel gov/docs/fy16osti/64472 pdt, accessed lune 21, 2017. atone! 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Government Accountabiity Office (GAO), Generation Mix Hos Shifted, and Growth in consumption Has Slowed, Affecting System Operations and Prices, (Washington, DC: lune 2015}, fitp(/weny.2a0 gov/products/GA0-15-524, accessed June 23, 2017 Page 148 Electric Power System, Markets and Retabtity Stucy U.S Tanarmant af Eder (0UO // PRE-DECISIONAL DRAFT / NOT FOR DISTRIBUTION June 26,2017 + *erequerty Asked Questions: How Many Power Piants Are Therein the United States?” Energy Information Adminstavon, ‘nccested October 18, 2016, bttou//mywu.cla gov/toolsteas/faaucimficsGSBe=2- a len Flynn Giles end Kathy L Brown eds, 2015 UDI tector of Elect Power Producers and Distbutors 12374 Eton of tie Electrical World Directory (New York, NY: Platts, 2034), vit, ‘attoss/ ivy platts.content/downloads/udfeondfeendsir.osf, > julia Pyper, "The US Solar Market Is Now 1 Mion Installations Strong," Greentech Media, April 21,2036, eenteshmedia.comJartiies/rea;/The-U.-Soler-Market-Now-One-Milion-instal ations Strong, «electric Substations” Platts, generated March 6, 2009, atts com/lt blstts Content/ProductsServices/Products/elsmetadata/substatn.ock s elen Flyan les and Kathy. Brown ed, 2015 UD Dectry of lecte Powe Producers and tbutrs 23rd Eaton of the Electra! Word Directory (New Yor NY Pits, 2028), i-, seen Flynn Ges and Kathy. Brown eds, 2025 UD Directory of lect Rowe Producers ond Distributors 123rd Edin of the Electrica! World Directory (New York, NY: Platts, 2024), v, httns://vnioeolatts.comyim platts.content/doynloads/udl/epad/, 7 energy information Adminstration (IA), “Table 2.1. Number of Ultimate Customers Servad by Sector, by Provider 2005 through 2015,” in Electric Power Annuel 2015 (Washington, OC: EIA, 2036), nto://wwww ela gov/elecricin/annut 2.02 OL.himl + “cletic Power Sales, Revenue, and Energy fcency Form EIA‘B61 Detalle Data Files,” Energy information Adminstration, last modified October 6, 2016, http://www 2la gov/elertrity/dasa/ela86M. + international Monetary Fund, Word Economic Outlook Cotabase, Entire Dataset, by Country Groups, GP, Curent Prices {intrnationl Monetary Fund, Api 2036), tina it crp/extural ubs//weo/2016/0:/edntshdownioadas <= capacty addons and retirement are the anrus! total for tha continental Ure tates Regulations tavlocentes 37 sans prelemented between 1990-2046 fom Tables X,Y, andZ are shown (note fr review the labels will be undated afer cee igh in on which regulations, Incentives, and orders to include In te appendix table]. Wholesele Gay ahead cree rcy matiat passe for the PIM West Repon. Delivered coal and natural prices are agaregated monthly PM regions Fearne, devived from FEXC-473 and EIA 923 datafiles. In adtion tothe 7 states in PM, EIA included power pla: fel costs Hee euealth exison, Eat Kentucky Power Cooperative, Dominion Power in North Careline, an Indiana-Mchgay peace welghted the fuel receipts by total quantity of fuel delivere to calculate a weighted average monthly cost We cowed the fel prices from MMBtu To MWh to account for cifferentefclencies cf power plants Usha an average heat fate of 10000 Btu/kWh for coal and 7200 Btu/kh for naturel as. 11 SNL Energy, ABB Energy Velocity ‘2 Energy Information Administration (EIA), "Monthly Update to Annual Electric Generator Report” March 2017, https://aww.ela gov/electriity/date/elaB6Or/ 1 Energy information Administration (EIA), Internal Analysis, June 2017. ¥ energy Information Administration (EIA), “Monthly Update to Annual Electric Generator Report," Mirch 2017, https// ‘Travis Kaila paper 14 FERC Rellailty Primer © NERC letter 5/9/27 1 “coal/gas plat cycling: Costs, causes, impacts” Dr. Debra Lew, GE Energy Consulting, 1s Harvard Electricity Policy Group, March 11, 2016, ios ww. his harvard.ecuheos/Papers/2036/March9202036) evse20P resentation ost 2» nergy information Adminstration (IA), “Monthly Update to Annual Electric Generator Report March 2017, ineps://awww.ela.gou/electklty/data/elaBeom/ 2 nergy information Adminstration (EIA), val Analysis, June 2017. Page 149 Elantrin Ogwar Systam, Markets and Reliability Study U.S. Departmentof Energy OUO 1/ PRE-DECISIONAL ORAFT 1! NOT FOR CISTRIBUTION June 28,2017 formation Adri’ (,Slectrie Power ton tes env. gcvielectrictsy/mostny. Energy informatien Administration (21), "Men hisps//waweela gov/eiectrichy/data/elaBeom) hy (washington, DC: ENA, 2027), Update to Anrval Et Generate’ Resort," March 2017, * Energy infor * Evergy onthly Usd sy/datafele8sorn) lectei Ge Report," ttarch 2017, pour. 0 Adinlstration (EA stration (SIA), “Ofonthly Uncate to Annual Electric Generator Aepart" March 2217, vyidata/elessore/ Energy in ermation Administration a), Internal Analysis, june 2037, ® Energy information hetpsi/hwrva'a goufelacr ration (EIA), "Monthly Update te Annual Electric G yidate/ela8son/ nerator Repor," March 2017, nation Adreintstration (SI, latesna} Analysis, june 2047, Siectrie Ganeretor Report," March 2017, 1 Boric o! 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