Do I Stay or Do I Go? A Dispatchable Generator’s Dilemma

On May 4, 2023, Senator Barrasso (R-WY) introduced the Spur Permitting of Underdeveloped Resources Act (SPUR Act, S. 1456, 118th Congress). Among other things, the SPUR Act would require the Federal Energy Regulatory Commission (FERC) to adopt tariff provisions, rate treatments, and other reforms needed to protect the adequacy, affordability, reliability, and security of the supply and delivery of electricity and other attributes of electric supply. Power plant operators’ investment and retirement decisions are crucial to ensuring such goals.

Just days later, on May 11, 2023, in Docket No. EPA-HQ-OAR-2023-0072, the Environmental Protection Agency (EPA) proposed Clean Air Act emission limits and guidelines for carbon dioxide from fossil fuel-fired power plants that would drive major new investment and retirement decisions. As discussed in our Advisory, those emissions limits, if finalized, would apply to new gas-fired combustion turbines, existing coal, oil, and gas-fired steam generating units, and some existing gas-fired combustion turbines, as part of an effort to achieve an 80% reduction in the power sector’s greenhouse gas emissions by 2030. Reports indicate that the EPA draft version of the proposal sent to the White House did not include existing gas plants, but the final proposal was altered to include them at the behest of White House officials who sought to accomplish steeper emissions reductions.

In setting limits, the EPA’s proposal distinguishes among gas-fired units based on their capacity factor, or percentage of maximum output they achieve annually, as peaking, intermediate load, and baseload units. Coal units would need to be compliant by 2030 with the applicable compliance obligation dependent on the unit’s planned retirement date and capacity factor, divided between those retiring before 2032, before 2035 operated as peaking units, and before 2040, and those remaining in service. EPA touted its extensive lead time for full compliance and the compliance flexibility the rule proposed as demonstrating its recognition of the importance of maintaining resource adequacy and the reliability of the power grid. But the overriding message is that operators will have to make new investments to reduce carbon dioxide emissions or plan to retire facilities. The question is whether this conflicts with efforts to ensure reliability and affordability, such as those reflected in the SPUR Act.

FERC, rather than the EPA, is the federal agency with jurisdiction over the terms and conditions of utility service and is responsible for ensuring reliability. Grid operators, including Regional Transmission Organizations (RTO) and Independent System Operators (ISO), run the electric systems in the country’s organized markets, subject to FERC’s oversight. Grid operators and FERC increasingly have recognized that dispatchable power plants (those that the grid operator can call on or off, which typically include gas and coal units) provide attributes the grid needs. One of these grid operators, the Midcontinent Independent System Operator (MISO), has been at the forefront of preparing for operational challenges associated with the evolution of the resource mix on the electric grid. Given that electricity is needed on demand 24 hours a day, seven days a week, MISO has introduced the concept of accredited capacity as a way to normalize, based on historical actuals, the capacity that different units actually can provide. MISO has estimated the capacity value of nuclear at 95%, coal and gas at 90%, battery at 87.5%, solar at 35%, and wind at 16.6%. MISO also has identified six essential reliability attributes: Capacity Availability, Fuel Assurance, Ramp Up Capability, Voltage Stability, Rapid Start-Up, and Long Duration Energy at High Output. These are the types of attributes that FERC may compensate should legislation like the SPUR Act become law. While technological advancements may lead to the ability of wind and solar units to become go-to providers of these reliability attributes, at present they cannot.

Notably, a FERC Staff report relayed the “broad industry consensus that [grid operators] will need more operational flexibility from resources to reliably serve loads as the resource mix evolves to include more weather dependent variable energy resources (VERs) and loads change due to weather-dependent distributed energy resources, electrification, and other factors.” The report explained that “unless and until an adequate proportion of VERs are deployed or paired with storage or other technology that enables them to be dispatchable in both directions, a portion of current VER resources’ output will be largely unable to respond to dispatch, or only able to respond to dispatch to a limited extent due to their weather dependence.” EPA’s proposed rule would require major investments or retirement for those fossil fuel-fired units that could be paired with VERs or provide dispatchable capability on their own.

By way of additional background, on June 21, 2022, four grid operators, including the PJM Interconnection, the Electric Reliability Council of Texas, the Southwest Power Pool, and MISO (collectively, Joint ISO/RTOs) filed comments with EPA focused on the reliability-related implementation challenges of the EPA’s proposed rule on the implementation of nitrogen oxide emission limits on electric generating units. In those comments, the grid operators expressed the need for including a reliability-based “safety valve” provision in any future final rule. They stated:

Resource adequacy, in general terms, is achieved when the megawatt capacity of the generators in a particular region exceeds the forecasted load for that region by a reserve margin. The Joint ISO/RTOs are experiencing a trending decline in reserve margin, and believe that the Proposed Rule could substantially accelerate that trend at a time when we are facing the need for increased reserves resulting from extreme weather, high load conditions and generator retirements. Replacement of retiring generation with new facilities presents its own risks. It will take time to obtain the required regulatory approvals to construct new generation and especially any needed transmission facilities to connect that generation to the grid. Of course, resource adequacy must be maintained and NERC reliability standards met in this interim.

The Joint ISO/RTOs are concerned that the Proposed Rule could cause generator retirements due to the limitations on operations and/or the cost of installing Selective Catalytic Reduction (SCR) by 2026.

One might reasonably expect the grid operators to express similar sentiments in their comments on EPA’s recent proposal. As successful legal challenges have foiled many a past EPA rule, it remains to be seen how EPA will address grid operator concerns that the electric grid can ill-afford an increase in dispatchable retirements before adequate substitute resources are in operation.

And the dispatchable generator considering how to react in this push-pull environment of competing agencies and objectives may find the words of The Clash quite apropos:

If I go, there will be trouble
And if I stay, it will be double.

© Arnold & Porter Kaye Scholer LLP 2023 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.