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September 12, 2016

House Energy Committee Dives into the Federal Power Act

September 12, 2016
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Last week, the House Committee on Energy and Commerce began a long-term, bipartisan examination of the Federal Power Act (FPA) with a hearing titled “Federal Power Act: Historical Perspectives.” Witnesses included former officials from both the Federal Energy Regulatory Commission (FERC) and the Department of Energy. The hearing—held by the Subcommittee on Energy and Power—was led by interim subcommittee Chairman Pete Olson of Texas.

The focus of the testimony was on the history of the FPA and federal regulation of the power grid. However, the hearing also touched on a range of policy issues that are directly relevant to today’s electricity debates. Two issues of note include: 1) the tension between FERC’s responsibilities under the FPA and environmental regulations under the Clean Air Act, and 2) the long-term effects of subsidized wind and solar power on the grid. Both issues are ripe for the Committee to explore.

Tension between the Federal Power Act and the Clean Air Act

The Federal Power Act’s mandate from Congress—dating back to 1935—is to ensure wholesale electricity prices are “just and reasonable.” Despite the restructuring of wholesale markets that began in the 1990s and continues to this day, nothing has fundamentally changed about that mandate, which is now the responsibility of the Federal Energy Regulatory Commission.

However, recent regulations from the Environmental Protection Agency under the Clean Air Act threaten to upend the competitive markets that guarantee just and reasonable wholesale rates in many parts of the U.S. Those organized wholesale markets are based on using the least-cost generation to satisfy demand, whereas the EPA continues to impose tighter and more complex environmental constraints on the electricity generation sector.

Representative Joe Barton of Texas—former Chairman of Energy and Commerce—highlighted this tension, asking: “How do we interact between the Federal Power Act and the Clean Air Act?” The response from witness Linda Stuntz, a former deputy secretary at the Department of Energy, reflects expert consensus on the so-called Clean Power Plan or CPP: “I don’t know how the CPP is going to work on the back of a market-based regional system… I foresee real difficulties. I can’t fit them together, I don’t know how that’s going to work.”

The conflict between the FPA and the CPP—essentially between FERC and EPA—comes into sharpest relief when we consider how states or utilities within a regional electricity market might try to comply with the rule. The most direct method may be to shift away from the tried and true method of economic dispatch (satisfying electricity demand with the generators that can do it at lowest cost) and adopting a new method of environmental dispatch. Notably, environmental dispatch would only work within existing markets without major disruption if operators apply a “price” for carbon dioxide emissions (a carbon tax).

Hence the CPP either forces a radical (and as-yet undeveloped) restructuring of wholesale electricity markets, or it provides a back door for a carbon tax—a politically toxic policy that IER has consistently shown to be all pain, no gain, and a legislative non-starter for good reason. In both cases, CPP compliance raises significant economic and political challenges to the proper functioning of the U.S. power grid.

Effects of Subsidized Wind and Solar Power on the Grid

Several subcommittee members took last week’s hearing as an opportunity to discuss the rapid changes in electricity markets they are witnessing in their own districts. Representatives Shimkus and Kinzinger of Illinois both asked about the economic health of conventional power plants in light of the increasing penetration of renewable resources, namely wind and solar power.

Specifically, Rep. Kinzinger asked about how power plants interact in real time with the intermittent generation from wind facilities. The question is commendable because it highlights an obscure but important feature of wind power—the cost it imposes on the dispatchable generation fleet. Wind output forces dispatchable power plants to “throttle back or shut down,” as Rep. Kinzinger put it, without replacing the need for the plant to remain online to satisfy demand second-by-second (a task wind is wholly unfit to handle). In IER’s report on the levelized cost of electricity, we estimate these “imposed costs” of wind power to be about $26 per megawatt-hour—rivaling the average wholesale cost of electricity—when wind displaces natural gas generation. These costs are real but show up nowhere in electricity prices or government data.

The long-term result of the imposed cost effect is that reliable power plants will increasingly lose an economic battle against heavily subsidized wind power, but will remain indispensible to the grid for their reliable operation. In order to stay online, these reliable plants may require one or all of the following options for remedy: 1) further economic support to make up for losses in energy markets, 2) a new revenue stream from capacity markets, or 3) immediate termination of subsidies and mandates for renewables.

Imposed costs put wholesale markets and policymakers in a bind. Option 1 above is unattractive because two wrong subsidies do not make a right and the exercise could become unbearably expensive. Option 2 is contentious and subject to manipulation but is the status quo in several regions in the country. Option 3 is attractive but unlikely because the wind production tax credit (PTC) is scheduled to remain in effect through 2019 and pay subsidies for at least 10 years beyond that for qualified projects. Further, many states have renewable energy mandates that would force increasing amounts of wind power on the grid even in the absence of the PTC. Allowing wind energy to find its natural place in the power grid would require elimination of the PTC and all state-level renewable energy mandates.

Conclusion

Ensuring the economic health of the U.S. power grid is a huge undertaking, and one that is not likely to receive high praise from constituents or glowing headlines from reporters. As Representative Barton quipped, “This is a complicated issue. It is not an issue that any of us get any kudos for at our town hall meetings.” Nonetheless, last week’s hearing was a vital first step in the long-term process of rooting out the policies hampering the U.S power grid, and the Subcommittee on Energy and Power should be commended in its early efforts to that end.

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