This is the fifth in a series of six blogs that summarize discussions by top executives, investment bankers, and ex-Federal Energy Regulatory Commission (FERC) Commissioners about developments in the U.S. utility and power sectors. The discussions took place at the virtual 34th Annual Power and Gas M&A Symposium on February 24, 2021.
Jim O'Reilly, Principal Analyst at S&P Global Market Intelligence, moderated the session that included three panelists: (1) Branko Terzic, Managing Director of Berkeley Research Group, (2) Phil Moeller, Executive Vice President of Business Operations Group and Regulatory Affairs at the Edison Electric Institute (EEI), and (3) Travis Kavulla, Vice President of Regulatory Affairs at NRG Energy.
The Roundtable focused on:
The session focused on the Biden administration’s clean energy agenda, issues FERC must deal with, and additional hot topics facing the energy industry.
A few highlights:
- There is an intensity in how the Biden administration is moving ahead, and the entire economy will be affected, not just the energy sector.
- Two thirds of the sector are still fundamentally under state-level regulation, so the federal government will need to be a willing partner to promote investments, not a roadblock.
- If the EPA can recognize that gas is going to be a necessary part of the energy mix for the foreseeable future, although in decline, that will make for some reasonable decision-making.
- How the FERC relates to states and state-preferred resources is high on its agenda, along with transmission incentives and ROE.
- FERC may want to work with states to bring clean energy resources into a wholesale market-based construct.
- The minimum offer price rule (MOPR) is not working efficiently as it pertains to state-subsidized resources, so FERC may work towards something that looks more like a competitive market solution for clean energy attributes.
- The Federal Power Act authorizes the Federal Energy Regulatory Commission to establish a joint board with states that are affected by a particular decision. The FERC Chair could establish a joint board with selected states and have the boards make certain decisions.
Questions to the Panelists:
President Biden has made it clear his administration will focus on climate change and the energy transition. What do you see as the biggest challenges Biden faces in pursuing his clean energy agenda?
Branko Terzic, Berkeley Research Group: There is an intensity in how the administration is moving ahead. For example, John Kerry as climate envoy even has a seat on the National Security Council. The areas of contention will be the green energy and greenhouse gas (GHG) emissions programs and considerations regarding the social cost of carbon. On the oil and gas side, we have already seen a move to stop permitting on federal lands. There will be more stringent regulations invoked with respect to existing water and air regulations. There will be a revoking of the executive order on trans-boundary developments, and other executive orders will be used. Environmental justice will be seen in decision-making, with agencies looking at impact reports on troubled communities. Putting carbon pricing and capacity markets more in tune with state decisions will be one option. We will be looking at pipeline certification, and there will be cybersecurity considerations, continuing the ban on certain foreign manufacturers of controls and equipment for the bulk power industry. So, the entire economy will be affected, not just the energy sector.
Philip Moeller, EEI: About FERC, the resilience docket will be on their plate, and the Chairman will be focusing on wholesale markets. He has made it clear that state preferred resources should be part of markets without being limited through Minimum Offer Price Rule (MOPR) type practices. Again, pipelines and natural gas are going to be viewed more thoroughly. More voices are pointing to the need for extra transmission, and that is extremely difficult. Cost allocation is an issue, as are return on equity (ROE) and transmission transition incentives. With the interconnection queues so long in many places, that will tie into the agenda and the need to get transmission built.
Travis Kavulla, NRG Energy: There are a lot of regulatory activities that either open up lands and permitting processes to the citing of preferred resources, or close things to the citing of disfavored resources. I think we will see a lot of that. For the Environmental Protection Agency (EPA), we will see a return of targeted and forceful regulations on the fossil power sector. Two thirds of the sector is still fundamentally under state-level regulation, so the federal government will either be a willing partner or a potential roadblock to a lot of investments that could come up through that process.
Any other thoughts on EPA's coming agenda and what it could mean, particularly for capital investment in the generation sector?
Philip Moeller, EEI: With the Clean Power Plan, we already exceeded the 2030 targets as an industry, so we are on a cleaner trajectory. The challenge is that our industry still needs to use natural gas. It is so flexible, not only in terms of if-needed baseload, but the ramping capacity that helps facilitate greater penetration of renewable resources. If the EPA can recognize that gas is going to be a necessary part of the energy mix for the foreseeable future, although in decline, that will make for some reasonable decision-making.
Branko Terzic, Berkeley Research Group: There is a significant difference between what Europe and the U.S, is doing on natural gas. Europe has decided that hydrogen will replace natural gas in the future, so the natural gas infrastructure can stay in place, but hydrogen and clean fuel would flow through it. We don't have that policy here, and are talking about writing off stranded investments in natural gas. If Europe can move ahead technically with hydrogen, we ought to be looking at the same thing.
What are some of the challenges Chairman Glick will face in the coming months navigating the ship at FERC?
Philip Moeller, EEI: The state of wholesale markets is one. How the commission relates to states and state-preferred resources is high on his agenda, along with transmission incentives and ROE. There are two new members who will have to learn about different regions, etc. The commission has a series of extensive technical conferences coming up, so there will be a time for education of the new members, which will be necessary.
Branko Terzic, Berkeley Research Group: A relook at the wholesale power market is still going to be very difficult, as these are large organizations with huge bureaucracies now. We probably have 10,000 people regulating the electric power market, and there isn’t consensus on what a wholesale power market should look like. Our wholesale markets have a slightly different definition for kilowatt hours, for example, so a tough task to improve things.
Travis Kavulla, NRG Energy: The existing capacity markets are really FERC creations. If those end up giving way to state-level decision-making, that plugs various clean energy resources into the market, and they receive capacity credits. The capacity markets FERC has worked so hard to create fundamentally become residual, so I wonder whether Chair Glick wants to preside over a significant diminution of the commission's authorities or wants to work with states to try to bring the clean energy resources into a wholesale market-based construct with state participation.
Looking down the road a little bit, what do you see? Do you see a guiding hand? Do you see substantial revisions to market structures and reforms?
Travis Kavulla, NRG Energy: MOPR is dead as it pertains to state-subsidized resources, and a sufficient number of commissioners have indicated that view. In some sense, MOPR is a useful tool. But, when there is no permissible quantification of what an environmental attribute should trade for, it becomes unworkable. So, is there a halfway point that gets us out of MOPR, while preserving the integrity of the capacity market price signal? A likely outcome is one where FERC and the states work together to try to value the contributions of clean energy and the emission attributes they create or reduce in the wholesale markets. The other path is really the abnegation of these capacity markets, except for a very residual function in the face of state policies. I think FERC will work towards something that looks more like a competitive market solution for clean energy attributes.
Branko Terzic, Berkeley Research Group: Chairman Glick has another tool — the Federal Power Act authorizes the Federal Power Commission, now the Federal Energy Regulatory Commission, to establish a joint board with states that are affected by a particular decision. So, Glick could establish a joint board with selected states for each of those solutions, and then have the joint board make the decision.
Philip Moeller, EEI: Looking six or 12 months forward, there will not be major changes because these are very complicated issues. I think state commissions would greatly welcome the chance to work with FERC, and the composition of the commission will be a factor in what FERC decides to do.
Looking down the road a little bit, what are some of the potential outcomes and perhaps lessons to be learned from what happened in Texas?
Branko Terzic, Berkeley Research Group: Clearly, the Electric Reliability Council of Texas (ERCOT) is done, although it may be restructured. Texas is the only market that is energy-only without an integrated resource planning process, and it does not have a capacity market. Texas has 1/6 of all the pipelines in the U.S., but there were freeze-offs at the wellhead and in the pipelines. Permian Basin production dropped by 60% in one day, and all these factors contributed to a market with a cap of $9,000 per megawatt. Most Texans pay a flat rate, and it was their suppliers that took the hit. There are about 29,000 customers with variable rates that have a huge bill. It will be a difficult political decision as to how and how much the state can help.
So what is EEI recommending FERC do with respect to transmission planning? And what are your views on both existing and proposed transmission incentives?
Philip Moeller, EEI: I was always been in favor when I was on the commission of giving extra returns to transmission, given how difficult it is to build it and given the optionality a system with adequate redundancy provides. Also, it is not that big a part of an end customer's build. ROEs are part of that. The incentives have been directed by Congress to FERC and these should be in place. The previous package appears to be pulled back, so we are interested to see where the commission now takes that set of issues, especially in the context of the need for more electric transmission in order to meet customer goals and the administration's goals of more clean energy on the grid. There is also a lot more discussion on the need for interregional planning to meet those goals. However, it is very complicated when you are proposing something between regions, with cost allocation and the variety of issues related to who benefits and who pays. These big projects will need to be partnerships. So partnerships/collaboration is hopefully the tone that will be set going forward in order to get this very important infrastructure actually built.
Branko Terzic, Berkeley Research Group: If you want to have multi-state electric transmission lines where the FERC has full authority, a single agency can determine the benefit of a transmission line. Congress tried to give FERC some of that authority in the Energy Policy Act, but it was a badly written. If the Biden administration is really serious about multi-state transmission to bring wind and solar across the country, it either has to do what Phil just said or it has to have legislation transferring electric transmission to the FERC the way natural gas pipeline transmission is at the FERC.
Travis Kavulla, NRG Energy: I wouldn't want people to think there is no spending happening in the transmission space, because there is a lot of capital that gets invested there. I generally support the transmission where it needs to be built, and interregional projects should be built. But, we are seeing the end-use consumers build, and markets being taken up by transmission and other non by-passable fees that ultimately affect the overall competitiveness that is possible within the market.
Is there one key message that you would like the audience to take away from today's discussion?
Travis Kavulla, NRG Energy: There is a real need for state and federal cooperation, especially in some of the clean electricity policies and how they intersect with wholesale market design. The possibility of joint boards is a great idea.
Philip Moeller, EEI: Investments in the infrastructure, adaptation, hardening, and resilience as we see more extreme weather are going to be necessary. As we have seen, reliable electricity is essential for people's health and well-being and the economy.
Branko Terzic, Berkeley Research Group: I want to commend the Biden administration for stepping forward and saying they are going to put science first. We have to do that and complete life-cycle analysis of all these technologies. I think that is the way we move forward here with these complex interrelated environmental, cultural, and sociological issues.