The Niskanen Center, joined by MIT Professors Paul Joskow and Richard Schmalensee, filed an amicus brief in the U.S. Court of Appeals for the District of Columbia Circuit in People of the State of Michigan v. U.S. Department of Energy, et al. At issue is whether the Department of Energy (DOE) exceeded its emergency powers and disrupted electricity markets to keep the coal-powered Campbell Generating Plant in Michigan operating past its scheduled retirement date. The Niskanen brief argues that the order was unnecessary to ensure the reliability of the power grid and that ordering it to stay open undermines electricity markets.
Niskanen has for years advocated for market-based policy tools as essential to ensuring a reliable and affordable supply of energy.
Federal intervention forcing a power plant to remain online after its owner chose to retire it, with approval from its regulator, disrupts the marketplace. That disruption prevents markets from functioning as intended to meet reliability needs at least cost, and overturns investor expectations. It also runs counter to the extensive least-cost analysis for meeting demand and the [Midcontinent Independent System Operator] capacity obligations that [plant owner] Consumers Energy undertook. It means either maintaining an asset that is uncompetitive in the wholesale market it bids into, suppressing investment signals that would spur lower-cost and more reliable new assets to come online, or both. Regardless, it impairs the market mechanisms that the region relies on to ensure resource adequacy over the long term.
In our brief, we explain that markets function best when they are allowed to operate under the minimal necessary intervention. When informed by accurate price signals and open to competition from new entrants, markets are able to solve emerging grid challenges such as supply shortages at the least cost to consumers. Niskanen contends that the DOE’s use of emergency powers under Section 202(c) of the Federal Power Act undermines comprehensive electricity capacity planning and distorts efficient operation of energy markets.
What’s at issue in the 202(c) orders
Under Section 202(c), the DOE has limited, short-term authority to order the production of power in response to a war or emergencies causing sudden increases in demand for or shortages of supply of energy. Recognizing the need for restraint, Congress amended the Federal Power Act in 2015 to limit the duration of Section 202(c) orders to 90 days.
In the past year, the DOE has used its authority under 202(c) to upend retirement decisions for about 4.5 GW of coal capacity across the U.S., a sharp escalation of federal intervention into ordinary grid planning and market processes.
In this case, last May the DOE first issued a Section 202(c) order to keep the J.H. Campbell Generating Plant of West Olive, Michigan, operating. It has since extended the order twice, asserting that an “emergency exists in portions of the Midwest region of the United States due to a shortage of electric energy, a shortage of facilities for the generation of electric energy, and other causes.” It directed Midcontinent Independent System Operator (MISO) and Consumers Energy to keep the plant operational. MISO operates the electric grid for the central United States.
States, with the support and expertise of regional grid operators, routinely make decisions about which resources are built and which are retired to meet forecasted energy demand cost-efficiently in order to maintain electric reliability for customers. At the time DOE issued its 202(c) Order, the Michigan Public Service Commission (MPSC) had already approved the Campbell plant’s retirement through the state’s integrated resource planning process. The retirement had also been incorporated into MISO’s regional planning and market analyses. Niskanen argues that the DOE’s emergency order is at odds with the temporary, limited nature of its emergency powers under 202(c) and is disruptive to the very mechanisms that secure system reliability for the MISO region.
What’s at stake
Electricity markets such as MISO are a cornerstone of the U.S. economy. Their operation is carefully managed, and electricity reliability is maintained through coordinated planning and competitive market activity. Our brief provides the court with vital background on the engineering and economic principles applied in iterative processes to ensure that reliable, affordable power is available to consumers. We also highlight the negative implications of the DOE’s 202(c) order on the functioning of these essential processes.
MISO performs a rigorous engineering analysis of its system to identify how much electric generating capacity is needed to meet customer demand, including reserves needed above the expected peak demand to achieve reliability standards. MISO then assigns a proportionate share of that need to each utility within its footprint, including Consumers Energy. Utilities conduct extensive analyses themselves to compare generation technology options that they may build, and other options such as power purchase agreements, to find a least-cost mix of supply to meet their obligations within MISO. These “integrated resource plans” (IRPs) also evaluate power plant retirements. The MPSC exercises oversight for the IRPs, ensuring that the least cost economic plans are selected that will meet reliability requirements.
MISO also operates a series of competitive power markets. In the capacity market, generators bid in for the chance to be compensated for being available to produce power when it is needed. The brief explains that when MISO’s system capacity “runs low, capacity market prices rise, incentivizing the development of new capacity to meet generation needs or allowing older, less economical generators that otherwise might retire to stay online.” In the energy market, generators bid in for the chance to meet the demand in a specific hour of the next day. The market “clears” at the point that the amount of energy offered matches demand, and winning bids are paid the market clearing price per megawatt-hour generated.
Thus, the markets provide price signals. As we explain, “Developers that can build new, less expensive generation have clear signals to do so. On the flip side, if a relatively expensive power plant cannot win — or only rarely wins — energy or capacity bids, it may not be worthwhile for its owner to maintain the plant. In MISO, these market results feed into integrated resource planning processes, as states scrutinize the results to ensure that non-competitive power plants are retired and replaced with more economic generation capacity.”
Taken together, these processes form “a rigorous system that involves regional transmission organization, state, and utility planning as well as market forces, and responds in the normal course to forecasted ‘shortfalls’ like the long-term trends that the [DOE] Order cites.” In other words, when the system detects a potential shortfall, it responds.
Our brief breaks down this vital but complex system, illustrating that ultimately, by supplanting the established engineering and economic processes, DOE’s 202(c) order “disrupts and undermines” the very mechanisms in place to ensure reliability.
