[UPDATED] Trump Administration to Force Purchases of Coal, Nuclear Power

A draft memo circulated by the Trump administration before the National Security Council urges federal action to force grid operators to buy power from uneconomic coal and nuclear plants.

Bloomberg on May 31 first pointed to the existence of the 41-page memo, which is dated May 29 and distributed Thursday. The memo outlines plans for a directive by the Department of Energy (DOE) under Section 202(c) of the Federal Power Act (FPA) to "direct the operators to purchase electricity or electric generation capacity from at-risk facilities."

The draft memo, which is tagged "Privileged & Confidential, Attorney-Client Privilege," says that regulatory and economic factors have prompted the premature retirement of "fuel-secure" plants-which include nuclear and coal, but also oil-fired and dual-fuel units with adequate storage. "Although the lost megawatts of power often are replaced by new generation from natural gas and renewable energy sources, this transition comes at the expense of fuel security and resilience," it says.

The memo reasons that because premature retirements of fuel-secure baseload plants reduce resilience to fuel supply disruptions, and because this "crisis" is caused by regulatory and economic actions, federal and state regulatory bodies as well as the private sector must act promptly "to achieve a lasting solution that meets the needs of both national security and the efficient operation of energy markets."

The DOE adds that it has begun a 24-month-long analysis, working with five national laboratories to identify critical defense facilities" served by "Defense Critical Electric Infrastructure." In the meantime, the DOE will issue an order (or directive) with authority under the Defense Production Act and FPA as a "temporary stop-gap measure to prevent the further permanent loss of the fuel-secure electric generation capacity for the grid upon which our national security depends, much like the interstate highway system."

The directive-which will be effective for two years-will direct system operators "to purchase or arrange the purchase of electric energy or electric generation capacity from a designated list of subject generation facilities (SGFs) sufficient to forestall any further actions toward retirement, decommissioning, or deactivation of such facilities during the pendancy of DOE's order." SGFs, outside of wholesale market territories should meanwhile continue generation and delivery of power according to their existing contractual arrangements with load-serving entities.

As outlined in the memo, the order will also establish a strategic electric generation reserve (SEGR) to promote the national defense and maximize domestic energy supplies. "This prudent stop-gap measure will allow the Department further to address the Nation's grid security challenges while the Order remains in force."

In response to POWER's questions on Friday, the DOE shared a statement confirming federal action from White House Press Secretary Sarah Sanders.

Sanders said in the June 1 statement that President Trump believes in "total energy independence and dominance, and that keeping America's energy grid and infrastructure strong and secure protects our national security, public safety and economy from intentional attacks and natural disasters." Because "impending retirements of fuel-secure power facilities are leading to a rapid depletion of a critical part of our nation's energy mix, and impacting the resilience of our power grid," the president has directed Energy Secretary Rick Perry to "prepare immediate steps to stop the loss of these resources, and looks forward to his recommendations," she said.

PJM: No Need for 'Drastic Action'

PJM, the nation's largest RTO, on Friday said in a statement that it has not received any official documents or directives from the DOE. "Our analysis of the recently announced planned deactivations of certain nuclear plants has determined that there is no immediate threat to system reliability. Markets have helped to establish a reliable grid with historically low prices," the grid operator said. "Any federal intervention in the market to order customers to buy electricity from specific power plants would be damaging to the markets and therefore costly to consumers."

The grid operator emphasized that there is no need for "any such drastic action." PJM results for its 2021/2022 capacity auction, released just last week, saw an increased amount of coal resources clear the market, along with other resources it noted. Wholesale prices were also tumbling. "From 2008 to 2017, wholesale prices in PJM fell by more than 40 percent. Competition has required generators to operate more efficiently while also attracting new, more efficient technology, resulting in more than $1.4 billion in annual savings."

PJM also said it acknowledged concerns raised by the Trump administration and regulators about the long-term resilience of the grid. "We are embarking on a fuel security initiative that we announced just a few weeks ago. Our goal with that initiative is to ensure that the already reliable electric grid will continue to remain both reliable and resilient for years into the future without the need for government intervention in the marketplace," it said.

An Extraordinary Emergency

Section 202(c) of the FPA gives the energy secretary extraordinary authority to order temporary connections of facilities and generation, delivery, interchange, or transmission of power to mitigate a power emergency, such as a shortage. But the DOE has only issued emergency orders under the FPA at least seven times before-mostly during active energy crises, such as in California in 2000; in Long Island in 2002; during the well-known Northeast blackout of August 2003; and during Hurricanes Rita and Ike in 2005 and 2008. Last April, however, the DOE issued a first-of-its-kind emergency order to keep open a plant slated for shutdown under the Mercury and Air Toxics Standards and secure reliability in Oklahoma.

On March 29, FirstEnergy Corp.'s bankrupt competitive arm FirstEnergy Solutions (FES) filed an application with the DOE urging the agency to "find that an emergency condition exists" in PJM Interconnection's footprint that requires immediate intervention by the energy secretary in the form of a Section 202 (c) order. The order should direct "certain existing nuclear and coal-fired generators in PJM " to enter into contracts and all necessary arrangements with PJM, on a plant-by-plant basis, to generate, deliver, interchange, and transmit electric energy, capacity, and ancillary services as needed to maintain the stability of the electric grid," it said.

While the DOE hasn't publicly rejected the application, it continues to seek ways to keep uneconomic baseload generation from retiring. In September 2017, the agency proposed its "Grid Resiliency Pricing Rule," directing the Federal Energy Regulatory Commission (FERC)-an independent regulatory government agency that is officially organized as part of the DOE-to exercise its authority under sections 205 and 206 of the FPA and require that independent system operators (ISOs) and regional transmission organizations (RTOs) "establish just and reasonable rates for wholesale electricity sales" for power plants that show "reliability and resiliency attributes." FERC rejected the DOE's rule on January 8, however, initiating instead a new proceeding that will examine the resilience of the bulk power system.

A More Recent Tactic: The Defense Production Act

This past April, meanwhile, coal and nuclear generators who were supportive of the DOE's controversial proposal called on the Trump administration to use a Cold War-era law-the Defense Production Act-to subsidize uneconomic baseload plants to secure grid security. The 68-year-law passed by Congress during the Korean War has historically been reserved for use during military operations and major national emergencies, such as the California gas crisis. Energy Secretary Rick Perry told the House Committee on Science, Space and Technology on May 9 that the DOE is "looking very closely at" the law as a way to secure the nation's energy grid.

"That's approaching this from an economic standpoint and I think " it's about the national security of our country, of keeping our plants, all of them, online, being able to deliver energy" in an emergency, he told the committee.

But that measure, too, was heavily criticized. On May 10, a bilateral and bipartisan coalition of American industry associations submitted a legal analysis to the DOE stressing that the Defense Production Act does not contain authority to provide above-market pricing to power plants. The trade groups-which include the Advanced Energy Economy, the American Petroleum Institute, the American Wind Energy Association, the Electric Power Supply Association, the Interstate Natural Gas Association of America, and the Natural Gas Supply Association-also urged the DOE to reject FES's petition under Section 202(c) and noted that Section 215A of the FPA authorizes only temporary measures in response to grid security emergencies.

David Spence, an energy law professor at the University of Texas at Austin, told the WashingtonPost in early May: "One can't really use this wartime authority to subsidize coal and nuclear with a straight face. And I say that as someone who believes that keeping nuclear power plants open is good policy."

A Federal Fog

Where FERC stands on the issue of propping up uneconomic baseload power plants for reliability is also murky. The regulatory body has traditionally opposed intervention in wholesale markets. In January, as it rejected the DOE's grid pricing rule, it said it has taken steps with regard to reliability and other matters that have helped to address the resilience of the bulk power system. However, it added: "The Commission recognizes that it must remain vigilant with respect to resilience challenges, because affordable and reliable electricity is vital to the country's economic and national security."

On Tuesday, in a move that surprised industry observers, FERC told the U.S. 7th Circuit Court of Appeals that Illinois' nuclear subsidy program does not preempt federal statute, siding with the state and Exelon Corp. in a contentious legal fight that has divided the power sector.

According to Bloomberg, the memo makes a case for action, arguing that a lapse in reliability would affect national security, and federal intervention is necessary. Under the plan, the DOE would reportedly direct grid operators to buy power from designated facilities for two years "to forestall any future actions toward retirement, decommissioning or deactivation," the news outlet reported. The planned action will serve as a "prudent stop-gap measure" while the DOE addresses the nation's "grid security challenges" in a two-year-long study.

-Sonal Patel is a POWER associate editor (@sonalcpatel, @POWERmagazine)

Updated-June 1: Adds comments from the White House press secretary; adds comments from PJM; adds details from the leaked memo

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