FERC's Solution to DOE's NOPR - What's the path forward for natural gas?

The Federal Energy Regulatory Commission's (FERC) interim rule, to be released by December 11, may shape the nation's energy infrastructure by maintaining coal and nuclear plants past their expected retirement dates. Maintaining baseload plants for the sake of grid resiliency could stall new natural gas infrastructure development and distort power markets as early as next spring. But in another, more fuel-neutral scenario, FERC has an opportunity to stimulate investments in firm gas transportation, gas storage and backup fuel capabilities, thereby supporting infrastructure development. Regardless of its substance, the rule has already set a path toward months, if not years, of legal challenges, as well as state, Independent System Operators and Regional Transmission Organization responses and rulemakings.
After thousands of filings and countless trade press articles, LawIQ's White Paper offers a view into the implementation timeframe, the FERC decision making process, and the market impacts. Our expert team will continue to offer insight into developments in order to provide our subscribers with the "so what," as we do for critical regulatory, litigation and policy matters impacting the natural gas industry.

Table of Contents

• Executive Summary
• Possible Implementation Timeline
• FERC's Decision Making Process
• Market Impacts
  • Natural Gas
  • Coal
  • Nuclear
  • Gas Pipelines
• Opportunity for FERC to Shape Energy Infrastructure

Executive Summary

The Department of Energy's (DOE) recent Notice of Proposed Rulemaking (NOPR), directing the FERC to issue a rule early next month directing RTOs and ISOs to, essentially, subsidize coal and nuclear electric generating plants has generated more heat than light. Ostensibly aimed at ensuring the reliability and resiliency of the nation's bulk power system, the proposal would subsidize those plants that can hold 90 days of fuel supply on site, i.e., coal-fired and nuclear plants, and effectively penalize gas-fired plants. More than a thousand comments have been been filed with FERC in response to the NOPR in a rulemaking that would, based on our analysis of rulemakings, be the fastest ever at FERC. (The shortest rulemaking with 100+ comments took 500 days.)
Despite the industry's generally negative reception, it appears that FERC may soon decide on a measure to benefit coal and nuclear plants in the short term. This measure may also provide an opportunity for FERC to balance the threat to other fuel sources by providing gas-fired generators with an incentive to contract for firm pipeline transportation, as well as energy storage, thereby supporting infrastructure development (which, in addition to supporting coal, deliver on another of President Trump's campaign pledges). If the interim rule encourages investments in firm gas transportation as a mechanism for crafting a fuel-neutral solution, which fits squarely within FERC's jurisdiction, the result could be beneficial to developers, primarily those adding laterals to gas generating plants or planning incremental compression.

Possible Implementation Timeline

Speaking at an industry event last Thursday, FERC Chairman Neil Chatterjee announced that FERC was working on an interim plan to maintain baseload generation while FERC more fully evaluates the DOE proposal. Chairman Chatterjee indicated that an interim solution was required to avoid "plant shutdowns" while FERC undertakes the thorough analysis required by DOE's NOPR. Chairman Chatterjee, in an interview November 15 with Utility Dive, further outlined his plan, indicating RTO and ISO will either be required to provide "interim compensation" or "show cause that it not be required to do so." This interim solution is expected to be promulgated early next month, as FERC is statutorily required to act in response to the NOPR's requirement that FERC either "take final action by December 11, 2017 or ... issue the proposed rule as an interim final rule."
Based on FERC taking action on December 11, the estimated timeline of events will drag out at least until February 2018, when ISO/RTO tariff revisions are implemented:

NOPR Timeline

FERC's Decision Making Process

Many of the public comments filed with FERC complained that the NOPR's mandated response timeline was far too short. To that end, apparently, Chairman Chatterjee has indicated that FERC's interim solution will be issued along with a plan that provides for FERC's further analysis and action to address the NOPR's requirements. The plan may be based, at least in part, on a FirstEnergy proposal, submitted in its public comments to the NOPR, that provides that certain baseload plants be designated as "resilient" by regional grid operators and receive financial subsidies in the form of monthly payments that would offset operational costs. FirstEnergy's proposal has been in the spotlight for several reasons. Commissioners disclosed that they had met with the company in recent weeks (along with other stakeholders). FirstEnergy's struggling coal and nuclear plants stand to benefit from the rule and, as a result, the company is one of the few generators supporting the NOPR.

This interim plan must be supported by a majority of Chairman Chatterjee's fellow commissioners, two of which, Commissioners Cheryl LaFleur and Robert Powelson, have expressed their concern that the DOE proposal would destabilize energy markets. Two other commissioners, Kevin McIntyre and Richard Glick, were confirmed November 2 by the Senate, and will soon be sworn in to serve on the Commission, with McIntyre replacing Chatterjee as the chairman. For his part, Chairman Chatterjee does not anticipate any disruption in seating a new chairman; he indicated last week that, with respect to FERC's interim plan, he is hopeful that McIntyre will carefully evaluate the record prepared by FERC and follow the course that FERC has embarked on in response to the NOPR. Although unlikely, it is possible that the new chairman could direct staff, who work for the chairman, to revise FERC's response to the NOPR.

FERC Rulemaking Timeframe ('08-present)

Market Impacts

Although Chairman Chatterjee has predicted that FERC's response to the NOPR will not disrupt the energy market, it is hard to believe that there will be no effect, given the thousands of contracts struck previously to buy or sell power in 2018 and beyond. If FERC's response is similar to the FirstEnergy plan to subsidize baseload plants, it is likely that the interim plan -- and the eventual, final FERC response to the NOPR -- will disadvantage gas-fired plants.

The focus of the NOPR and its responses have been on PJM and MISO, given that the other organized markets (ISOs and RTOs) have either very little remaining nuclear or coal capacity (California, New York and New England) or such generation is already subsidized by state programs (New York) or are owned by rate regulated utilities (most of SPP). Indeed, on November 15, PJM issued its own updated proposal that would change how the nation's largest grid operator sets energy prices, and which could provide increased revenues for "inflexible resources," including coal and nuclear plants. This proposal could ostensibly be seen as the ISOs' response to the imminent FERC NOPR and, therefore, provide further weight to such concerns.

Natural Gas

Natural gas consumption for power generation and, therefore, flows on regional pipelines, could be impacted by changes to power market rules in five of the states discussed above, Pennsylvania, New Jersey, Maryland, Ohio and Illinois. All five states are at least partly within PJM and feature merchant natural gas as well as coal and nuclear plants.

Assuming the rule incentivizes coal plants to bid below their marginal costs and therefore less than the cost of even the cheapest gas plants, gas burn could fall back to the average seen between 2011-2015 from levels observed since the start of 2016. Under that scenario, gas consumption could decline as much as ~750MMCF/d in those five states, based on data from the Energy Information Administration. The five years prior to 2016 are a useful reference period as that is when U.S. coal generating capacity fell from roughly a third of the U.S. total to 26%, as plants shut down ahead of tightening emissions rules, according to the August 2017 DOE's Staff Report on Electricity Markets and Reliability.


Assuming the remaining coal generation is encouraged by FERC to stay online or run longer, this has the potential to tilt the playing field against existing gas plants and the nearly 10,000MW of new, combined-cycle generation expected to start operating over the next year or so in these five states. In another scenario, the impact to gas plants could be seen only during periods of high demand  as coal and nuclear generation remain in service longer than currently envisioned, and help maintain extremely high reserve margins in power markets.

Natural Gas Consumption by Power Generators in Key PJM/MISO States

Coal

At least 2,500MW of coal generation is expected to be retired over the next year in Pennsylvania, New Jersey, Maryland, Ohio and Illinois. Depending on the breadth and precise nature of FERC's interim plan, some or all of this capacity may be retained if the subsidies are sufficient to stimulate the operators of these plants. Other plants not currently slated for retirement are also in jeopardy of closing due to a continued shortfall in energy revenues, which is what the NOPR is trying to avoid. In addition, coal plants in the region that are to be converted to run on gas may remain at least partly on coal, which can be stored on site. In the long term, coal powered generators considering conversion may be discouraged.

Currently, coal inventories at power plants in some of these affected states remain high by historical measures, but have declined over the past year due to higher generation this year and coal production cuts since 2015, as demonstrated below. Few if any carry 90 days of storage on site, due to cost of inventory and space to store such amounts of fuel, with industry standards typically in the 30-60 day range.

Power Plant Days of Forward Coal Supply in Key PJM/MISO States

Nuclear

Plants at five nuclear sites are also currently scheduled for retirement over the next four years, including one each in Pennsylvania and New Jersey (Three Mile Island and Oyster Creek) in 2019. While there are many considerations that drive a decision to retire a nuclear plant, the availability of financial subsidies may cause the operators of nuclear plants scheduled to retire in the next several years to reconsider their plans.

Gas Pipelines

Currently, there are more than 10 combined-cycle natural gas plants under construction in Pennsylvania, Ohio, Maryland and New Jersey, which cumulatively are expected to consume more than 1 Bcf/d of gas. Those plants have either direct interconnections to the major Northeast pipeline systems or through new laterals such as the UGI-Sunbury line connecting Panda's Hummel plant in Northeast Pennsylvania to the Transco Leidy and Marc-I systems. While some of these gas generators have dual-fuel capability, the infrastructure to hold 90 days of backup supply, as called for in the NOPR, may require substantial, future investment. And, as shown below, gas pipelines less than 100 miles take, on average, 638 days to complete.

As an alternative, these gas plants could contract for firm transportation rights or incremental storage capacity, but it is unclear until the rule is set whether that would be viewed as equivalent to on-the-ground inventory at a coal or nuclear plant. If that were to be the case, the rule would then need to outline how the ISOs would provide for those plants to recover the cost of firm pipeline capacity. Assuming such a provision is put forth, it would support both revenues for existing pipelines as well as some new capacity to serve existing and new power plants.

Pipeline Expansion Project Duration from Certificate Application to In-Service

Opportunity for FERC to Shape Energy Infrastructure

While developments impacting the next steps are changing daily, at this juncture a rule emanating from FERC on December 11 will undoubtedly disrupt energy markets and set a path toward months, if not years, of legal challenges, as well as state, ISO and RTO responses and rulemakings. Although Chairman Chatterjee disclaims any intention to distort markets, FERC's response to DOE's NOPR will invariably shape the nation's energy infrastructure, at least on the margins - by maintaining coal and nuclear plants past their intended retirements.


Beyond baseload plants, the end result could, at least in one scenario, stall new natural gas infrastructure development. In fact, the North American Electric Reliability Corporation (NERC), which is charged with maintaining grid reliability, issued its own report this week on the potential for disruptions to power markets in the event of a major natural gas system outage. NERC recommends, among other propositions, to increase the use of firm fuel agreements and to continue to expand the pipeline network to keep pace with growth in gas-fired electric generating capacity.

Whatever transpires on December 11 may foreshadow FERC's final response to the NOPR. LawIQ will continue to monitor the process and provide our subscribers with our qualitative insights about the "so what" of the regulation and the opportunities and risks that the ultimate decision presents.