Why Electrical Grid Governance Needs Reforming

Welcome to the Energy Policy Now Podcast from the Kleinman Center for Energy Policy at the University of Pennsylvania. I'm Andy Stone.

The past few years have witnessed unprecedented challenges to the U.S. electric grid. In 2021, power outages tied to Winterstorm Uri in Texas led to more than 240 deaths in the state. More recently, during Christmas 2022, another winter storm, Elliot, led to outages in the eastern U.S. and brought the PGM electricity market, the nation's largest, perilously close to failure.

These and other recent system problems are frequently attributed to the country's rapidly changing mix of generating resources, including the growing reliance on natural gas-fired power plants and renewable energy. The aging of the nation's grid infrastructure and the increasing frequency of severe weather events have also been named as factors contributing to the grid's reliability problem.

Yet there is a strong case to be made that the electricity system's challenges are not at their root simply a matter of power resources and severe storms. Instead, these problems are symptomatic of a more fundamental failure of grid governance, or the institutions and rules that determine how the electric grid is planned and subsequently built, and how it is operated.

On today's podcast, we'll explore the Byzantine reality of electricity grid governance in the United States and why it makes developing solutions to ensure the current and future reliability of the grid so challenging. Today's guests are Shelley Welton, a professor of law and energy policy at the Pancarey Law School and the Kleinman Center for Energy Policy. Josh Macy is an associate professor at Yale Law School.

The tool will discuss how a lack of public oversight of grid reliability, inadequate coordination between electricity grid regulators, and a misreading of reliability challenges underlie the grid's reliability concerns. They'll also explore solutions to meet these challenges and provide their view on how a changing national political reality may complicate efforts to reform grid governance. Shelley and Josh, welcome to the podcast. Thanks so much for having us.

Thanks. So, Shelly, earlier this year, you and Josh, along with co-authors, published a paper titled The Key to Electric Grid Reliability: Modernizing Grid Governance. Introduce the grid challenges that are driving reliability concerns today, if you don't mind. And this is what your paper seeks to address. Yeah, so I think you started to get at a lot of these dynamics in your excellent intro. Um, but fundamentally the electricity grid is changing and there's several things that are driving that.

We are in the middle of a clean energy transition and that is in part fueled by economics. It is in part fueled by the largest climate bill ever passed in the United States, the Inflation Reduction Act from 2022. It's in part fueled by some state policies. And we're fundamentally seeing a different set of resources.

Connecting to the grid and lining up to connect to the grid. Um, I think the most staggering statistic that I've heard on this is that if you look at what's in line to be built by developers, it's almost all solar storage and wind. And there's about twice as much waiting to connect to the grid as there is total power in the US electric grid right now. And so we're just witnessing a sea change in what developers want to build and put onto the grid.

And you know, that creates a different set of challenges for the grid in terms of how you manage reliability under this set of resources versus the previous century set of resources. And we'll talk more about those in a minute, I think. Uh two other dynamics I thought I might talk about. One is

You know, you brought up these worsening storms and many of those that are putting severe stress on the grid are caused by climate change dynamics or at least contributed to by climate change dynamics. And so at the same time as we see an energy transition underway

to try and address some of these challenges. We are s watching the ways in which climate havoc is really uh putting new stresses on the grid that need to be managed and that you know, in many cases sort of weaken the ability of old resources to perform the functions that they used to perform on the grid.

Uh and then the last thing I thought I might mention is just we are also entering a period of load growth unlike what we've seen in a long time, right? Driven by you know, a confluence of electrification and increased domestic manufacturing and everybody's favorite darling to talk about, uh artificial intelligence and data centers as well to a certain extent.

And so As we see old resources retire and new resources line up but not get connected yet, and load growth increasing, you're seeing more and more people worried about reliability under these changing system.

We're also seeing a corresponding shift in the nature of the grid reliability challenge, which you started to talk about there. Traditionally, reliability was a quote resource adequacy issue in industry speak. More recently, however, concern has grown around the issue of what's called operating reliability. Josh, what are these two concepts, resource adequacy and operating reliability, and what are the implications of each four grid reliability?

Okay, so I'm gonna sort of softly question the premise, but but first I'll answer the question and then I'll ask a follow-up question. So one way of thinking about this is resource adequacy is sort of the provenance of economists.

And operating reliability is the provenance of engineers. So so traditionally resource adequacy refers to the idea that you need enough generating capacity to be able to meet peak demand. So when it negative ten degrees in the winter or a hundred ten degrees in the summer, you need to make sure you have enough generation to actually meet demand at those peak moments.

You can sort of think of this as as how do you build a parking lot? You don't build a parking lot so that there are enough parking spaces uh when nobody goes to the supermarket, you build a parking lot. to make sure you have enough spaces uh during rush hour. And there are a set of challenges about how to pay generating units. The generating units that operate a few times a year or only a few times every few years. but which are really, really needed to maintain reliability.

And resource adequacy has typically been understood to be that problem. Now, there are ongoing challenges about how to deal with that, and I think we'll we'll get back to those in a bit, but the resource adequacy issue is just you need to have enough generating units to meet peak demand, and how do you develop markets, resource adequacy markets to do so?

The operating reliability, you can sort of think of it as can the system respond to sudden, rapid changes in demand or withstand disturbances without major disruption?

these disruptions can occur for a variety of reasons. A transmission or distribution line can trip. You don't want the whole system to go down. You want to be able to contain it to that sort of small area. And so Operating reliability we think of as maybe an engineering question about how can you make sure electricity continues to get where it's needed and how do we have kind of backup systems or ancillary services to make sure that we can do that.

I guess the final way you can think of it is just how do we manage power during disturbances that we don't anticipate because we know that things will go amiss and so we need to have a way to to to keep the lights on. So you know, as I said, operating reliability, y you know, one way you can think of it is it's can the grid maintain a stable flow of electricity during unexpected events or disturbance?

And so unlike resource adequacy, it's not about making sure there's enough generation in the market. It's about how do you respond to sudden, unexpected shifts. That can be um a transmission line goes out. That can be the grid, as as many of you know, must maintain supply and demand in perfect balance in real time.

And so if a a generating unit is suddenly unavailable for some reason, or if consumers start increasing, rapidly increasing demand for electricity, uh you have to be able to balance that, otherwise you have system-wide challenges. And operating reliability is typically understood to be about how do you address those challenges. And

w the when I mentioned that I was gonna sort of gently push back against the premise of your your question, what I meant was that um you know you you suggested that operating reliability is an increasing issue as the grid changes. And and I think My own view is that both resource adequacy and uh operating reliability at least have become increasingly controversial as the resource mix changes and as climate change leads to different weather patterns. And just to give a few

Obvious examples. To the extent that wind and solar are perhaps more intermittent than traditional baseload resources, that can lead to both resource adequacy and operating reliability challenges. It means there may be more uncertainty about how much backup or firm power you need, though there's excellent research on this question. In terms of operating reliability, it means that you might see both because resources are intermittent, but also because you see more extreme weather events.

more instances in which grid operators have to suddenly respond to unexpected shifting conditions.

So Shelley, you and Josh and your co-authors argue uh in the paper that the way in which the grid is governed is ill-suited to enabling the necessary change or driving the necessary change. That is necessary to address the reliability issues we've begun to discuss. To start us out on this, can you define for us clearly what is grid governance? When we use the term grid governance, we mean the landscape of institutions and rules.

that basically create the conditions under which we try to manage the grid, right? So the players in the system and the powers that they're given by law to try and Build a good grid that delivers all of us power whenever we want it, at the times that we want it, from the sources that we collectively decide that we want it. So grid governance today is highly silent, which in turn makes effective governance very difficult.

Can you talk about the many different jurisdictional silos that exist and how they make responding to grid challenges much more difficult? This requires a little bit of a whirlwind tour and I think maybe the easiest way to do this is to start from the top down and talk a little bit about the different players in the system. You know, at least putatively sitting at the top of all of this is the Federal Energy Regulatory Commission, which is the major federal agency.

that's charged with managing the transmission system and the wholesale electricity system that is like sales between uh generators and utilities not to end use customers. And, you know, FERC has some legal authority over several of the entities that I'm about to discuss, but part of our argument is that perhaps it's not enough.

So One of the entities that FERC oversees in part is the North American Electric Reliability Corporation, which uh as its name suggests actually operates somewhat uh beyond the borders of the United States, a little bit into Mexico, a little bit into Canada. And NURC is in charge of setting standards for the reliability of the bulk power system, which you could basically think of as like generation and transmission, right? The big stuff. And it's somewhat jurisdictionally cabined, so it can't

set any standards that require new things to be built. It can just set standards for the performance of the things that are already on the bulk power system. And it operates under fairly lenient FERC oversight. Also operating below FERC are what are called regional transmission organizations or RTOs, they're often known as. And these are I think of them as like a utility of utility.

It's a bunch of utilities that get together in a region and they've agreed to basically, you know, jointly manage their systems, at least to a certain extent. So RTOs control the dispatch of electricity across the system. They run whatever markets the region decides to run and they do future transmission planning for the region. And again, these are overseen by FERC, but under, you know, pretty lenient standard.

And then, you know, I'll say just a word about a couple other entities that have some roles in this space. One is that there are a bunch of other regional players in this system, right? So if you're not in an RTO, you still have to be a part of regional transmission planning efforts. All utilities belong to some regional entity that sits below NURC that does sort of like regional level planning and provides like regional data for the big assessments that NURC does.

And then of course there's another huge player in this system, which is the states, right? So the way the jurisdiction is set up in the US, FERC, as I mentioned, controls transmission and wholesale sales, but states control Their distribution lines, so the smaller lines within their territories. They control retail sales, so how much you and I pay for electricity.

And then they control one other really big thing, which is they decide what kinds of electricity gets built within their state, right? They control generation. Um and some of them do this through still sort of like very comprehensive planning. And some of them have ceded some of this authority to RTOs to essentially decide what gets built through regional

If I could jump in because I think Shelley's answer is completely right. It is clear and it is complicated and it also covers up how complicated some of it gets. The reality is that the specific entities Shelley mentioned, the governance is even more complicated than just that we have these layers within governance entities. So for example, nerd

Is a member owned organization that promulgates reliability standards, but it also does reliability assessments. Those reliability assessments are typically conducted by Sub Nurk regional reliability entities. Those regional reliability entities typically consist of utilities that operate in the region. One way of it's complicated is we have Nurk layered under Nurk which does some

reliability standards which are different from the resource adequacy standards that RTOs do. But another that and that's sort of a a a horizontal complication. You have RTOs that do resource adequacy. And you do NURC that does reliability standards. But then there's a vertical complexity, which is that NURC itself delegates a lot of work. to sub regional reliability entities, which delegate a lot of the work to the utilities themselves. And so in terms of lines of accountability,

our f state and federal regulators don't just look to sort of nurk or the RTOs. They look to nurk the RTOs, they look to the sub regional entities within NERC. within RTOs that are usually it's usually a complex Array of actors on subcommittees that develop specific resource adequacy standards. And sort of time and again it's A difficult to keep track of these lines of accountability, but the the result is time and again, utilities themselves are in decision making roles.

though often opaque ones that are very difficult to see, not just from as a casual observer, but even as as for people who spend most of their days trying to track these things. So what you've described here is an absolutely Byzantine system of of governance for the electricity system where there are so many different entities that are responsible

and each of them has has a a role to play and they are not necessarily coordinated, which is is one level of complexity that we're gonna get a little bit more into in just a few more moments. But

I wanna bring in another issue uh that you highlight with a very interesting quote from the paper. Shelley Uh you and your co-authors write that those outside the energy industry are often surprised to learn that core decisions about the US electricity grid are made by functionally private entities. Could you tell us a little bit more about that?

Yeah, and I think Josh was starting to get at this thicket of ways in which it turns out that electricity governance is largely privatized, right? And I'll say like I think everyone's dream is that they wouldn't ever have to know about this because the system just works and they don't have to understand NURC or RTOs.

or any of the ways that this is comprised. And I think that that was true for a long time, but the dynamics that we're talking about here that are shifting the system, we argue are making it much more difficult to trust. that a system that is run by private entities can actually do the job. So let me talk a little bit about how these entities actually make their decisions and why that's giving us real pause in the clean energy transition.

So maybe I'll start with Nerk, which at least to me has a really fascinating history. So, you know, utilities originally as they were starting to develop their service territories, late 1800s, early 1900s, were working in individual vertically integrated territories where they all built all the equipment that they needed to serve their customers in their territory.

They pretty quickly realized that there were gains to be made from coordination and so began to share power, began to form some like sort of cooperative pools where they would back each other up and have ties across their systems. And by around the 1960s, Um, they realized that they'd created this interdependent system where, you know, because they were connected, if one of them failed, it could have these cascading consequences across many other entities.

And so they decided that they would voluntarily, as a matter of sort of self preservation and their own interests, get together and form a group that would set standards, basically so that one utility's generators couldn't screw the whole system by not being up to snuff. And so they got together, they created sort of the original NERP.

And things persisted this way for a long time and they basically said, you know, Congress, don't worry about this. We've got it under control. Like we care about having a reliable system and so Of course we're going to set the right standards and you can just be hands off about this because we're self-interested in having a reliable system. This all began to fall apart when we saw that.

switched from having vertically integrated utilities to a system where generators are competing to sell power into centralized markets and utilities are buying that power. Uh these generators don't necessarily have incentives to maintain the same standards because, you know, they're not running an integrated system where they could each cause the other's demise, right? And so in the nineteen nineties,

People begin to question, like, does it still make sense to have industry self-regulation of electric reliability? This gets batted around Congress for a little while, and then in the early 2000s, the big Northeastern blackout happened. And this really brought reliability back to the top of Congress's agenda.

And a lot of people said it's time to make a public reliability organization, right? We need a public entity that's setting standards, that's making sure the grid is reliable. And NARC basically went to Congress and said, No, you don't, right? Like what you need is a little bit of federal oversight, but you should still have the industry doing this because we understand the system the best. We, you know, like we know the technical details here, we're best poised.

to basically figure out what we need to have a reliable system. And so we settled for kind of a weird compromise where Congress said, We're gonna create an electrical liability organization, FERC is gonna oversee it, and FERC can decide who they certify. But like everyone always knew that it was gonna be NERC, they got certified.

So they are now certified, but you still have this group of industry incumbents that sets standards for grid reliability through what is functionally like a membership club, right? So all of the generators and other bulk power participants get together in committees

They propose standards, they work through the standards in the committees, they vote the standards out of their committees, they send it onto the board, and the board proposes these standards to FERC, which basically has to like pretty deferentially accept most standards. So Shell, you've just described a situation where private entities are responsible for the reliability of the grid that uh a person who I work with in this industry has described as a situation where the inmates run the asylum.

And there's a very interesting quote that I actually want to ask you about, Josh, that also comes from the paper that I think it's Directly to this problem, paper states nerd. struggles to produce sufficiently stringent standards in instances where these standards would impose substantial costs on generators. Talk about that reality.

I think one way to answer that is to go back to one thing Shelley was emphasizing and and to maybe put it in kind of more obnoxious academic terms, which is there is a a set of conceptual reasons why

academics think self regulatory organizations work in some circumstances. And one reason is Self regulatory organizations are wa are typically thought to be effective when there are clear lines of accountability, such that some regulatory body can actually monitor what's going on and sanction misconduct. And the second

interesting reason is self-regulatory organizations often are thought to really require a kind of harmonization of interests. So every now and then the nuclear industry is cited uh on the idea that If a single nuclear reactor has a problem, the popular response is panic, and so it will negatively affect every nuclear reactor. And and one of the things Shelley was getting at is that in the early days of the electricity industry But it is possible that these conditions applied.

individual utilities controlled their service territories. They would interconnect with utilities nearby, but they were sort of understood to be the the entity responsible for keeping the lights on in that service territory. But as the market has changed and as the resource mix has changed, none of those conditions apply anymore. What you see after every single reliability failure is everyone points fingers at everyone else, right? We now have this.

cavalcade of entities that participate in grid governance, in developing standards, and they can all blame everyone else. And second, people seem to buy that other people are responsible. So after Winterstorm Uri Many politicians in Texas, along with certain industry participants, pointed at wind and solar. Wind and solar are certainly not perfect. They don't solve our reliability issues in every instance, but during Winterstorm Uri, the biggest culprit was gas.

But because there was this sort of narrative, it was reasonably easy to say, well, it's not our fault. And in the wake of Winterstorm Uri, we've seen interventions that increase revenues available to get And so we have a situation where there's no longer clear lines of accountability. It's easy to engage in finger pointing, and we don't have an alignment of interests. And that brings us to your actual question, which is

we don't see penalties. And one of the interesting things about NURC is it actually has authority to bring enforcement actions. But as Shelley was mentioning, it's a member owned organization. And one thing we've observed, though causal inference is tricky here, is despite increasing f the increasing frequency of reliability challenges, NURC has been reluctant to bring enforcement actions. And when it has done so, it's been kind of very light slaps on the roof.

And this is going to tie into something that I think we'll get into later about why are resource adequacy markets not functioning. Once again, all of our regulatory entities are highly reluctant to actually Four. the utilities that they regulate to pay penalties when things go wrong. And one explanation for that that draws a w a great deal on Shelley's work.

is it's really, really hard to penalize the entity that governs you. There's just an obvious misalignment of incentives. And so, you know, while we can't prove that causally. We think it is consistent with the incentives of Nurk and RTOs that they would be reluctant to really rely heavily on sticks rather than carrots when trying to make keep the grid reliable.

So I think, you know, one way in which you saw this manifest in like Truly probably ways that, you know, caused death was that After I can't remember what the twenty eleven storm was that got Firk thinking about this, but

There was a big storm around that time where FERC said, you know, what we really need to be doing is weatherizing a lot of these plants and um suggested that NERC take up a mandatory weatherization standard, which would have required All plans to be able to withstand more extremes.

cold and Nerk started to run it through its process and it just didn't get traction. And what they ended up saying was, you know, we think that plants in their own self-interest will weatherize and that Nurk doesn't need to do anything to make them do so. Right. And you know, sort of the theory governing Texas was

We're gonna have an energy only market and plants that do weatherize will, you know, see such upsides for being available at peak market prices that that's gonna drive them to weatherize. And so we don't need to do it.

And it turns out it didn't drive them to weather ize, right? Like natural gas plants experienced extreme crisis under winter storm eerie eerie conditions. And if Nurk, you know, had been more in line with what Burke thought should have been done at that time, our public regulator, a lot of this place probably would have been weatherized alright.

So I've I've talked a little bit about NURC and NURC's governance and I just want to point out that you have a very similar sort of dynamic at work in RTOs, right? So um RTOs are voluntary regional organizations that utilities join.

if they want to. And they turn control of their transmission, though not ownership, over to the RTO to run the system. And you have a very similar structure to RTOs. These are membership organizations in which uh entities get together in committees to discuss in this case it's not reliability standards, it's really important things like uh what are the rules of transmission planning gonna be.

what are the rules of market entry gonna be? What are the rules governing how you interconnect to our grid going to be? Right. So really foundational rules about what kinds of resources can participate in the system and in electricity markets.

uh are ch are decided by committees in RTOs. Similarly, there's a board at the top. You know, these committees pass their recommendations on to the board. And, you know, in many instances the board does have independent authority to override these decisions, but

Rarely does it do so because these are fundamentally membership organizations where they can back out if they don't like the way that it's being run. And one other point that I'll make on this is just and this gets to what Josh was saying earlier. These are two different entities governing two different parts of the grid, but their membership is largely overlapping, right? So you have membership organizations of the same industry incumbent.

that are setting both all of the market rules, sort of basic resource adequacy principles, and all of the reliability standards. So it's a very entangled privatized system. On the NURC side, you've also you've written that when it comes to solving some of the reliability problems, Nurk has tended to look towards traditional fossil fuel based solutions rather than other solutions that may, for example, imply the use of more renewables or storage. Could you talk about that?

One thing that Nurk does is it publishes these reliability assessments. And one thing that we were surprised to learn when writing this paper was Nurk doesn't actually write the reliability assessment. it outsources the regional reliability entities that sit underneath NURC write them. And typically they delegate considerable work, at the very least, data collection, to the utilities themselves that operate in that service territory.

And usually these reliability assessments contain recommendations. Uh we don't have enough gas on the system, is a very frequent one, especially in the South East and in New England. And These reliability assessments have the NURC stamp on them, and it looks like they're coming from this neutral body, but it actually one was one of the claims we made is that they're effectively written by the utilities themselves. And their recommendations were

typically align with the financial interests of those utilities that participated in drafting. So when you see NURC reports that call for more gas, they're very often in regions where utilities have proposed additional gas investments. in their IRPs. And there are often many reliability solutions to these issues. Additional investment in transmission, additional investment in storage. And

It is extremely rare to see a reliability assessment that considers a menu of options about how to meet the reliability challenges that that region faces. What you typically see is a proposal that aligns with the proposal that the utilities in the region are making in other domains. So that's sort of one way we see what we think of as a kind of Predilection, presumably even a bias towards fossil resources, but the fossil resources that align with the utility's own investment preferences.

Josh, you just mentioned transmission as being one of the possible solutions to the grid reliability challenge and it it's it's pretty clear and it's pretty well established that a a bigger grid is going to be needed to maximize the potential of clean energy.

But a reliable gas supply system is also needed to ensure reliable gas fire generation. And this highlights another reality that we're increasingly seeing, that the electric system has become increasingly reliant on a natural gas supply system that lacks its own reliability oversight. Can you tell us more about this and the operational vulnerabilities that this might create?

I do think that electric gas harmonization is a really important issue and one that we're not dealing with. And it's something that Shelley and I didn't actually address directly in our paper, though perhaps we should have. So to give a few examples, the a as you mentioned in the question, the reliability of the electricity system often relies on a reliable gas.

But the two are not harmonized. So during Winterstorm Uri, one problem one reason it seems that that gas fire generators could not actually get gas. is that the while the ERCOT, which is the grid operator in Tech much of Texas, regulates the electricity system, the Texas Railroad Commission regulates the gas system.

And the Railroad Commission had mandatory curtailment rules that s that explain exactly who pipelines will serve when they can't meet serve the needs of all of their customers. And what the Railroad Commission says is you need to first provide gas to to hospitals, schools, and churches. And don't get me wrong, I I fully support certainly that hospitals and schools get gassed before many other consumers, but I, you know, we can quibble about churches. But the way that this curtailment rule works

is in tension with the way that Texas's electricity market had worked. And the reason for that is it means if you are a gas fired generator, the incentive you have to make investments to make sure you can operate during extreme weather events is you make an ungodly amount of money during extreme weather events, right? When

If a one gigawatt gas fired generator had operated for two and a half days in Texas during Winterstorm Uri, it would have made close to nine hundred and fifty million dollars. To give you some perspective about that. the s entire fixed costs of building a one gigawatt gas-fired power plant are about nine hundred fifty million dollars. I think nine hundred sixty, but I'm not sure about that. So you would have collected the whole fixed cost of a 40-year asset By operating for two and a half days.

And one kind of mystery that a lot of uh you know, Shelly and I don't always agree. I'm a little bit more of a of a markets person than she is. And and one of the things that that people said, and I'm I don't entirely disagree, is, oh, the Texas model obviously didn't work. But so in in some work that you know that g promising nine hundred fifty odd million dollars is not working if the generators don't make investments. And I can't prove this, but a challenge I think is that

These curtailment rules really diminish a generator's incentives to make these investments. And the reason is that if a generator can't enter into a contract for firm supply of gas, It is unlikely to make investments in preparedness for extreme weather events, even though it could get$950 million, because it doesn't know that it will be able to get the gap.

So that's just one example of how we have a set of rules about how the gas system works in Texas and we have a set of rules about how the electricity system works. And they don't align and so that means that the resource adequacy markets we create in the electricity system don't actually work well with the

set of rules about reliability in the gas system. Another example is that we've often allowed force majeure contracts with gas suppliers that say, in an act of God you can get out of this contract. And You know, I've struggled to get good data on this. If anyone uh has has suggestions, I'm I'd be extremely grateful for my own research interests. But it does seem at least anecdotally, that in extreme weather events, gas suppliers

declare force meseure such that that creates a difficulty. It makes it difficult to actually guarantee you can get gas. when the at the very moment we most need it, suppliers can get out of their contracts. And there's even some suggestion I've heard, but I wanna be very clear I have not

been able to prove this, that suppliers will declare force majeure and then sell it to another buyer at a higher price. And that would be, I think, a illegal anti competitive practice that we should carefully bring enforcement actions against. But the point being To bring it back to the animating thesis of the work Shelley and I have done, across all of these domains, you have

a need to think about how these rules interact, but you have regulators that look at the gas system, the electricity system, the resource adequacy system, and that creates tensions that that lead different reliability rules to operate at cross purposes with each other.

So Josh, we've just talked about the complexity, the silos here. So many hands in the pot when it comes to governance for the electric grid. And that fundamentally makes change difficult because there's a lot of a lot of touch points. To keep things very simple at this point. But I also want to point out that the grid operators themselves have looked into solutions to address the reliability challenges that are becoming increasingly worrying.

And uh one of the biggest or the biggest grid operator in this country, PJM, which is here in the Eastern United States. recently pushed through a few reforms to its capacity market. That's the market that it uses to ensure that they have enough generators available at any given time to Theoretically, hopefully in reality, meet demand at those times. Could you talk about PJM's reforms and are they on the right track? What PJM has done is it

modified how it accredits resources that participate in the capacity market. So that just to go back a second, a capacity market as you said, is a market that compensates generators for being available to sell electricity, regardless of whether they sell it or not. It's a solution to that peak demand problem we talked about earlier when we talked about resource added.

In order to participate in a capacity market, you need to be accredited, which is we basically use some measure to say, how much will you contribute to meeting the system's reliant resource adequacy needs? And so you might have a hundred megawatts of nameplate capacity, meaning if you everything is going right, you can provide a hundred megawatt hours of electric energy.

That nameplate is literally the nameplate on the side of the power plant that says this power plant can output a hundred megawatts of capacity. capacity. Pretty much. If when everything is going right, when when the nothing is going wrong, if it's using if it's producing as much electric energy as it possibly can, that's its nameplate capacity.

And accreditation will say, but we know you're not always available. So in some sense we'll say you can operate, you know, 20% or 30% or 60% of the time. And so we'll basically treat you as though your capacity is 60 megawatts. not 100 megawatts, because we know you're not always going to be around. And so what PJM has done recently, it has shifted accreditation to something called effective load carrying capability, or ELCC.

ELCC is a measurement of how much that resource will be able to produce energy when the grid is likely to experience electricity shortfalls. That 30% or forty percent that you just mentioned, right? Exactly. Yep. And and often we've used a historical approach and ELCC basically moves to more sophisticated probabilistic modeling about how to calculate this. Ideally, it happens on the unit specific level rather than every resource of that type.

But basically grid operators run all sorts of simulations where they look at when will there be extreme weather events, what is the expected load or demand at that time. How much will intermittency lead to swings in in supply? So that we can look at each individual's resource contribution to reliability. And one thing that that we do when looking at this is we say

If we took this resource off the market, how much perfect capacity would be required to replace that unit? And so if you take a hundred megawatt solar facility off of the market, if you have a hypothetical, mythical generator that doesn't actually exist that operates 365 days a year, 24 hours a day, you might find you only need a 30 megawatt generator to replace the solar facility. And in that case, we say, okay, the solar's ELCC is 30, not 100.

And so it's compensated as though it contributes 30 megawatts of capacity, not its 100 megawatt nameplate capacity. So that is the the accreditation reform that PJM and other grid operators have been thinking about. So it's basically trying to understand really what is the actual capability of this power plant to provide power in some of the most critical hours of the year. And you know, if you take a if you take a coal-fired power plant, traditional fossil fuel plant.

you have control over the fuel and that is generally going to be a higher rating if you take a renewable because you can't depend on it for the intermittency reasons, right? You you're not gonna have that high of a number. And also if you have a bunch of wind and solar plants or a bunch of natural gas plants, the individual Capacity value of each of those is lower because it's likely that they are going to correlate in their outages. If one goes down for a reason, like

There's a cutoff in a gas pipeline, and there are multiple gas plants tied to that pipeline. Multiple gas plants will in a correlated fashion go out. So the more you have of any type of resource in general, the less reliability contribution it makes to the grid. Is that accurate? Exactly. And accuracy is sort of the relevant word here. ELCC is trying to make our capacity markets more accurately predict whether resources will be available when needed.

And so my own view is that getting resource adequacy markets right requires two things. One is you have to get the accuracy right. You want to know that resources will in have a reasonably accurate way of Predicting whether you have the types and portfolio of resources needed to meet peak demand so that we can maintain a reliable system. The other thing you need is incentives so that the resources actually do what they're supposed to do.

So, one of the things I've I've been worried about is that while ELCC I think reflects an improvement in the accreditation process. we've been less successful at improving the incentives uh that those resources have to perform.

And w th in in capacity markets, one reason for that is that non performance penalties have tr historically been far too small. The way that you're compensated in a capacity market is you

sell capacity and you receive a great deal of revenue for selling that capacity. Then in real time, if you're unable to meet your capacity obligation, if there is if the grid is under stress, and you were supposed to be able to operate, you pay a non-performance penalty because you were not meeting your obligation. And until recently, non-performance penalties have been much too small.

And what this means is if you're a resource, you have some incentive to overpromise your your capacity so that you're paid more upfront because the penalties for non-performance don't actually give you an incentive to operate when needed. And recently in both PJM and in ISO New England, we've seen reforms to increase the stringency of non-performance penalties.

And this is also a welcome development. And in order to get a reliable system, we should accurately predict whether resources will be able to operate, and then we should have some amount of carrots or sticks to make sure that they do. Interestingly, though, as non-performance penalties have gone up, we've seen two problems with getting incentives right. The first is that When grid operators have tried to actually enforce nonperformance penalties, there's been considerable pushback.

So during Winterstorm Elliot, many, many resources were unable to operate. They didn't meet their capacity obligations. They faced a lot very, very high non performance penalties. And then they threaten to sue, they reach a settlement agreement, and the non-performance penalties go down a great deal. Now you could think of this as aligning with a lot of the governance problems Shelly and I have talked about.

If a non-performance penalty is levied against a generator that participates in the governance of the grid, what we're asking RTOs to do is bring penalties against the members that own them. And so it is perhaps unsurprising that grid operators have Seemingly thus far been reluctant to bring significant non-performance penalties, even when they've had rules to do so. The second problem is that.

we've seen during both Winterstorm Yuri and Winterstorm Elliott Bankruptcy by the the unit responsible in a capacity market for paying a non enforcement penalty in Texas's energy only market, the retail supplier that has to pay astronomically high prices. What this is suggests is that we have a uh what we might think of as a counterparty credit risk issue.

that that in a capacity market, a generator, rather than paying its non-performance penalty, could simply default on them its obligation and in doing so not pay. And so what you need if you really want to get resource adequacy markets right. is you need high non-performance penalties, good accreditation, and you need to make sure that generators can pay non-performance penalties. And that probably means they need to be able to hedge. They need to there's a requirement that they get insurance.

Such that they can pay. Or the grid operators themselves force generators to keep enough capital on hand that we know they have cash available to pay high non-performance. And These kinds of reforms would be extremely costly to the generating units. And we've we have not seen

As non-performance penalties have increased, and again, IS New England might be the exception here where it does seem to be thinking about the counterparty credit risk issue, but you also need to make sure they can pay. And that because that is so costly. It's I think unsurprising that that reform has you know, the the RTOs have been reluctant to do this kind of thing. The they would be basically saying we're going to bring a a stick against the the

Some of the generators that participate in our the governance. And so just like Nurk was r has been reluctant to bring enforcement actions against its own members, it seems unsurprising that the RTOs If the two things they need to do are get incentives right and get more accurate, the getting incentives right is the one that is costlier for their members, and that's the thing that has they've been most reluctant to do.

Well so that's that's a very interesting point. So as you've just very clearly stated, the RTOs, which are member organizations, are essentially going to be very reluctant to levy additional costs. or

financial obligations upon themselves. And Shelley, this gets to the next point here in the point of the paper. How might governance therefore be deprivatized? and consolidated to remove some of these conflicts of interest and lead to better governance. So maybe I'll try to zoom us back out a little bit, um, and just point out, right, like we were just in the weeds of one piece of how you ensure

grid reliability, right? Like one theory is you run a capacity market to try to meet resource adequacy and you redesign it for changing conditions to try to get it to meet resource adequacy under you know, a shifting grid. Right. But in fact, as we started with, there's like a huge array of organizations that actually impact reliability beyond this question of capacity markets and resource adequacy. Right. So

NURC is setting these standards that are supposed to ensure that these generators show up when they're supposed to. RTOs are designing these markets and they're also doing transmission planning, right? We really haven't touched that much on transmissions role and reliability in this podcast yet. Right, like as we're you know trying to solve everything on the generator side, transmission is an alternative or additional solution that gets out a lot of these reliability challenges, often at a much

cheaper way if we can build the kind of interregional high voltage long distance lines that we need. We have states doing generation planning, right? So they can be getting new resources to show up on the system through the ways that they run their planning.

Interconnection cues could help new resources show up so that you could lower capacity market prices, right? Like this is a very deeply interconnected system. And part of our argument is that we have a real coordination challenge in the ways that we siloed these little pieces off to various entities.

when what we really need is somebody that can kind of like mind the store and do the whole thing. Right. So I think there's two pieces of the reforms that we suggest. And part of it is that Somebody needs to have more authority to be able to look at this holistically and systematically and not sort of apportion reliability off into these various little pieces.

of ways to solve the puzzle, but like understand that this is a system that's gonna run as a whole and we should be planning it as a whole so that we don't overpay for reliability and under deliver on it. Okay. So there's a coordination sort of like matching the the powers to the problem.

What we've been focusing on the last few minutes is the privatization problem, right? And if you're gonna try to match the scale of the problem to the powers that you give an entity, then privatization becomes an even bigger problem because you don't wanna give that. kind of power to an entity that has, you know, incumbent bias, self-interest, all of the kind of pathologies that we've been tracking.

And so part of what we argue is that especially if you're gonna consolidate power to really do reliability well, you wanna hand that authority to somebody that's gonna do reliability well and like, you know, do it in a way that's gonna be most cost effective. most align, you know, all states priorities across the system as best possible before we're looking, not backward looking.

uh like resource neutral as best it can be in terms of how you come up with solutions. And so to do that, our argument is you're gonna have to stop relying so much on these membership clubs to do both your standard setting and your rule setting. And just to put Shelley's point in in maybe dramatic terms, one way you can think about the effect of we have essentially outsourced reliability planning to the firms themselves, those firms

often have significant, arguable market power in both generation and transmission. And Holistic approach to planning would reduce costs, it would facilitate decarbonization, it would also reduce market power in.

wholesale power markets in the generation side and it would reduce transmission owners' ability to preserve their monopoly over transmission. And so I one way you think of the kind of the what what Shelley, I think, referred to as a reliability Fed or a central coordinator for reliability, is it we really need some way of making sure that entities that want to use their authority to

plan investments to protect their own market power. We need some way to prevent that from happening. And that looks like a central coordinating. And that's the reliability Fed that you just you referenced. So that reliability Fed, w where would that be how?

I will say um I think that we we try to be measured in our piece and both, you know, sort of like lay out a grand vision and then lay out some smaller steps that could move towards that vision. So I think the reliability fed concept is our grand vision. Right. If you wanted to really plan and run a system for maximum reliability, least cost under decarbonization conditions.

Our proposal is that probably that should be housed in FERC, right? You should give the power to your federal regulator that already at least nominally is charged with insuring reliability, but has a pretty scattershot set of tools to do it. You should give them the tools that they need to actually do reliability and meet their mandates to run a just and reasonable system.

Right. And we make this analogy to the Fed because, you know, if you think about the the Fed's role in the financial system, they're given a real like coordinating set of tools, right? So they they can set interest rates and they can sort of monitor banks and make sure that they are doing what they need to do to be stable.

It it has emergency lending powers when needed, it sets capital requirements. So it essentially has some amount of authority to do bank specific Regulation, supervision, and monitoring to make sure that we have a resilient financial system and it has authority to step in when there's a financial crisis.

And I think that's a reasonably good model for the utility system. That you need to stress test utilities, you need to Do scenario planning across the very large system to look at what set of investments would best address our reliability challenges. And you need to have a entity that's not captured by incumbent interests that can bring enforcement actions when things go wrong.

So this concept of a reliability Fed that would be housed potentially ideally or in the scenario that you've just been talking about within the Federal Energy Regulatory Commission, the FERC, would imply that the FERC would have additional authority and some of the authorities that are distributed throughout the industry, let's say, would Come more to the Ferk directly.

That sounds, you know, great to have a one-stop shop, but the the fact of the matter is that there has been some opposition to the FERC having additional authority.

And we saw this under the first Trump administration. We're now one week after this fall's election and Donald Trump is coming back in. What does that potentially mean for having all of this authority concentrated in one area? And and what is the argument? that that administration used in the past and I suppose will use in the future against allowing the FERC to have additional authorities in these areas. One thing I think we need to to mention is that

A FERC Fed can't possibly do all of the reliability things. Right? There are technical standard setting issues where A it may not have the competence to do so, but perhaps more importantly, much of the data is only housed in utilities themselves. So some of the information needed to do planning, as well as the technical expertise, is something that would be difficult for a federal entity to do.

I still think, and I think Shelley agrees with me here, that you want a central entity to develop best practices for resource adequacy markets without having to let utilities do so first, to do transmission planning, to sort out cost allocation, but it might be equally important

To do things like mandate information sharing and transparency requirements so that both FERC and third parties actually have an insight into some of the really technical criteria that would otherwise make it difficult to do. Now, your question I think is basically we just had an election, or at least while campaigning, the Trump administration suggested it would limit federal energy regulatory authority.

And the Trump administration has spoken out of two sides of its mouth. On the one hand, Project twenty twenty five, along with FERT Commissioner Mark Christie, have been highly critical of too much federal authority over the grid, and that would suggest a more limited role for FERC. On the other hand, during the first Trump administration, There was considerable pressure on FERC to use almost unprecedented tools to favor certain resources. So to give two examples.

At one point, um, I think he was commissioner, then he might have been chair, but Chatterjee said, well, if too much coal and gas retires, we'll RMR everything. And what he meant by that is we'll use reliability must-run agreements. which take a generating unit out of the market and guarantee it a return. And we'll make sure that certain resources simply stay in the market because those are tools that we have. These are resources that would otherwise retire. Exactly.

And the other thing that got a l more press was there was a proposal that was pushed on DOE and FERC to use FERC's Section 202C authority, which is its emergency authority. to essentially find out of market ways to guarantee coal and gas would get

huge compensation for storing fuel on site. This too would have is a s you can think of it as a actually there are many examples, but these are just two. We could go into mopers. All of these instances that seem to require a far more aggressive federal regulator to achieve various federal policies that seem to involve a central coordinate.

Which means I'm uncertain about how to predict what the Trump administration is going to do here because At times they seem to want to give authority back to the states, but at times they seem to want to push for rules that favor gas and coal, and to do so by using FERC's own authority.

Shelley, I want to ask you this question. Uh just kind of cutting to the chase, could governance move in the wrong direction going forward in terms of addressing the reliability issues that we've been discussing? What I think I really worry about and I think, you know, pretty much the starting animus for our paper was that we saw entities using this concept of reliability to promote a particularly

sort of backwards looking stalling vision of what the grid should look like. And I have real concerns that this is gonna rear its head again, right? That that reliability is in a way used as like a an excuse or a delay tactic against the clean energy transition, right? So you see the ways in which Texas is now leaning back into subsidizing gas as an answer to reliability challenges, even though gas was central to their problems in ways that we discussed.

And you see entities pushing for changes in how resources get interconnected to the grid to prioritize gas resources. Essentially, right. And so I think my big worry is that we lose sight of reliability as a governance challenge that has many solutions at the technical level and it becomes this sort of like buzzword that maintains a fossil fuel path that we absolutely don't need from a sort of technical perspective of how we manage the grid.

Josh, I want to ask you just a a kind of a final question here. You know, we've been talking this whole podcast about consolidating authorities in in one place. And as we see an administration coming in that may be deregulatory. As a practical consideration, it may be advantageous that at least for the next four years, these authorities remain dispersed.

That the states maintain and exercise their own authority over grid development, you know, generation resource mix, things like that. What are your thoughts? it is obviously hypocritical for me to say this, but you know, Shelley and I wrote this paper when There was a federal government that wanted to reduce electricity bills, improve reliability, and support decarbonization.

we've seen a shifting political landscape. One might say that that's democratic, but I suspect that the the Trump administration will continue what it did in twenty sixteen of favoring certain fossil resources over other resources. And when Shelly and I wrote here is what a empowered FERC would be able to do, an assumption was that FERC would actually try to do things that improve rates and support decarbonization efforts.

Now that the political landscape has shifted, s there are entities that still have a great deal of power to make decisions about how we re-operate the grid. And those are especially states utilities in areas of the country that have either corporate or state decarbonization goals that they need to meet. And those entities are now you can think of them as acting countercyclically. They there are things that they can do. Some of them are quite aggressive. They involve leaving a capacity market and

entering into a joint forward capacity market. Some are simply using the the authority that states do have under recent FERC regulations to do things. And those are in direct tension with what Shelley and I wrote about.

last year, but it does suggest that to the extent that at a federal level the political landscape starts to to look somet like something I don't support, the siloed parochial terrible governance has a silver lining, which is that some of the actors that do want to invest in transmission, invest in clean energy resources. might be able to do more than they otherwise would. Shelley and Josh, thanks for talking. Thanks everybody. Thanks for having us.

Welton, a professor of law and energy policy at the Penn Carey Law School and Climate Center for Energy Policy, and Josh Macy, an associate professor at Yale Law School. For more podcasts, as well as energy policy research, blogs, and even Visit the Kleinman Center website where you can also sign up for our monthly newsletter. Our web address is Kleman.com. Thanks for listening to Energy Policy Now and have a great day.