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Energy
October 15, 2024

Federal Energy Reforms to Ensure Grid Reliability, Encourage Competition, and Combat Inflation

Recommendations for the next administration and the 119th Congress 
October 15, 2024
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Executive Summary and Introduction

  • Energy inflation has been been devastating to the budgets of lower income Americans and their families
  • Top-down mandates and egregious subsidies have undermined grid reliability, expanded the deficit, and raised energy costs for American families and businesses
  • The next president must appoint chairs to the Nuclear Regulatory Commission and the Federal Energy Regulatory Commission who will pursue policies that expedite approvals and investment in new nuclear plants and critical energy infrastructure
  • The next president must reverse and abandon the use of the federal bureaucracies to implement a top-down energy transition that picks winners and losers in appliances, automobiles, and on the grid
  • Congress must take action to amend the Inflation Reduction Act to scale back subsidies that will both grow the deficit and undermine American energy security

The North American electrical grid is the backbone of American prosperity, providing the electricity that enables our modern way of life. To fulfill its mission our electrical grid must provide electricity that is both affordable and reliable. Unsound energy policies have undermined reliable grids and stable, affordable prices for households and businesses. Electricity prices rose by 14.3 percent in 2022. The bottom quintile of income earners in America spent $4,639 on utilities and gasoline in 2022, up from $3,887 in 2021, over 31.9 percent of their household income. The median American household saw their energy costs rise by over $1,000 dollars. Energy inflation has devastated American families’ budgets.

The value of reliable and affordable power is most evident in its absence, when the heat and lights go off and no one knows when they will return. In recent years, blackouts have resulted in hundreds of deaths in Washington, Oregon, and Texas. New York City has been left at risk of deadly rolling blackouts during a severe heat wave due to insufficient power generation. Federal and state energy policies undermine the reliability of the grid and have left Americans vulnerable to spikes in electricity prices, rolling blackouts, and the potential for catastrophic grid collapse.

America’s electrical grid regions struggle to keep a steady and reliable flow of electricity for their customers. Subsidies and mandates that favor wind and solar have fueled their growth in Regional Transmission Organizations (RTOs) at the expense of dispatchable power generators, particularly coal and nuclear facilities. Technocrats and lawmakers have forced gas-powered appliance manufacturers to discontinue their products, or outright banned them, leaving American families more dependent on the electrical grid. The bureaucracy of the Nuclear Regulatory Commission (NRC) has stifled innovation and prevented the deployment of third and fourth generation nuclear technology onto our grid. These policies have left American families vulnerable to blackouts and hinder their ability to protect themselves from the hardships of extreme weather events.

In 2022, Congress passed the Inflation Reduction Act which included tax credits for electric vehicles, solar panels, geothermal production, nuclear power. The total cost could exceed one trillion dollars. These subsidies and the use of top-down regulations will accelerate the reliability problems on grid regions throughout the United States. Throughout history, every previous energy transition resulted from bottom-up processes where a superior form of power outcompeted its rivals on the merits. The world transitioned to coal from wood because it was a superior source of power, with greater power density, easier transportation, and more scalable extraction processes. Similarly, natural gas has continued to replace coal due to the lower operational costs of gas power plants, cheaper transportation, and ability to ramp up and down production to respond to changes in demand and supply. The electrical grid is not the system that should be targeted for top-down experimentation. The consequences of a mandated transition have the potential to be catastrophic as electricity demand increases and reliable baseload power is forced off the grid due to regulations and subsidies. Federal regulations limit the ability for the private sector to respond to new demand from industrial customers, limiting economic growth and reducing investment in industries critical to the United States’ prosperity and national security, from artificial intelligence to aerospace manufacturing.

In 2025, Congress and the president should pursue policies which will ensure grid reliability, encourage innovation, and combat inflation. They should rescind regulations and tax credits that pick winners and losers among power generators and consumer appliances. They should also liberate natural gas production and expedite approvals for import and export terminals. Congress and the NRC should also create streamlined regulatory processes to accelerate the development, approval, and permitting of new advanced nuclear reactor designs. The continued prosperity of the United States requires legislative and executive action to unlock the power of American entrepreneurs, investors, and engineers to build and manage an energy system designed to meet the demands of the 21st century.

The state of the grid and energy inflation

The American bulk power system is at the brink of crisis. The Federal Energy Regulatory Commission (FERC) allowed for the creation of RTOs and Independent System Operators (ISOs) with orders 888, 889, and 2000. The goal of these orders was to deregulate the electricity markets to reduce costs for consumers and improve operational efficiency, while maintaining grid reliability. In RTOs, the power generators are independent entities that compete with each other to sell electricity into the grid. In theory, less efficient power generators would be outperformed by more efficient competitors, which would drive down costs for consumers. In practice, mandates and subsidies have distorted these markets and forced the premature shutdown of dispatchable power generators—nuclear, coal, and older natural gas plants—that are critical to maintain grid reliability.

The North American Electric Reliability Corporation’s Summer Assessment 2023 warned of the possibility of significant issues in grid regions throughout the United States. In practice, the grid regions were able to persevere without catastrophic failure, but there were many stressful moments. The Texas grid broke its maximum load record ten times over the course of five weeks and was forced to issue an energy emergency alert level two—the second most severe warning, indicating persistent low operational reserves—and take significant action to prevent damage to critical grid infrastructure. New England faced similar issues and needed to burn significant amounts of fuel oil that power plants had stored on site. California’s grid ran on slim operational reserve margins but was able to avoid significant issues due to greater than average output from its hydroelectric power plants.

Energy prices in the United States are also more volatile because of specific policy choices. These choices have devastated the budgets of lower income Americans. Energy costs make up a larger portion of lower income Americans’ budgets. Inflation in energy costs translates to higher utility bills, more expensive groceries, and frustration every time they fill up their gas tank. According to the U.S. Energy Information Administration (EIA),the average cost of residential electricity in 2022 rose more than in any year since record keeping began four decades ago. The average monthly cost increased from $121 to $137 per month, or five percent after adjusting for inflation. 

Most of the problems plaguing RTOs stem from top-down mandates and subsidies that favor wind and solar. A 2023 report from NERC added a new section to highlight this category of risk: “Risk Profile #1: Energy Policy.” Subsidies and mandates that accelerate the adoption of solar and wind power in RTOs increase the risk of rolling blackouts and catastrophic grid failure. Residential utility bills increased due to a greater reliance on these intermittent sources as severe heat waves in Texas and elsewhere stressed grids. In Texas, high temperatures caused prices to spike as high as $5,000 per megawatt hour (MWh). Grid operators were forced to deploy all available dispatchable resources to keep the air conditioning on. The risks to the grid grow as a smaller portion of power comes from readily dispatchable power plants—coal, nuclear, hydroelectric, and gas. Batteries and other forms of storage may have the potential to mitigate these issues in the coming years, but those will also require significant investment.

The United States grid is also vulnerable to cybersecurity attacks, particularly from state actors. The NERC report states that as the United States transitions to more intermittent resources, batteries, and grid-connected microgrids, the complexity of the power grids compound. This additional complexity makes communication systems more critical to successful operations and, therefore, a higher value target for cyberattacks from hostile state actors. State actors will aim to attack the grid when it is at its weakest, during a heat wave or winter storm when the system is already stressed.

The United States’ bulk power system and the American people have been left unnecessarily vulnerable to shocks and attacks. Leaders at the federal and state level need to take decisive action to mitigate these risks and deliver on the expectations of their constituents. A top-down energy transition that devastates lower-income Americans’ budgets and leaves them vulnerable to catastrophic risks is doomed to fail.

Executive Action 1: FERC appointments to promote reliability and investment

The next president will have the opportunity to appoint four or more commissioners to the Federal Energy Regulatory Commission before the end of their term in 2028. FERC is responsible for regulating interstate transmission of electricity, oil, and natural gas and has the authority to pass rules which shape American energy markets. While FERC is an independent body, the president has influence over its rulemaking by appointing the chair and the commissioners. The chair has significant influence over FERC as they set the agenda for the commission, oversee the staffing of the agency and its offices, serve as spokesperson, and lead strategic initiatives.

With the right appointments, the next president can exert significant influence over American energy policy. The next chair and commissioners must:

At present, electricity markets in RTOs do not effectively ensure reliability. The subsidies in the Inflation Reduction Act will only exacerbate existing problems. The next FERC chair will need to take decisive action to address reliability issues and ensure that Americans have access to a world class electrical grid which provides reliable power at an affordable price. 

Executive Action 2: NRC appointments to promote competition and innovation

The next president will also have the opportunity to appoint a chair and at least four commissioners to the Nuclear Regulatory Commission. Since the creation of the NRC in 1974, only two new reactors have been approved, built, and commenced operations. The Nuclear Regulatory Commission needs competent leadership to pave the way for an American nuclear renaissance.

The president should appoint a chair and commissioners to the NRC who will reform its regulations and procedures to accommodate greater innovation in the American nuclear sector. The new appointees must amend 10 CFR Part 20, which establishes standards for protection against ionizing radiation for all activities regulated by the NRC. Specifically, they must replace the Linear No Threshold (LNT) model of radiation harm with a Sigmoid No Threshold (SNT) model of radiation harm and remove all ‘As Low as Reasonably Achievable’ (ALARA) standards. The LNT model is based on unscientific assumptions of harm and creates requirements that impede new reactor construction. ALARA should be replaced with set operational guidelines that maintain employee and civilian safety and consider the benefits of nuclear power and the costs of excessive regulation, in the forms of greater poverty, higher carbon emissions, grid unreliability, and pollution. The safety record of the American nuclear power industry is impeccable: there have been no civilian deaths associated with the operation of an American nuclear power plant. The industry safety accident rate—for all workplace accidents—is lower than office workers and tax accountants. American nuclear power plants are safe and these changes will keep them safe while enabling the nuclear industry to innovate and compete.

The most significant barrier to an American nuclear power renaissance is the approval process for new reactor designs. Under the Nuclear Energy Innovation and Modernization Act (NEIMA), the NRC was directed to create a new process for approving advanced reactor designs. The appointed chair and commissioners should create processes that are non-prescriptive, will allow for innovation in reactor design, and provide a clear path to approval for applicants. With the recent signing of the Accelerating Deployment of Versatile, Advanced Nuclear for Clean Energy (ADVANCE) Act into law, the NRC has been charged with developing an expedited procedure for combined license reviews of new nuclear reactors at existing nuclear sites, or sites adjacent to them, and otherwise improving the efficiency of the approval process. The NRC has also been given greater authority to hire contractors and provide bonuses for NRC employees in order to execute on the ADVANCE Act’s bipartisan mandate. The next chair of the NRC will play a critical role in determining the trajectory of the United States nuclear industry over the coming decade.

The new appointees should also seek reforms to allow for greater collaboration and, where pertinent, information sharing between the Nuclear Regulatory Commission and the peer regulatory authorities of allied nations. When possible, the NRC should work towards reciprocity:that is, allow American companies with NRC-certified designs to receive expedited approval abroad.

If the United States intends to meet proposed emissions goals, maintain grid reliability, and secure its future prosperity, reforming the Nuclear Regulatory Commission is essential. These regulatory changes will allow for greater investment into critical infrastructure that will protect Americans from extreme weather, mitigate electricity price volatility, and power the growth of critical industries. The approval of advanced reactor designs is urgent as communities seek the opportunity to transition retired coal plants into small modular nuclear power plants. These communities in particular will be the first, but not the last, to benefit from an abundance of energy, higher tax revenues, and greater job opportunities.

Executive Action 3: Rescind harmful regulations that eliminate consumer choice and hurt competition

The Department of Energy (DOE), the Environmental Protection Agency (EPA), and other administrative agencies rulemaking has reduced consumer choice and suppressed market competition. The agencies’ focus has been to improve efficiency, but their rulemaking will not meaningfully decrease emissions and will lead to reduced competition and higher prices for consumers. The next president should steer all relevant administrative rulemaking toward enhancing competition and rescind top-down mandates. In particular, the president’s appointees should roll back all rules which place a higher value on efficiency over other product qualities.  

Specifically, the following rules should be withdrawn, or otherwise neutralized:

Rescinding these rules will allow greater competition and innovation. Federal efficiency standards are not effective to reduce emissions or resource use. Indeed, a focus on greater efficiency may result in Jevons’ paradox, wherein improvements to resource efficiency lead to an unexpected increase in the aggregate use of the resource. The case for these types of mandates also assumes that the higher efficiency products are effective substitutes and not deficient in other relevant or more important qualities. For example, a more resource efficient dishwasher may not clean dishes as effectively as an older ‘less efficient’ one. That is, an owner may have to run the dishes through multiple cycles to achieve the same effect, or even wash more dishes by hand, negating any claimed efficiency.

The real issue is not efficiency but a lack of supply. The solution to energy scarcity is to increase energy supply through proper market design and a regulatory environment that encourages competition and technological innovation. As new technologies reach economies of scale and deliver abundant energy at lower costs, there will be new solutions to persistent problems, from water insecurity to greenhouse gas emissions. Matters of efficiency can also be left to states and localities to decide, as they may face specific challenges that are not relevant to other Americans. The federal government should pursue an agenda that promotes consumer choice.

New performance standards for greenhouse gas emissions rules will exacerbate existing reliability problems. These top-down federal mandates arbitrarily close power plants critical to the well-being and prosperity of communities throughout the United States. These communities will suffer from a smaller tax base, less reliable electricity, and higher marginal electricity prices. Instead of picking winners and losers through aggressive mandates, power producers should be liberated to compete on the merits and provide communities with an abundance of reliable and affordable electricity. 

Legislative Action 1: Amend the Inflation Reduction Act to reduce the deficit and maintain grid reliability

The Inflation Reduction Act provides an immense amount of subsidies to support investment in electric vehicles, solar panels, geothermal energy, batteries, clean hydrogen, nuclear power, and more. The IRA also has provisions which expand the loan authority of the Department of Energy’s Loan Program Office (LPO) to support investment in first-of-a-kind commercialization of proven technologies and investment in communities that have been harmed by the top-down energy transition. The Congressional Budget Office initially estimated that the energy-related sections of the Inflation Reduction Act would cost $369 billion over the next decade. Goldman Sachs estimates the IRA subsidies will instead cost taxpayers closer to $1.2 trillion over that time. Other estimates suggest that the total cost of the IRA subsidies could be multiple trillions of dollars, as many of the tax credits are both uncapped and could persist indefinitely.

Although the IRA passed through the Senate narrowly, as Vice President Kamala Harris cast the tie-breaking vote, attempts to completely undo the IRA are unlikely to be successful. The subsidies in the IRA will continue to disproportionately flow into Republican congressional districts,providing bipartisan opposition to full repeal. Additionally, the loan authorities granted to the LPO in Section 1706 of the Inflation Reduction Act will help finance coal-to-nuclear transition programs. These investments will reinvigorate localities that have faced higher electricity prices, lower tax revenue, and fewer economic opportunities since their coal plants shut down. This will also help finance American small modular reactor manufacturers and other participants in their supply chain to scale production and work towards economies of scale.

That said, the next president and Congress should rein in the costs of the Inflation Reduction Act. Failure to amend the IRA will have catastrophic consequences for our country. The scope and scale of the IRA is excessive, and, contrary to its name, will fuel inflation and increase the budget deficit. As the tax credits are uncapped, taxpayers could be on the hook for trillions of dollars of spending. This has the potential to lead to an unprecedented misallocation of resources into companies that are created to capture tax credits, even if they will cease operations as soon as the subsidies end. At minimum, Congress should set a specific end date for the subsidies, or otherwise impose a cap on subsidy costs. The production tax credits for intermittent power producers are particularly worrisome as prior iterations of these tax credits led to intermittent renewables being overbuilt and fueled our present grid reliability crisis.

Legislative Action 2: Reduce barriers to American nuclear power innovation

The current process to approve a new nuclear power plant design is bureaucratic, prescriptive, and expensive. Two of the most recent NRC-certified designs cost the companies between $45 million and $70 million in fees.  Provisions in the recently passed ADVANCE Act should help to streamline these processes and will reduce fees for applicants to encourage more companies to seek approval for innovative designs. It is essential that the NRC’s approval process does not limit competition and innovation.

To encourage greater competition, Congress should amend Section 202 of the Energy Reorganization Act of 1974 and other pertinent laws to allow the Department of Energy to approve demonstration reactors—scaled-down new reactors used to validate the design and safety features through testing—and allow those reactors to sell the power they generate to the grid or other purchasers. This change would not affect commercial nuclear reactors or any non-demonstration reactors. The purpose of this change would be to allow companies that build demonstration reactors to earn revenue. At the margin, this will reduce the burdens of successfully building demonstration reactors by making it easier for new entrants to secure financing for these reactors. The NRC should create a pathway to design approval that uses non-prescriptive criteria and objective testing of demonstration reactors to allow for greater innovation in reactor design.

Nuclear power does not need to be expensive power. The first plants built in the United States had overnight costs—costs excluding financing—that averaged from $1,400 to $2,800 per kilowatt of capacity (2023 dollars). South Korea has built reactors for $2,157 per kilowatt of capacity in recent years. If the United States could build plants at this price point, it would be even cheaper than the current price for combined-cycle natural gas with carbon capture and sequestration technology. These reforms will create a regulatory environment that will allow American nuclear providers to innovate and compete and drive down the price of new reactors. There is no physical reason that American entrepreneurs should not be able to build new plants at a price-point that rivals what the pioneers of the industry were able to do back in the 1950s and 60s. The construction of new nuclear power plants at a competitive price will ensure that American families have access to affordable electricity, drive down the cost of necessities, support the growth of American industry, and reduce the risks of catastrophic grid failure.

Conclusion

The top-down energy transition has exacerbated energy inflation and reduced grid reliability, both of which disproportionately harm lower income Americans. The United States has immense natural energy resources and the human and financial capital necessary to create an electrical grid that will be the envy of the world. The next president and Congress have the opportunity to change course and pursue an energy agenda which will ensure grid reliability, minimize unnecessary regulatory costs, and protect American families and businesses from serious threats to their energy security and prosperity. The future success of America will be determined by how policymakers respond to these challenges.

ABOUT THE AUTHOR
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Grant Dever

Visiting Fellow, Energy
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