Energy Department Proposes Outrageous, Massive Coal and Nuclear Bailout

Department of Energy (DOE) Sec. Rick Perry just proposed a massive bailout for coal and nuclear power plants. The radical and unprecedented move is couched under a false premise that power plants with fuel located on site are needed to guarantee the reliability of the electricity system. The proposal relies on a mischaracterization of DOE's own recent study of electricity markets and reliability (discussed here), which if anything demonstrated that this kind of proposed action is not justified.

If adopted, the proposal would essentially ensure that coal and nuclear plants in regions encompassing most of the country continue to run even where they are too expensive to compete in the energy market. It would saddle utility customers with higher costs, while posing obstacles to the electricity system integration of cleaner and less risky energy sources such as solar and wind.

The Natural Resources Defense Council (NRDC) is still carefully analyzing the proposal, but below is a very preliminary take:

The proposal would bail out expensive and uncompetitive coal and nuclear plants

The proposal asks the Federal Energy Regulatory Commission (FERC) to take action within 60 days that would financially prop up "fuel-secure resources," which must have "a 90-day fuel supply on site enabling [them] to operate during an emergency, extreme weather conditions, or a natural man-made disaster." This requirement is aimed squarely at coal and nuclear power plants, which would generally be able to satisfy these criteria.

Many coal and nuclear units are very expensive and are having trouble competing in the wholesale electricity market (as discussed here). So the proposal asks FERC to bail out these power plants by essentially guaranteeing them profits and insulating them from competitive market forces. The proposal amounts to a massive subsidy that would ensure the plants continue to operate, rather than being economically retired when they are more expensive than other units (including wind and solar) that sell electricity at lower cost.

The proposal would radically reshape electricity regulation for most of the country

The rule would have a massive scope, covering regional wholesale markets where electricity is bought and sold to serve most of the nation's customers. It would apply to areas where the electricity system is operated by regional entities known as Regional Transmission Operators (RTOs) or Independent System Operators (ISOs), which administer competitive markets for electricity. The RTOs tell the more expensive plants not to operate when there's cheaper electricity available from other plants.

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Federal Energy Regulatory Commission

As shown in the map, RTOs cover most of California, the Midwest and southern states in the middle of the country, as well as the mid-Atlantic and Northeast. The Electric Reliability Council of Texas (ERCOT) is not subject to FERC jurisdiction and would not be covered by the proposed rule, if adopted.

Secretary Perry's proposal would be a radical departure from the way FERC currently regulates electricity prices in these regions. Under FERC's system, electricity prices in RTOs are governed by competitive market forces. A power plant is only insulated from this system by FERC under extremely limited circumstances, where a detailed examination of the grid reveals that the plant is needed for reliability purposes. The plant is then guaranteed its costs of operating, but only on a temporary basis, until a replacement can be constructed.

The proposal would lead to higher energy bills and more pollution

Customers across the country would ultimately foot the bill for supporting these more expensive plants. While no credible analysis has been conducted of the costs (which can't even be done given the vagueness of the proposed rule), it is safe to assume that the toll would be many billions of dollars.

The proposal also would favor more expensive and risker power plants over cleaner and safer energy sources such as wind and solar power. Coal power plants emit a massive amount of pollution. They are one of the largest sources of greenhouse gases causing climate change. Coal plants also cause an array of other problems, such as acid rain and asthma. And while low-carbon, nuclear energy poses myriad health and safety risks (discussed here).

The proposal is unjustified

The purported basis for the proposal is that "[t]he resiliency of the nation's electric grid is threatened by the premature retirements of power plants that can withstand major fuel supply disruptions caused by natural or man-made disasters."

But DOE's own reliability report found that all regions of the country have excess supply of energy resources needed to meet demand. Furthermore, while it included a brief discussion of the potential benefits of on-site fuel supply, it also highlighted examples of power plants with on-site fuel supply failing, such as coal plants that could not operate during the 2014 Polar Vortex when their fuel supplies froze in the extreme cold.

The lesson that no type of power plant is immune to weather-related disruptions was clear during the recent hurricanes. Nuclear power plants had to be taken off-line in preparation for Hurricane Irma. Natural gas plants and pipelines suffered disruptions during Hurricane Harvey, and the onsite coal pile at a W.A. Parish plant in Texas became so saturated with rainwater that the coal could not be delivered into storage silos, forcing the plant to switch to natural gas for the first time in eight years.

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Ultimately, the proposal's justification is as flimsy as Secretary Perry's initial suggested basis for subsidizing coal and nuclear—that "baseload" is necessary for the system, a myth that has been thoroughly debunked (as discussed here and here).

DOE is asking FERC to rush to judgment

FERC has already adopted detailed regulations to ensure the reliability of the grid, and follows established processes to consider any necessary tweaks. As DOE's own report explained, these systems have worked to meet the industry's high reliability standards even as the mix of generation serving customers' needs has changed dramatically.

DOE is asking FERC to sidestep that normal process by adopting its radical proposal in a mere 60 days, a timeline that would make it impossible to conduct any of the rigorous analysis that would surely be necessary before making such extreme changes. DOE's proposal is so vague that FERC could not possibly adopt it as is, making it hard to see how FERC could possibly advance it in a manner that complies the procedural requirements for a formal rulemaking proposal.

FERC should reject Secretary Perry's proposal

Perhaps the only silver lining in Secretary Perry's proposal is that DOE has no independent authority to adopt this proposed rule, which is already eliciting pushback from leaders like NY Attorney General Eric Schneiderman. As discussed here, FERC, not DOE, is the agency primarily responsible for regulating electricity markets. FERC should reject Secretary Perry's outrageous and poorly thought out request.