Why You Should Be Concerned About DOE’s Electricity Study
If you like markets, renewable energy, innovation, clean air, and/or logic, you should probably be concerned about DOE Secretary Perry’s April 14th memo calling for a 60-day study examining electricity markets and reliability that is to develop the Trump administration’s approach to electricity policy.
The memo initiates a study to “explore critical issues central to protecting the long-term reliability of the electric grid,” with a focus on impacts to baseload power resources, and a directive to provide concrete policy recommendations. Specifically, the study will examine the following:
- The evolution of the wholesale electricity market, including how federal policy interventions and changes in the fuel mix may be challenging the policy assumptions that shaped the creation of these markets.
- Determine if competitive markets adequately compensate for attributes such as on-site fuel supply and other grid resiliency factors, and how failure to do so can impact future reliability.
- Evaluate how continued regulatory burdens, mandates, and subsidies are responsible for forcing the premature retirement of baseload power plants.
The study seems to be calling into question both the adequacy of competitive markets – specifically failure to value coal and nuclear (i.e. resources that store fuel on-site) – and the pitfalls of regulations and subsidies on baseload power.
So, here is why you should be very concerned…
Ignores Reality, Economics. The memo is packed with basic errors about the reality of electricity markets and economics. The memo says nothing about the impacts of low natural gas prices and new gas build economics on competitive markets and baseload retirements, nor does it mention lack of load growth. ZERO. As another example, the memo complains about “diminishing diversity of our nation’s electric generation mix.” In reality, the system has evolved over the last decade from being extremely coal-dependent, to becoming much more diversified.
Snubs Markets, Innovation, and Consumers. Perry’s myopic focus on preserving baseload power ignores the direction technology, markets, and consumers are moving. While a certain amount of baseload may always be needed, the future grid is likely to have more distributed resources, place high value on resources that are flexible (i.e. can ramp up and down), and incorporate more energy storage as costs decrease. That is unless DOE stands in the way, but how much can they tip the scale? After all, on an unsubsidized basis, the cheapest power resources to build new are wind, utility scale solar, and combined cycle gas (page 2), whereas new build baseload coal and nuclear are simply not competitive (or economically disastrous).
Arbitrary and Discriminatory Recognition of Subsidies. The memo dials in on the negative impacts that mandates and subsidy policies have on baseload power, but this is just part of the story. Yes, there are state and federal subsidies for renewables (the latter are soon set to expire). But all energy resources are subsidized. Just eleven federal fossil fuel subsidies cost U.S. taxpayers over $4.7 billion annually, and directly benefit oil, coal, and natural gas producers (and therefore oil, coal and gas electricity plants). For example, for coal and gas plants, fuel costs represent 72% and 85% of operational costs, respectively. So any tax break or other subsidy that lowers the cost of fuel (e.g. extraction, production, transportation, processing, reclamation) absolutely benefits these plants. Oh yeah, don’t forget that baseload nuclear plants wouldn’t exist without federal subsidies (e.g. Price Anderson Act, federal assumption of spent fuel custody via the Nuclear Waste Policy Act). And of course, states also provide subsidies for fossil fuels and nuclear too.
Open to Overriding States’ Rights. At a recent energy conference, Secretary Perry proclaimed he would use federal powers to prevent retirement of baseload resources, going so far as to concede this may even mean overriding state and local policies.
Devalues the Environment, Human Health. It is no secret the Trump administration is hostile toward environmental regulations. Trump’s EPA is fighting past regulatory efforts to reduce carbon, mercury, and other health-harming pollution related to the power sector. This DOE study will further examine how regulations are burdening baseload power.
Sprinting in a Vacuum. This study is large in technical scope and policy implications, but Perry has provided only 60-days for development, with an approximate due date of June 18th for completion. Apparently, in drafting the memo and study scope, DOE did not reach out to any of the nation’s top electric reliability organizations. That means organizations like NERC, FERC, EPRI, PJM and others had no input scoping out the report that will set the Trump administration’s electricity policy plans. One can only hope these organizations will be able to weigh in during the development of the document.
What does this all mean?
Good for coal. In all likelihood, this study is being set up to develop policy recommendations consistent with Trump’s campaign promises to bring back coal. So what can we expect? A return to rate-regulation, perhaps through changes to the Federal Power Act? Requirements to force markets to place greater value on resources that can store fuel on-site? Efforts to eliminate state (i.e. renewable portfolio standards) and federal subsidies for renewables? Promotion of new federal subsidies for coal and nuclear? I suspect everything is on the table.
Unclear for nuclear. Federal support for nuclear power would benefit the industry. On the other hand, it looks like Perry is preparing to declare war on renewables, in favor of coal and nuclear. This is likely to hurt nuclear industry efforts to reach state-level compromises with environmentally-minded politicians, organizations, and citizens whose support is needed to enact state-based nuclear subsidies. While there may be compelling benefits of keeping nuclear online, these folks will likely gird for the war ahead.
Bad for natural gas, renewables. These industries are mostly likely to suffer reduced opportunities from efforts to help coal and nuclear. Since these industries are the most competitive, it stands to reason that costs to consumers/taxpayers will also increase.
Perry’s study and policy recommendations might result in delay, but some of these baseload plants can’t run too long from the underlying fundamentals. Investors know this (and someone needs to tell Secretary Perry).