Can Nuclear Bailouts and Electricity Markets Coexist?
In 2016 Illinois and New York became the first states to provide direct subsidies to the nuclear power industry, with the goal of keeping economically uncompetitive reactors operating within their borders. The states deemed the nuclear plants, which generate electricity without producing carbon dioxide, as critical to their efforts to limit greenhouse gas emissions that contribute to global warming.
Yet the bailouts proved contentious in the two states, and the controversy over subsidies is now spreading to a handful of other states weighing similar bailouts. Opponents object to subsidies cost, and argue that they may discourage investment in other new forms of generation, such as natural gas and renewables. And the very legality of the bailouts is now being reviewed in court.
In this episode, Christina Simeone, the Kleinman Center’s Director of Regulatory and External Affairs, and David Cherney, an energy industry advisor in the Energy & Utilities Practice at PA Consulting Group, will examine the roots of nuclear’s financial woes, and the widening debate around nuclear power’s role in decarbonization of the electricity sector.
Andy Stone: Hello, and welcome to the Energy Policy Now Podcast from the Kleinman Center for Energy Policy at the University of Pennsylvania. I’m Andy Stone. Late last year, the states of New York and Illinois moved to subsidize nuclear power plants within their borders in efforts to keep the plants economically viable and in an operation. The states deemed that the nuclear plants were important to their goal of limiting carbon dioxide emissions, a cause of global warming. The nuclear plants generate electricity without producing greenhouse gases.
Yet the plants in question, three in New York and two in Illinois, produced electricity that was too expensive to compete in wholesale electricity markets. The plants have become a financial liability for their operator, the Chicago based electric company, Exelon, which more recently announced its intention to close the Three Mile Island nuclear plant in Pennsylvania.
On today’s podcast, we’ll look at the expanding debate over nuclear power subsidies and explore the root of nuclear’s financial woes. We’ll also look at the potential for subsidies to undermine competitive electricity markets where coal, natural gas and renewable generation also compete. Our guests are Christina Simeone, who is Director of Policy and External Affairs at the Kleinman Center and David Cherney an energy industry advisor in the Energy and Utilities Practice at PA Consulting Group. Christina and David, welcome to the podcast.
Christina Simeone: Hi Andy. Thanks for having us.
David Cherney: Hi Andy, glad to be here.
Stone: Before coming to the Kleinman Center, Christina was Director of the PennFuture Energy Center for Enterprise and Environment. She also worked for the Pennsylvania Department of Environmental Protection and was Policy Director at the Alliance for Climate Protection. David’s work at PA Consulting Group spans public policy analysis, energy infrastructure investment, and utility strategy. He has also worked as an Adjunct Professor in Public Policy at the University of Denver’s Josef Korbel School of International Studies and as a Teaching Fellow at Yale University.
So to get this complicated topic on the road, Christina, let’s start with this question. Nuclear power was once viewed as cheap power. Now it’s expensive. What has changed in terms of nuclear’s economics and its role within the electricity system?
Simeone: Okay, well, let’s start with a little bit of history first. It’s important to understand that most existing nuclear power plants were built between 1968 and 1990 in an effort to diversify our electricity resource portfolio. These plants were expensive to build, but once they were up and operating, they could provide power at a relatively low cost.
At that time electricity generation in the United States was built using electricity rate payer funds through a sort of state-controlled method of central planning. This was basically called the regulated generation model. In the late 1990s, states started to move towards competitive markets to build and run electricity generation because they were concerned that the regulated model was cost inefficient. Under the regulated generation model units are basically guaranteed to recoup their costs, plus a rate of return. In competitive markets is a little bit more risky because units have to compete against one another on cost and operational performance in order to secure obligations to run.
So moving to competitive markets is one change. The next big change is also shale based gas, which has led to abundant supplies of low cost gas. Most of the economically challenged nuclear plants operate in competitive markets where natural gas units typically determine the market price because they operate on the margin. As natural gas commodity prices have reduced, so have market prices. Since demand has been relatively flat this means basically that there’s a smaller pool of revenue in the market to distribute to the generators that are operating in there for compensating those units in the market.
So as revenues have decreased, we’ve gotten to the third issue, which is high costs for these nuclear units. These market revenues are decreasing, but the plants have to make expensive investments on an ongoing basis. For example, to renew their operating licenses or maintain operational performance and to meet regulatory compliance. For example, there were new regulatory requirements put in place after lessons learned in response to the Japan’s nuclear accident, Fukushima.
Stone: Looking at this New York and Illinois decided to support nuclear plants with subsidies in 2016. Dave, can you give us a bit more detail here on how the plants are specifically being supported?
Cherney: Absolutely. And so both New York and Illinois have chosen to support these nuclear facilities by compensating them for what we call their zero emission benefits. And so we are not paying these facilities for their energy or their capacity under these subsidy programs, rather we’re focused on the carbon free benefits that nuclear generation provides those states.
This conceptually is very similar to how we compensate renewable generation in states that had subsidies such as renewable portfolio standards, where we subsidize these renewable generators for their renewable attributes. However, there is a really a key difference between the nuclear example and the renewable example more broadly. And that is when we think about renewable portfolio standards for wind and solar, there’s quite a bit of wind and solar generators in the market. And that is to say, there’s a fair bit of competition between solar, wind, other forms of renewable generation that allows these renewable, if you will, subsidies this additional revenue stream associated with renewable attributes to be determined by the competitive market.
However, in the case of the nuclear industry, there are very few nuclear power plants and they are owned by an even smaller set of owners. And so there’s really not enough competition to effectively set the price for these zero emissions emission attributes. And so what both New York and Illinois have done is found a way to synthetically create a price for these zero emission attributes, absent of a competitive market.
And they’ve done this by tagging the price of carbon to the social cost of carbon developed under the Obama administration, and then subtracting out what you can broadly think of as the average energy price earnings and average capacity price earnings by nuclear generators to take out those forms of compensation. And what is left is theoretically the value associated with zero emission benefits.
Stone: So, this is also taking place in other states as well. I know Ohio has talked about subsidizing these plants. I think that’s been put on hold. New Jersey, Connecticut, is the situation the same in those states as well?
Cherney: So, it’s, I’d say it’s similar in those States. So, Ohio, while it’s currently on hold, which also happened in Illinois, so legislation tends to bounce back and forth, is following a very similar model to Illinois and New York. New Jersey, however, is taking a slightly different tactic in their current form of the legislation, which is still being developed, and that’s to study this issue. So rather than go to a direct subsidy, they are studying whether these subsidies will be necessary within the state. And Connecticut has gone through a few different iterations, some similar to Illinois in New York and some quite different.
Stone: Now, also most recently, here in Pennsylvania, there’s the Three Mile Island nuclear power plant, which became infamous in the late 1970s when there was a near meltdown at that plant. The owner of that plant, also Exelon, announced recently that it plans to close that plant about 15 years early. Christina, how’s this all playing out here in Pennsylvania?
Simeone: So like you said, in May, the owner of Three Mile Island, Exelon, announced it would retire Three Mile Island in September of 2019. It’s a premature retirement before its operation license expires because the plant has continuously lost money and also failed to win reliability resource obligations in these competitive capacity markets. One of the reasons TMI is so challenged is because it only has one reactor, so it’s generating less power, less megawatts, but it still has those relatively high costs. So among most nuclear plants that have two reactors, it is particularly challenged.
Stone: So the economics are really bad for Three Mile Island?
Simeone: Right, it’s less competitive than some of the other nuclear units. So there hasn’t been legislation proposed yet. Exelon has expressed strong interest to work with Pennsylvania’s General Assembly to establish policies that would create new revenue streams to keep TMI viable. Again, the discussions are in the early stage, nothing’s been proposed, but there’s been general talk about maybe amending the state’s alternative energy portfolio standard to include nuclear power or developing some sort of zero emissions credit like Dave talked about in New York or Illinois.
There has been a nuclear caucus established of interested legislators who have held hearings on the topic. There’s also an advocacy group of local government, labor, and business leaders in and around the TMI area that has been established that are advocating to support the plant. However, unlike Illinois and New York, Pennsylvania has a very strong natural gas industry that would be harmed by these subsidies. The gas industry, along with consumer interests like AARP and manufacturing groups, have formed an advocacy effort to oppose these subsidies in Pennsylvania. So it’s really, it’s really unclear. The politics in Pennsylvania are different than New York and Illinois, so we’ll see what happens.
Stone: It’s interesting, you brought up that point that we have here in Pennsylvania, a very strong natural gas industry that does not exist at this point in New York. And in Illinois. You also mentioned that, in the state legislature here in Pennsylvania, there’s a group of representatives who are looking at this issue. Also there’s external groups. What are the arguments that both sides are using either for or against the bailouts for nuclear power plants here in Pennsylvania?
Simeone: Well, the nuclear industry argues that competitive markets do not currently compensate their units for the value of zero carbon power and rather than being subsidized, they argue that they’re seeking to address this market failure. Exelon notes that TMI employees, over 675 workers, another 1500 union employees, every time they refuel the reactor, it pays over a million dollars annually in property taxes and contributes charitably to the community.
These jobs and economic benefits and zero carbon power would be lost if the plant closes and unlike other plants, like coal or gas plants, once the plant closes because of Nuclear Regulatory Commission regulations, it can’t reopen again, at least not how the regulations are currently stated. So once it’s gone, it’s gone forever.
On the other hand, the gas industry believes that the competitive markets are working well, that these markets have attracted significant investments in new resources while keeping new reliability resources, while keeping costs low for consumers. They argue that the subsidies would distort competitive markets by further suppressing prices. And that the subsidies would unfairly favor uneconomic competitors at the expense of competitive resources, which in this area is really dominated by natural gas.
Consumer advocates also point out that Pennsylvania has moved away from a rate payer funded generation model when they passed the restructuring act back in the late 1990s and that these nuclear units were made whole through stranded cost recovery payments. And they argue that the industry can’t pick whichever is highest at any given time, either the regulated model or the competitive model based, you know, based on what is the highest level of compensation.
Stone: Let me ask you both. If we could just take a step back a moment here. Obviously, the competitive markets are very important in this whole context of what’s going on. Wondering if you could just give us a bit of insight for those listeners who may not have that much back on this, how the electricity markets work and specifically how that electricity market, the competitive electricity market, has really been the root of this problem here, or one of the contributors?
Simeone: So I guess in very simple terms, there’s two main markets that are, when we talk about the wholesale markets, we talk about the energy market, which basically dispatches resources on a day to day basis to provide electricity in real time based on whatever costs, whatever resource costs the least. Then there’s another market, the capacity market, which seeks to attract investment into resources, electricity supply resources, to ensure that we have enough supply to meet our reliability requirements.
Whereas the energy market is in that kind of real time, more happening day to day, the capacity market has auctions to secure resources for three years into the future. So that if we ever got into a situation where there wasn’t enough supply, there would be enough time to build new supply when needed. Generators operating in the market need revenue streams from both of those markets to make them whole.
With natural gas, low cost shale based natural gas, what we’re seeing is kind of a two factors that are impacting both the energy market and the capacity market. Low price natural gas has brought down the clearing price in the energy market, meaning that all the generators in the market are bringing in less revenues in that energy market. At the same time, natural gas combined cycle resources, the technology has gotten so efficient and so cost effective to build that these resources are also the most competitive things to build. They’re cheaper, quicker to build very highly efficient will operate at very high levels.
So we’re seeing a ton of investment in new natural gas capacity that is crowding out some of the existing coal and nuclear resources. So it’s a little bit of a double whammy. You see low electricity, low energy market prices, and low capacity market prices as well.
Cherney: So to add onto what Christina was saying, which is absolutely right, I think it’s also important to take a step back and realize that there’s not just one energy market and one capacity market across the United States. Rather, you can divide up the states into multiple electricity regions and there is some debate in terms of how many electricity regions there technically are. I tend to think there’s around 15, but when we’re thinking about nuclear subsidies, but we’re really talking about three distinct regions.
One is the PJM region, which encapsulates 13 States, including Illinois and Pennsylvania. PJM from when it was founded initially was Pennsylvania, New Jersey, which is the J, and Maryland. Then we have the New York market, which is within one state. And then we have the rest of New England, ISO New England as it’s called. And each of those different markets have different energy markets. They have their own capacity market and they’re wrestling with these issues and in slightly different ways.
Stone: So cutting to the chase here, who bears the cost of these subsidies?
Cherney: Well at that at the end of the day, in Illinois and New York, it’s the rate payer. So it’s customers within those states have to pay the costs of these subsidies. Each state has slightly different mechanisms for how this will occur. But at the end of the day, it’s the customer.
Stone: And those are pretty significant. I’ve seen figures for New York. I think it’s on the order of $235 million a year. I think Illinois is about double that. Does that sound about right?
Cherney: It’s in the ballpark. I think Illinois is in the 200, I think it’s capped out and I think $234, $235 million per year.
Stone: You know, Christina, one of the arguments against subsidies is that they’ll distort electricity markets. Is that true? And is that specific just to nuclear subsidies?
Simeone: Well, it’s a good question because I think it’s important to understand that all energy resources are subsidized and this has historically been because energy is important to citizens and the economy. And there have been longstanding efforts to lower the cost of energy and diversify our energy resources as a sort of hedging mechanism.
As a result, some subsidies for newer resources like renewables are very transparent, in the form of market supply mandates by the state or federal tax credits, other subsidies are kind of longstanding and a little less transparent, for example, tax exemptions or special treatment for natural gas, oil, or coal extraction where these fuel costs represent 70 to 80% of the operating costs for fossil fuel fired power plants. Or for the nuclear industry, these federal liability insurance limits or assumption of custody and disposal of spent fuel waste.
So it’s really important to understand that subsidies are everywhere in these markets and while they’ve always existed, the recent focus on subsidies kind of come down to two issues. One, where is the line between state rights to establish policies like subsidies and federal jurisdiction, and two, how will a patchwork of state subsidy policies to support significant volumes of power represented by these nuclear power resources where you’re talking about hundreds and hundreds of megawatts, how will that impact the competitive markets?
Stone: So that’s really the new issue that these are really big resources. They have the ability to really impact the market by their presence and through their subsidy, more than a wind or a solar plant might.
Simeone: Correct. And now we’re seeing these patchwork of state approaches, which can be distortionary in these regional competitive markets.
Stone: Getting past the economics here for a moment, there’s a major legal issue here, pitting the States against the federal government with respect to these subsidies. Namely are states interfering with electricity markets by offering these subsidies when these markets are ultimately regulated by the federal government?
Cherney: So this is a really interesting question. So it’s, of course these subsidies are interfering with wholesale markets. There’s no question about that. But sort of what is of question is whether or not that is permissible or whether or not that interference is illegal. And so, you know, when we think about the nuclear subsidies, I think there’s two sort of past precedents that we need to think about and opponents and proponents of these forms of nuclear compensation are sort of taking sides on these two issues.
And the first is if we think about renewable compensation. So I talk about renewable portfolio standards that similarly compensate wind and solar generation for their renewable attributes and what FERC and what the courts have held is that renewable attributes is a separate and distinct market from energy and capacity. So, that essentially this form of compensation, while it does impact wholesale prices both in energy and capacity at the end of the day, it’s a separate and distinct market created by the states and the states have jurisdiction and it’s not within FERCs jurisdiction. So it’s permissible to have these types of markets, even though there is some sort of interference.
This is in contrast to a recent Supreme court ruling known as Hughes v. Talen. And in that case. So if we go back to some of the facts. Maryland was very concerned, the state of Maryland was very concerned that not enough new generation was being built within the state, and this potentially would have negative reliability consequences for the state of Maryland. So Maryland went outside of the wholesale market of PJM and held a competitive solicitation process for new generation. And a company called Competitive Power Ventures won this solicitation and was awarded a contract to build a new power plant called St. Charles Energy Center.
And this type of contract that Maryland awarded St. Charles is what is known as a contract for the differences. And so what Maryland was doing was saying, look, St. Charles, you’re going to participate in the wholesale energy and capacity market. And if you fall short on the amount of money you need to be made whole, we’re going to pay you for the differences. And so they were guaranteeing them essentially a certain level of income.
And the Supreme court ended up ruling in this case that that was an illegal contract because the federal government, through FERC, has jurisdiction over energy in capacity sales. And so those contracts were, that contract was tossed aside. And so those opposed to these zero emissions credit programs rely on this ruling saying that the zero emission credit programs are essentially contracts for the differences to guarantee nuclear generators a certain level of income to make sure they stay within the market.
And then this is in contrast to those in favor of those programs and think you know, these really are contracts for the differences, they are contracts for zero emissions benefits, which are a separate and distinct market created by the states and this falls outside of the jurisdiction of energy and capacity markets. So it falls outside of wholesale markets and it’s permissible to have this type of market.
Stone: So what might we see ultimately with nuclear?
Cherney: So, there’s litigation, both in New York and Illinois. It’s very clear that whichever side loses is going to appeal the ruling. And so this, this ultimately will probably end up at the Supreme Court and that’s because there has been sort of a blurring of the lines between state and federal control in the energy industry, not just on the nuclear issue, but on a number of different issues due to changing market structure, due to disruptive technologies. And so the concept of what can state control and what can the federal government control is an increasingly important issue in the energy industry. And it’s likely going to be a topic that the court will want to comment on.
Stone: Okay David, let me ask you one more question here, carrying on with that. If nuclear remains what happens to demand for renewables, natural gas, et cetera, will the markets adapt or will they collapse?
Cherney: So I think that the market will absolutely adapt. There is, we have very robust wholesale markets across the United States. This is not enough to cause these markets to collapse. However, there will be winners and losers, you know, with these policies. Somebody is going to be economically harmed and somebody who’s going to be economically benefited by these policies. And so where that compensation is going will be reshuffled, but at the end of the day the markets are robust and they’re going to keep moving forward.
And I, you know, just to circle back to one of your points there too, and the demand for renewables, because I think that’s a really important topic when we’re talking about this. A lot of demand specifically for renewable generation is driven by those renewable portfolio standards or demand by corporate appetite for renewable electricity. And so at the end of the day, renewable demand is likely not going to be impacted by these nuclear subsidies. However, the price through the energy and capacity markets that renewable generators earn may be depressed.
Stone: Christina, you know, some would argue that we won’t have enough electricity if the nuclear plants are closed and that we need those plants to ensure reliable supply of electricity. If the nuclear plants close, what happens to the reliability?
Simeone: So I think if all nuclear plants close, then yes, we would have a reliability crisis. But nobody is really talking about that, the entire nuclear sector shutting down, we’re talking about specific plants in specific areas that are less economically competitive. This issue has been brought up recently, the Department of Energy, Secretary Perry, issued a memo back in May, that directed the agency to develop a reliability report and policy recommendations that are, the report and recommendations will probably be live by the time, will probably be released by the time this podcast is live.
The concern with the memo and the study that’s underway is that it was very biased towards protecting base load nuclear and coal power plants, asserting that they’re needed for reliability. It seemed hostile towards renewables and regulations and failed to acknowledge the role of natural gas in driving these base load retirements. In addition, Secretary Perry made some public comments supporting the idea of overriding state’s rights on energy policy. And while generally people recognize that DOE doesn’t have authority over, power markets or policy, the administration is in the process of appointing four new members to the Federal Energy Regulatory Commission, or FERC, that does have jurisdiction over these matters and there’s a concern that this is going to establish the administration’s priorities with respect to electricity markets.
So with respect to reliability, base-load resources operate continuously. They can’t easily turn on or off. It makes them very dependable, but also inflexible. Gas resources can easily ramp up or down, making them very flexible and well-suited to compliment renewable resources that are only available when the sun is shining and the wind is blowing. So there’s a lot of disagreements about what is needed for future reliability. In general, these markets that we’ve been talking about, other than I think, ISO New England and the Northeast have very high reserve margins, which means they have excess capacity for purposes of reliability.
Some argue that baseload is needed, others argue that these flexible gas resources are really what the future of the grid is going to look like, in addition to more energy storage, renewable energy, and demand side resources, for example, asking consumers or paying consumers to reduce their power usage when a demand is high. So I think there is a concern about the credibility and whether this report will really look at these issues from an unbiased manner. And it’s too hard to tell, but we’ll have those results pretty soon.
Stone: As you said, if all these resources went away, we’d have a problem. If we’re talking about one or two or three or a handful here, the electricity markets would adapt to that and be okay.
Simeone: Yes, now, I would caveat that with, you know, adding on to the question you just, that David remarked to about if nuclear remains or subsidized plants remain, what happens to markets? Do they adapt or will they collapse? There is a legitimate concern that if too many of these subsidized resources remain in the market and the market isn’t somehow modified to mitigate or accommodate the effects of these subsidized resources, that we’re already seeing a baseline of low energy prices and low capacity prices. These subsidized resources would further suppress these capacity prices, pushing off resources that would otherwise be economic.
And, by further reducing those prices, the concern is that the private investments, or our public investments, would no longer be attracted to investing in resources within those markets because the prices would be insufficient to reach the payback period for those resources. So, if that is a reality and nobody knows, that would be a real concern about the ability for these markets to withstand this kind of intervention.
Stone: So, if the nuclear power plants are subsidized, the price of the capacity in the markets goes down and people don’t make the investments potentially in wind, solar, even natural gas.
Cherney: There’s two aspects of that too. So yes, it potentially will have downward pressure on energy and capacity markets, but we also have to remember that these resources are currently within the market right now. So, a number of these nuclear generators have not, what they called, cleared the capacity market recently. So, they’re not receiving that income stream, but they are participating within the energy market. So, we’re seeing the price effects of these nuclear generators, at least on the energy side.
However, from the perspective of other competitive generators, if these units were to retire, it would not, just keeping the market would not just suppress prices, but it would actually increase prices by taking them out of the market. So capacity prices would go up because the supply within the market would go down and you’d see a similar impact on the energy side. And so this would afford these other competitive generators higher income streams, and help encourage investment within these markets.
Stone: So that leads into the next question, if the nuclear plants go away what replaces them?
Cherney: So at the end of the day, the competitive market, at least within PJM, New England, and New York will determine that. But it is most likely going to be natural gas resources, particularly combined cycle generation. That is generally the most cost-effective resource, particularly to replace base load power. So with, you know, assuming natural gas prices remain low, we will likely see the development of new natural gas generators.
Stone: There has been some talk in Congress lately about establishing a carbon tax, which would actually put a price on carbon emissions. It doesn’t look like this is going to happen anytime soon, but there’ve been murmurs. If we had a carbon tax in this country, would we even be discussing this whole issue of subsidies, Christina?
Simeone: Well, I would say it depends. And it really, to David’s point, if these zero carbon plants, nuclear plants retire, we’re going to be replacing it with natural gas and that will increase carbon emissions. And that’s a big concern. The thought with carbon tax or some kind of national price on carbon is that it wouldn’t have the same kind of distortionary effects that a patchwork of state-based subsidies would have on these regional competitive markets.
It would be a more elegant solution as well because it lacks this distortionary outcomes. So again, putting a sector wide price on carbon where all the units, not just some units, but all the units compete based on their emissions, again, would be a more elegant way to address this issue. I think though, one of the challenges what’s the right price? Because a price that’s too low won’t necessarily help the resources. If it’s a price that’s too high, it’ll unnecessarily impact the consumer. So I think the mechanism is much better, but the price is really going to matter.
Stone: David, has anyone proposed creative solutions to keep low carbon resources like nuclear, not compromised the market, basically having your cake and eating it too?
Cherney: So there has, and in particular, I’ll focus on PJM, who’s the operator of the wholesale markets within Illinois and Pennsylvania. And so PJM, the market operator has been very vocal in it’s displeasure associated with nuclear subsidies and has put forth really two main proposals to address these types of subsidies related to nuclear generation.
The first is a carbon pricing mechanism. So it would not be on a national scale and it may not even be on a PJM wide scale across the 13 states. Rather, states would have the ability to opt in and participate in some sort of carbon pricing program that would be exclusive to those states who bought in. So it would not be impacting generators in states outside of those states.
And the second is what they are calling a capacity market repricing mechanism. And so, as Christina was talking about, capacity is a form of compensation that competitive generators earn within the market. And it’s sort of, you can think about it at the most simple level, a simple auction process where people come in and bid what they would like to earn in the market and supply. So, utilities at the end of the day, you can think about it are on the other side of that fence. And what they would do instead is have a two auction process where first they would determine which resources would clear the auction, and then they’d have a second auction where they would remove the subsidized resources to determine what the competitive price should be. And those subsidized resources would not be receiving the full benefit of the higher uplifted price.
Stone: Christina, you know, just as we’ve talked about this whole issue today, it’s obviously very clear that the states want one thing. They want these subsidized resources, at least as we’ve seen in New York and Illinois. The markets are fearful of this strategy.
You’ve done a lot of work on the regulation, deregulation of electricity markets. Could we see a situation where competitive markets are minimized, go away, where we reregulate the markets so that, you know, these preferred subsidies, at least in the eyes of the state can continue to operate?
Simeone: I think it’s a possibility, it’s something that has been talked about, this idea of reregulation. There’s not a lot of work done regarding what that process would look like. So I think there’s been some talk, but I think that’s where it’s kind of ended. There’s also the option of kind of semi regulation, where the state takes back regulation of generation supply resources but continues to rely on competitive markets for that kind of day to day energy market dispatch function.
The other option is maintain the status quo and see what happens. And then there’s things that David was talking about, making these small, in the short term, small changes to the markets to try to accommodate or mitigate these subsidized resources. And then longer term may be broader redesign of the markets. Because what we’ve seen is really an evolution of the markets, especially in PJM, where, which is sitting on top of these huge gas shale plays, and this has really changed the economics.
And we’ve also seen at the same time technology evolution where the gas resources have gotten more efficient, renewable costs have come down, storage costs are coming down. So is there an opportunity to look long-term? And also with carbon pricing, I mean, that has been something that maybe changes from administration to administration, but longer term, what are the trends going to be for investors, internationally? And when you’re talking about assets that have 40 year plus lifespans, you want to think longterm. So, I think there’s a lot of ways this could play out, but this is going to be a big deal.
Stone: So, Dave, do we have any idea how long this is going to take the play out? Are we going to get a resolution at some point?
Cherney: I mean, I imagine we’d get a resolution at some point, but I think this is going to be a long standing issue. And it really comes back to that, that issue of federalism where, you know, what issues can states control related to their electricity future? And what does the federal government get to control?
And so when states gave up some control in terms of competitive markets, we were really focused on having reliable and affordable policy, but states have increasingly tried to pursue other policy objectives that are legitimate besides having reliable and cheap power. Some of these are having clean energy, having resource diversity, you can make an argument associated with jobs and so, you know, this is one issue in a much larger, complicated issue. And I think it’s going to take years to sort out.
Stone: Should consumers be concerned about how this all plays out?
Simeone: Well, I think they should be concerned. There are impacts to price. Prices are very low again in this area, PJM, because of the fact of low gas prices, there is a lot of benefit to consumers. The effects of the subsidies, some argue that the subsidies will increase prices. Some argue that the subsidies will cause a price suppression effect that will further lower prices in the short term, but maybe create these longer term issues where the markets won’t attract investment.
And also consumers have preferences about these issues that Dave mentioned about the state’s rights versus federal jurisdiction. And consumers may support renewable energy programs, energy efficiency programs. They may want to keep these zero carbon resources operating. So I do think it’s something important for consumers to pay attention to.
Cherney: I absolutely agree. I think this is something very important for consumers to pay attention to. You know, if we take a step back again and think about the broad energy industry, one of the trends I think we’ve seen over the last 10 years and really ramping up over the last five years is the concept of customer choice. And customers across the U S this is the case in Pennsylvania. It’s the case in Illinois. It’s the case in New York, are increasingly demanding greater choices about their energy future.
And this is one of these critical choices. Are we going to be focused on maintaining reliable and affordable electricity? Or are we going to be focused on other goals such as having clean energy? And so this is a very important debate for those customers who are interested in maintaining choice and control over their energy future.
Stone: Today’s guests have been Christina Simeone, Director of Policy and External Affairs at the Kleinman Center for Energy Policy and David Cherney an energy industry advisor in the energy and utilities practice at PA Consulting Group. Christina and David, thank you very much for appearing on the show.
Simeone: Thank you so much.
Cherney: Thank you, thanks for having me.
Stone: Thank you both. And thanks to our listeners for tuning into this episode of Energy Policy Now. We’d love to get your feedback on the podcast. Please let us know what you think by writing a review on iTunes, or by sending an email to the Kleinman Center. Our email address is firstname.lastname@example.org. Have a great day.