Photographer: Drew Angerer

Power Producers Stumble Off The Perry-Go-Round

Every so often, a policy proposal comes along that's so ill-conceived, one can dispense with the usual nuance and just call it flat-out ridiculous. Energy Secretary Rick Perry's plan to subsidize coal-fired and nuclear power plants for stockpiling fuel was just such a proposal.

As it turns out, the Federal Energy Regulatory Commission wasn't exactly won over by Perry's reasoning either: Late on Monday, it voted five-zero to reject the proposal.

The reaction in the market has been somewhat muted. Shares in FirstEnergy Corp., a struggling Midwestern utility with a lot of coal-fired capacity, haven't moved. Neither, as analysts at CreditSights point out, has there been a flicker in the bonds of FirstEnergy Solutions Corp. -- the generation arm that's soon to separate from the utility -- or Talen Energy Corp., the merchant power firm acquired by Riverstone Holdings LLC in 2016.

Which tends to suggest the market also wasn't exactly convinced Perry had this one in the bag. For example, look at FirstEnergy's stock over the past six months:

Rick Rolled

Perry's plan to subsidize coal and nuclear power provided a nice boost for FirstEnergy, but it has since given it all back

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Source: Bloomberg

The issue doesn't quite end there, though. Yes, FERC dismissed the proposal, and several commissioners offered frank statements as to why -- including, notably, one pointing out the irony of subsidizing coal-fired plants that contribute to the "anthropogenic climate change" exacerbating the extreme weather events at the heart of Perry's resiliency argument.

However, it also left the door open for operators of the country's regional electricity grids to propose reforms of their own if they saw a need. The question now is whether that door is open wide, or just a crack.

PJM Interconnection, which manages the grid in a large swath of territory across several mid-Atlantic and Midwestern states, has been pushing price reforms of its own, even before Perry's proposal saw the light of day.

One of PJM's proposed measures would let "inflexible" generators -- in practice, coal and nuclear plants that can't switch on and off easily -- play a bigger role in setting wholesale power prices. PJM estimated this could add $3.50 per megawatt-hour to the price, before any offsets.

That may not sound like a lot, but it would be a windfall for a typical Midwestern plant.

Imagine one in Illinois burning 10,500 BTU of coal from Wyoming to produce each MWh. Based on current futures prices from Bloomberg, the plant's margin after fuel costs averages about $27.60 per MWh in 2019.

Now take off $13 for railing the coal in and $5 to run the plant, leaving an operating profit of about $9.60. All else equal, an extra $3.50 per MWh would boost that margin by 37 percent. For some plants, it could be the difference between red ink and black.

Ari Peskoe, a senior fellow in electricity law at Harvard Law School, sees some merit in finding ways to prevent plants that are providing power to the grid from incurring losses. Equally, though, he points out that keeping inflexible plants on the grid adds cost to the system, especially as coal-fired plants, for example, "seem like the kind of resources that are eventually going to go away."

Similarly, the language in FERC's order from Monday afternoon puts the onus on grid operators to demonstrate the need for new market mechanisms, on top of existing ones, to compensate generators for the still-nebulous concept of "resiliency".

Christine Tezak, a managing director at ClearView Energy Partners, highlighted to me this line in a footnote of the FERC order:

There is no evidence in other Commission proceedings indicating that any RTO/ISO [regional transmission organization/independent system operator] tariffs are unjust and unreasonable because they do not adequately account for resilience. 

That isn't FERC shutting the door. But it is a pretty clear statement the commission doesn't see any basis for moving quickly to address some glaring market failure.

What that means is that PJM, for example, likely needs to use the next 60 days to flesh-out and pitch its proposal again in hopes that FERC finally agrees there is a specific problem in that market requiring it to act.

For power producers, that likely means the regulatory relief they have been half-expecting could be less than advertised, and not necessarily a 2018 event.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.