Nuts and Bolts

This Coal Power Subsidy Is Nuts

A short-term gain for his political favorites would raise risks for the whole industry.
Photographer: Alex Wong

Energy Secretary Rick Perry has hit upon a strategy to prevent blackouts and, coincidentally, subsidize struggling nuclear and coal-fired power plants. It's the squirrel strategy.

Perry sent a letter last week to the Federal Energy Regulatory Commission, directing it to come up with a rule that would change how electricity gets priced in America's unregulated wholesale power markets. Specifically, the Department of Energy wants plants that can store 90 days' worth of fuel onsite to be offered extra market compensation -- an effective subsidy.

Ostensibly, this is to reward those plants for their resiliency. Like giant squirrels, their stockpiles would help them power through disruptions to fuel supply (the letter cites the Polar Vortex of early 2014 as an example of this in action).

It just so happens that the only plants doing this to any degree are those using uranium or coal. Natural gas-fired plants rely on pipelines, and renewable sources rely mostly on the weather or the flow of water.

For coal miners, this rule would encourage their biggest customers to simply buy the stuff in order to have it just lying around. As it stands, coal-fired plants in most areas of the U.S. had enough fuel on hand to cover about 75 days of usage at the end of July:

The Hoard

Rick Perry's proposed subsidy for coal-fired power plants would encourage them to stockpile more of the fuel against potential shortages; a bit like giant squirrels

Source: Energy Information Administration

Note: Coal stockpiles at coal-fired plants expressed as days of burn based on consumption patterns. Bituminous coal relates largely to plants in the eastern U.S.; sub-bituminous to those largely in the West.

The DoE's proposal sounds an awful lot like at least partial re-regulation of power markets. Coal and nuclear plants have suffered from a combination of flat demand for electricity and competition from cheaper natural gas-fired plants and renewable power.

An August blog post by the DoE itself shows that, in one crucial respect, competitive electricity markets have worked as intended. Between 2006 and 2015, 43.1 gigawatts of coal-fired capacity was retired, versus 19.5 gigawatts of new capacity that was switched on.

Crucially, the heat-rate of the new plants -- the amount of fuel required to produce electricity -- was about 7 percent lower on average than for the old ones. In other words, less-efficient plants were priced out. One reason this hasn't saved the coal-fired sector: The corresponding drop in average heat rates for new gas-fired plants versus old ones was 37 percent. And as more coal plants have installed equipment to control emissions, their overall heat rate has actually risen:

Taking Heat

The average amount of fuel required to generate power from coal has actually increased while gas-fired plants have become more efficient

Source: Energy Information Administration

For this reason, the FERC may be reluctant to simply adopt the DoE's proposal wholeheartedly. Even so, the chance of some sort of coal-and-nuclear-friendly reforms being enacted in the near future is rising.

PJM Interconnection, which manages the grid in a large swath of territory across several mid-Atlantic and Midwestern states, has already proposed potential market changes that could tilt the economics back toward these plants. Evercore ISI analyst Greg Gordon estimates these could add $2-to-$4 per megawatt-hour to wholesale prices there if implemented.

FERC may choose to effectively piggyback on such existing plans. This would help companies with large, unregulated nuclear and coal-fired fleets in the region, such as Exelon Corp. and Public Service Enterprise Group Inc.

Gas-fired plants would, in contrast, likely lose market share. All else equal, existing renewable-power projects shouldn't be affected, as, lacking any fuel cost, they are price takers anyway.

And yet, Exelon's gain -- it was the best performer of the big utility stocks on Monday morning -- points to a longer-term risk.

As I wrote here when the DoE published its study on resiliency at Perry's behest, the resort to the squirrel strategy reflects a power market straining to reconcile market realities with political desires. Fans of coal can, of course, say they are suffering partly because of subsidies like state-level renewable portfolio standards pushing things like wind farms into operation, which then tend to depress wholesale power prices.

The rejoinder, though, is that the unwieldy edifice of incentives for renewable power reflects the inability, or unwillingness, of federal policymakers to address climate change with more straightforward tools such as pricing carbon emissions.

As it is, firms such as Exelon have also extracted other subsidies for their nuclear plants in the form of zero-emission credits, or ZECs -- placing a value by regulatory fiat on their lack of carbon emissions rather than their reliability this time (it also helps that these plants employ lots of people).

Speaking with me on Monday, Anthony Clark, former FERC commissioner and now a senior adviser at law firm Wilkinson Barker Knauer LLP, said the DoE's proposal would "take the problem inherent with the New York and Illinois ZECs to a whole new level."

Merchant power generators, more focused on near-term survival, may not care too much about the longer term. But the industry ought to.

While reliability is an established concept, "resiliency" is more subjective. A future FERC board might interpret things differently -- prioritizing, for example, more natural-gas pipelines or battery storage rather than just piles of coal or uranium.

Moreover, keeping plants open that might otherwise have shut down will tend to depress power prices overall (precisely why some generators like Dynegy Inc. hate those ZECs.) Subsidy begets subsidy, and the result is short-term gain for some, rising risk for all.

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

    To contact the author of this story:
    Liam Denning in New York at ldenning1@bloomberg.net

    To contact the editor responsible for this story:
    Mark Gongloff at mgongloff1@bloomberg.net

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