Energy

Subsidizing Coal Is Far From Conservative

Rick Perry, Trump's energy chief, flouts the free market when it comes to power generation.

Let the market work.

Photographer: Spencer Platt/Getty Images

Energy Secretary Rick Perry's proposal for "reforming" power markets is, in a word, nuts. One thing it isn't, in a word, is conservative.

Monday marks the deadline for initial public comments on Perry's plan. It would subsidize unregulated power plants holding 90 days worth of fuel onsite, effectively shielding those that use either coal or uranium from the market.

QuickTake Coal Power

The ostensible objective is to reward these plants for "resilience," an attribute that apparently isn't rewarded under the current market structure. That's the name for the role they play in preventing blackouts in extreme situations.

There's nothing inherently wrong with adjusting markets to reward unsung services. As Perry told a congressional committee earlier this month, the U.S. power market is replete with subsidies and regulated prices.

What is inherently wrong is Perry's cherry-picking of which special cases get recognized and his method of dealing with them.

There is no agreed-upon definition of what "resilience" means. But let's remember that the U.S. power grid is one of the largest, most complex machines ever built, balancing electricity supply and demand in real time across millions of nodes. So the idea that keeping it running smoothly involves having large piles of coal and uranium sitting around just seems a bit simplistic.

Feel free not to take my word for it. In a recent report, the Rhodium Group consulting firm found that in major electricity disruptions that occurred between 2012 and 2016, the share attributed to fuel-supply issues was precisely 0.00007 percent.

Perry's go-to emergency to justify his stance was the Polar Vortex of 2014, a January cold snap that strained power generating capacity across the East and Midwest. And it's true that a lack of fuel for natural-gas fired plants accounted for 24 percent of outages in that region during the worst of it.

Yet as the regional operator of wholesale electricity markets noted, thousands of megawatts of coal-fired and nuclear capacity were also knocked offline. Plus, whereas functioning fossil-fuel and nuclear plants helped to mitigate the impact, so too did programs that encourage large power users to temporarily reduce demand.

Multi-Polar

Types of outages at power plants in parts of the East and Midwest that were strained by a 2014 cold snap.

Source: PJM Interconnection

Outages as of 7 p.m., January 7, 2014.

In short, it's complicated. And singling out coal piles for special treatment looks less like a sophisticated resilience plan and more like ... special treatment.

PJM Interconnection, which manages the power market in the affected areas, has its own proposals for strengthening resiliency, including existing mechanisms like regular capacity auctions that reward plants for being ready to provide power if needed. These aren't perfect, but they are at least market-based.

Perry's preference to instead simply roll back a couple of decades of deregulation is the opposite of a traditional conservative approach -- and is all the more remarkable when you consider it's the antithesis of the way the power market works in his home state, Texas.

In addition, let's recognize that Perry is pushing for coal to be rewarded for one positive attribute, "resilience," even as the administration downplays a glaring negative one, carbon emissions.

Maximilian Auffhammer, a professor at the University of California at Berkeley, captured this inconsistency in a recent blog post:

Subsidizing coal for its reliability attributes is like subsidizing bacon for its nutritional content.

Ignoring the problem of climate change, or setting irrational thresholds for action, is to just roll the dice. Jerry Taylor, founder of the libertarian think tank Niskanen Center, put it this way in a detailed paper stating the case for a carbon tax, published in 2015:

Risks from climate change are real and a policy of ignoring those risks and hoping for the best is inconsistent with risk management practices conservatives embrace in other, non-climate contexts. 

Indeed, Perry's own plan nominally involves hedging against what is, statistically speaking, a vanishingly small risk of blackouts linked to fuel-supply disruption.

Taylor's point, summarized in this recent Twitter thread, is that the conservative thing to do would be to recognize the potentially catastrophic costs posed by carbon emissions and then take action to mitigate the risk in the most cost-efficient way.

That has been to tax the cause of the problem or price it some other way, which happened with the cap-and-trade program established in 1990 under the administration of President George H.W. Bush to deal with acid rain. (The grid has operated just fine since then and the economy has almost doubled in size, too.)

Perry's approach is the opposite, piling another handout on top of the existing, convoluted edifice of subsidies and regulations that define, and distort, the U.S. energy market.

A carbon tax would present an unambiguous signal to the power market about which plants to build and run reliably while addressing the threat of climate change. Yes, it would be punitive for coal-fired generators. Equally, though, it would be beneficial for the nuclear plants Perry also champions.

Moreover, if it were implemented in conjunction with an abolition of renewable-power subsidies like production and investment tax credits, it would have the added bonus of removing other distortions and provide a level playing field for generators and customers. This would, for one thing, mitigate the impact of very low pricing from wind farms, which has cut into the revenue of other power generators.

Equally, though, it would provide a powerful incentive for renewable-power providers to work even harder to reduce their costs. Indeed John Berger, chief executive of Sunnova Energy Corp., a large, privately-held solar energy firm, made this point in letters to Congress asking it to reject extending the investment tax credit for solar installations in late 2015. (The members didn't listen).

Berger's position was that the solar-energy industry no longer needed the help. Perry actually made the same point to the congressional committee, comparing the wind and solar sectors to children who should be mature enough to stand on their own. He did this while proposing subsidies for nuclear and coal-fired power, both positively geriatric in comparison.

Perry isn't the first politician to impose narrow political objectives on the U.S. energy sector. But he does so at a time of fundamental change in that sector, and with climate change breathing down everybody's neck. Perry's proposal represents a blunt rejection of these realities, adding to the complex of subsidies and regulations his Republican Party supposedly stands against. You may or may not think that this is smart politics. No one can credibly claim that it's conservative.

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

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

    To contact the editor responsible for this story:
    Jonathan Landman at jlandman4@bloomberg.net

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