State intervention in energy markets to boost coal and nuclear power
October 2019 | SPECIAL REPORT: ENERGY & NATURAL RESOURCES
Financier Worldwide Magazine
October 2019 Issue
The last decade or so has seen several revolutions in the energy market. First came the rise of natural gas. Once assumed to be an eternally expensive fuel source, natural gas prices have fallen from highs above $12 per million BTUs in 2008 to between $2 and $5 over the last 10 years. On the heels of this change came a revolution in renewable energy. Since 2010, the price of wind energy has fallen by half, while the benchmark price for solar has dropped 84 percent.
The rise of natural gas and renewables has proven to be a challenge for other fuel sources, particularly coal and nuclear power. Coal’s share of electricity generation fell from around 44 percent in 2009 to 27 percent in 2018. And while nuclear power’s share of electricity generation has held steady at just under 20 percent of the total, many existing plants are struggling to maintain economic viability while several new nuclear projects have been shelved.
When an industry has trouble competing in the marketplace, one all too common response is to turn to the government for support. This has certainly been the case for several high-profile companies with significant coal and nuclear power assets, who seem to believe that the road to profitability runs through the White House or the statehouse. And while not always successful in their efforts, the risk of political intervention in electricity markets will undoubtedly affect investment and business-making decisions in the industry.
Perhaps the biggest attempt so far to restructure electricity markets based on political rather than economic considerations involved the Federal Energy Regulatory Commission (FERC), which oversees the electric grid in most of the US. In September 2018, the Department of Energy (DOE) issued a Notice of Proposed Rulemaking (NOPR) asking FERC to implement new emergency regulations it claimed were needed to safeguard electric reliability. According to the proposal, the nation’s electric grid was at risk of disruption from extreme weather or terrorist attack due to a decline in ‘fuel secure’ power plants. To deal with this supposed problem, the proposal would have guaranteed cost-recovery to US power plants that maintained a 90-day supply of fuel on site. As coal and nuclear plants can easily stockpile fuel on site while natural gas and renewable energy cannot, the rule would have meant government guarantees of profitability for coal and nuclear.
DOE’s NOPR was surprising in several respects. The proposal sought final action from FERC within 60 days, with the rule to take effect 30 days after that. This is, needless to say, not the timeframe under which federal agencies like FERC typically operate, and would hardly have provided time to develop sensible regulations, let alone to incorporate public comments as required by administrative procedure. The rule was also curiously out of step with DOE’s own recent research on the subject. Earlier in 2017, the secretary of energy, Rick Perry, had ordered the DOE to examine potential reliability issues caused by retirements of so-called ‘baseload’ power plants (such as coal and nuclear) which operate continuously. That report had concluded that the nation was not facing a reliability crisis, and that markets were capable of adequately responding to any challenges.
The proposed rule created a firestorm of political controversy. Experts across the political spectrum questioned both the need for emergency action on reliability and whether the proposal would do anything to address actual reliability concerns. Most blackouts are caused by problems with transmission and distribution (such as downed power lines), not generation. A political coalition of ‘strange bedfellows’ developed, joining renewables companies with the American Petroleum Institute, green groups with free marketeers. After initially delaying consideration of the rule, FERC shot down the proposal on a unanimous vote.
But it was not over. Not long after FERC had disposed of the NOPR, press stories began appearing that DOE was looking for legal grounds to take action itself. The following months were a rollercoaster of leaks and counter-leaks, as the administration struggled to come up with a way to bail out coal and nuclear plants that would withstand legal challenge. Some of the options were quite creative, including invoking a Truman-era law regarding national security. These efforts progressed to an advanced stage. At one point president Trump even tweeted that he had ordered the DOE to implement the plan. But for whatever reason the plan was never executed, and was ultimately abandoned.
While efforts to bail out coal and nuclear plants were unsuccessful federally, similar efforts at the state level have borne more fruit. Earlier this summer, the Ohio legislature passed HB 6, which has been described as “the worst energy bill of the twenty-first century”. The bill bails out several coal and nuclear plants in the state, imposing a monthly surcharge on electricity bills for the next seven years. To offset these additional charges, the bill also scaled back existing energy efficiency and renewable energy standards.
As with the federal efforts, the passage of HB 6 involved some political arm-twisting. After initial efforts to pass the bill failed, the legislature was recalled during its scheduled recess to take up the bill at the behest of the house speaker and governor.
As it turns out, both the federal and Ohio efforts described above have a common factor in a single energy company. FirstEnergy, an electric utility headquartered in Ohio, has long sought government assistance for several of its power plants, and reporting by the Cleveland Plain Dealer and other venues documents the sizeable role they played in the development of both the NOPR and HB 6. During FERC’s consideration of the federal NOPR, FirstEnergy helped write hundreds of ghostwritten comments in favour of the proposal, and hired former Rick Perry aide Jeff Miller to lobby hard for the rule. Documents made public by First Energy Solutions (a FirstEnergy subsidiary that declared bankruptcy in 2018) also revealed that the company had spent $185,000 through intermediaries on ads supporting power plant bailouts in Ohio and Pennsylvania. And FirstEnergy’s PAC has contributed over a million dollars to Ohio candidates since 2014, including heavy contributions to the governor and house speaker.
Given the nature of our political system, it is almost inevitable that businesses will try to obtain special advantages in the marketplace via government favour. The ethics of such tactics aside, the risk of political interference in markets is something that markets themselves must take account of when making investment decisions. Yet so far, attempts by coal and nuclear generators to put government’s finger on the scale has not fundamentally altered the trajectory of the electricity market.
Josiah Neeley is director, Texas at R Street. He can be contacted on +1 (202) 900 8257 or by email: jneeley@rstreet.org.
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Josiah Neeley
R Street