Federal regulators deal huge blow to the coal industry
When President Trump’s bailout for coal and nuclear plants was unanimously rejected by regulators in January, the administration’s effort to prop up those ailing industries took a hit.
The Federal Energy Regulatory Commission (FERC), which regulates the U.S. electricity market, on Jan. 11 shot down a proposal from the Department of Energy that would have essentially subsidized aging coal and nuclear power plants.
The effort, pushed by Secretary of Energy Rick Perry, was billed as move to shore up the electric grid and improve “resilience” by rewarding power plants that held a 90-day supply of fuel on site. Only coal and nuclear met that definition. The idea was that coal and nuclear provide the backbone for the nation’s electricity supply, so the market should subsidize them to keep them from going out of business.
FERC unanimously rejected the proposal, despite President Trump having appointed four of the five members on the commission. The panel concluded that under the proposal, coal and nuclear plants would be compensated “regardless of need or cost to the system,” an idea that would not be “just or reasonable.”
"There’s agreement at the commission that the DOE proposal wasn’t sufficient," Richard Glick, one of the FERC commissioners, told Bloomberg. "It was unanimous."
Still, FERC acknowledged the importance of grid “resilience,” and instead asked regional wholesale power market operators to come up with some recommendations within 60 days on how to improve grid security.
No lifeline for coal, nuclear power industry
While it may seem arcane, the decision from FERC is a huge blow to the coal and nuclear industries, which hoped to receive an economic lifeline from the move by compensating economically distressed power plants. A November 2017 Resources for the Future study found that the DOE proposal would keep 25 GW of coal capacity from shutting down, and delay the retirement of 20 GW of nuclear capacity.
But the proposal from DOE sparked a strong and widespread backlash, uniting some unlikely allies. Opposition came from the wind and solar industries as well as the oil and gas industry. The plan “upsets the very foundations of the competitive wholesale electricity markets,” wrote the American Petroleum Institute.
Free market proponents and former FERC officials also criticized the idea because it would distort electricity markets. Consumer groups objected to the fact that ratepayers would have to foot the bill paid to aging coal and nuclear plants that are struggling for economic relevance.
Meanwhile, the decision was notable because it came just after a rather extreme bout of cold weather that left much of the East Coast in a deep freeze. Spot natural gas prices in New York and New England spiked to extreme levels. That led to some rather bizarre developments in the energy trade, with the U.S. importing LNG from Europe and burning oil for electricity.
Natural gas price spikes temporary
However, the high prices for natural gas were always going to be temporary, and they are an outgrowth of midstream bottlenecks into the northeast, not the result of a shortage of gas supply. In any event, the grid held up despite the massive wave of coal plant retirements in recent years. “There is no evidence in the record to suggest that temporarily delaying the retirement of uncompetitive coal and nuclear generators would meaningfully improve the resilience of the grid,” wrote Commissioner Richard Glick.
Moreover, FERC noted that outages mostly occur to transmission lines, not because there isn’t enough generation capacity. “[T]he record demonstrates that, if a threat to grid resilience exists, the threat lies mostly with the transmission and distribution systems, where virtually all significant disruptions occur.”
The upshot is that the Trump administration has little to show for its persistent effort to bail out the coal industry. Coal has received a temporary reprieve in the past year, with production up a bit, but that has more to do with international demand than it did with policies from Washington. Most analysts view the slight uptick in coal’s fortunes as a brief hiatus in the long-term structural decline of the industry.
In other words, Trump and extreme weather notwithstanding, natural gas and renewable energy will continue to eat into the market share for coal.
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