President Trump’s administration shocked the utility world by proposing a rule late last month that would effectively socialize the costs of coal-fired and nuclear power plants in this country. Many of these plants are uneconomic or, at best, marginally economic right now because of low natural gas prices. They’re on the brink of closure. But the new proposed rule would force large regional energy markets to bail these plants out — and soon — under the auspices of ensuring grid efficiency and resiliency.
To put it lightly: This rule, if adopted, would radically transform energy markets and the utility industry. And the primary loser would be the natural gas industry.
On Sept. 29, Secretary of Energy Rick Perry dropped his bomb, called the Grid Resiliency Rule, on the Federal Energy Regulatory Commission. The secretary directed that the Commission issue rules within sixty days to halt the “premature retirements of power plants that can withstand major fuel supply disruptions caused by natural or man-made disasters,” i.e., coal-fired and nuclear power plants. More specifically, Mr. Perry directed the Commission to expeditiously issue rules forcing the participants in regional energy markets (typically covering many states) to pay the owners of these plants for their “operating and fuel expenses, costs of capital and debt, and a fair return on equity and investment.”
In other words, the owners of these plants would get a market-backed guarantee that their plants will be profitable for many years to come, regardless of market conditions.
The rule’s details are somewhat scant and murky. And the ultimate decision as to what to do now lies with FERC, not Secretary Perry. But as proposed, any coal-fired or nuclear power plant that meets the following criteria would be guaranteed cost recovery plus a reasonable rate of return:
- it must be physically located within a FERC approved regional market run by an independent system operator or regional transmission organization;
- it must be able to provide essential energy and reliability services;
- it must have a 90-day fuel supply on site enabling it to operate during an emergency, extreme weather conditions, or a natural or man-made disaster;
- it must be compliant with all relevant environmental and energy laws; and
- it must not be subject to cost of service rate regulation by any state or local regulatory authority.
Only coal and nuclear plants can meet all five requirements, primarily because they’re the only types of power plants that can have a 90-day fuel supply on site. Which is the proposed rule’s point: coal and nuclear plants can operate more reliably after a natural disaster or if there’s a disruption in the fuel supply (say, for example, because a large natural gas pipeline goes down or is attacked).
Whether or not coal and nuclear plants are actually needed for reliability purposes is a hotly debated subject. But regardless, as I’ve argued elsewhere, having our entire grid primarily reliant on one fuel — natural gas — would be risky from an economic standpoint. If natural gas prices unexpectedly rise or we have large unforeseen disruptions in supply, the impact on our economy could be disastrous—if we do not have an alternative.
There’s therefore some sense to enacting rules that help incentivize fuel diversity.
The Trump administration’s proposal, however, seems a bit much, and a bit too fast.
As currently drafted, the proposal would appear to allow merchant power plant owners to offload the costs of their coal and nuclear plants onto regional markets, which would also have to pay the owner’s a rate of return. In some of the states with a lot of floundering merchant coal and nuclear plants (like Ohio), the states themselves have been debating bailing these plants out. Mr. Perry’s proposal would instead allow these bail-out payments to be spread more widely, across a multi-state regional market.
But that’s not all. The proposed rule would also appear to allow utilities in regulated states — where ratepayers are already paying for these plants and paying a rate of return on them — to do the same thing. If a regulated utility or its state public utility commission removed one or more coal or nuclear power plants from a utility’s rate base (meaning the utility would no longer be able to earn a rate of return on the plant from its ratepayers), the proposed rule would then appear to allow the utility to heft those costs onto the regional market.
Such a result would drastically alter regional markets and could lead to a large regulatory power shift from state public utility commissions to regional market operators (like MISO and PJM).
What might make more sense — at least in the interim — is for the regional market operators to instead require that market participants have a certain amount of capacity available of each power plant type. Capacity markets already exist that require utilities to have a certain amount of power plant capacity available to generate electricity (whether the plants actually run or not). But they generally don’t, however, distinguish between power plant fuel type or the ability of the plant to provide resiliency and reliability.
But they could. In other words, these markets could require that a certain amount of coal and nuclear power plant capacity be available to operate at all times and also mandate certain resiliency and reliability measures.
This might help slow down the retirement of some currently uneconomic coal and nuclear power plants. And it would do so without actually forcing us to use these less economic power plants for our everyday energy needs.