Dueling Federal Power Plant Bailouts: A Consumer’s Nightmare
- February 7, 2019
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The Federal Energy Regulatory Commission (FERC, the nation’s grid regulator) and the Trump administration are working on bailouts for different types of power plants that could end up acting at cross-purposes with one another, creating a nightmare for energy customers that would force them to spend billions propping up far more power plants than are necessary to keep the lights on.
Seals of the Federal Energy Regulatory Commission and Department of Energy
Source: ferc.gov and energy.gov
Trump’s attempts at a coal/nuclear bailout
The Trump administration has been searching for ways to bail out expensive coal and nuclear plants that can no longer compete with cheaper forms of meeting electricity demand, like wind, solar, gas, and energy efficiency. The Trump administration’s whack-a-mole style efforts began with a proposal from Secretary of Energy Rick Perry, which was rejected by FERC (as discussed here). Since then we’ve seen a range of bailout proposals and false justifications such as grid emergencies and national security concerns—each misleading and absurd in its own way.
A Trump administration coal/nuclear plant bailout, in any form, would be completely unjustified. A wide range of observers, including the Department of Energy itself, have found the grid to be both reliable and resilient—reliability is the overall ability to keep lights on, and resilience is the ability to withstand/recover from threats like extreme weather. Further, grid reliability has actually increased in the last 15 years, even with coal and nuclear plant retirements (NRDC’s Gillian Giannetti explains more here). Yet while not solving any system need, a bailout would cost customers billions, with the exact price tag differing based on the scope of the plan. One recent study estimates the cost of a two-year bailout at $34 billion. But one would at least expect that if the federal government arbitrarily requires customers to prop up aging, expensive coal and nuclear plants, then customers shouldn’t have to support as many power plants of other types, right?
FERC’s proposed bailout for other power plants
Shockingly, FERC, the nation’s grid regulator, is developing convoluted and highly flawed market rules that could essentially act as yet another bailout that would compete and conflict with the Trump administration’s proposed coal/nuclear bailout. (Recent news stories indicate some at FERC may also be helping with Trump's proposed bailout, meaning that they are working on both potential bailouts despite the conflict between them.)
On June 29, FERC issued an order affecting the PJM regional grid operator (which serves a region stretching from Illinois to New Jersey to North Carolina that supplies electricity to roughly 65 million homes and businesses), which could require customers in that region to prop up additional power plants above and beyond those potentially bailed out by the Trump administration. The order was framed as an attempt to adjust the PJM market in order to eliminate some of the economic effects of “subsidies,” and forced plants to sell in one of PJM’s markets only at “unsubsidized” levels. The details are complicated, but as explained below, because the proposed coal/nuclear bailout is a subsidy, this rule could end up working to force customers in the PJM region to pay for other plants (mostly natural gas), requiring them to support a total power supply far in excess of the region’s needs. In other words, it could force customers to support natural gas plants rendered unnecessary by the Trump administration’s decision to prop up coal and nuclear plants. The nonsensical plan would make bailouts to protect market actors from other actions by Trump's own administration a running theme. Similarly, the administration recently ordered a $12 billion bailout to help farmers suffering from the effects of the Trump Administration’s own tariffs.
The complicated details of FERC’s order
FERC’s plan operates through the rules for PJM’s capacity market—a market where power plants sell not electricity itself, but rather commitments to be available to utilities when called upon during times like hot summer days when the electric system is under stress. This piece from Vox’s David Roberts covering another similar order from FERC offers a good explainer of how capacity markets work and the issues at play.
FERC's PJM capacity market order stems primarily from an effort to protect owners of fossil-fuel fired power plants in PJM from competition with wind, solar, and nuclear generators supported by state climate policies, which compensate those plants for the emissions they prevent when they run in place of fossil plants. FERC characterized payments under these state programs as “subsidies,” setting up a rule by which the wind, solar and nuclear generators would be forced to bid into the capacity market at a higher price based on their revenues and costs excluding the so-called “subsidies.” If the adjustment cancelling out the effect of state policies causes cleaner plants to bid higher prices than enough other power plants needed to meet the region’s demand, the cleaner plants will not be chosen to sell capacity and will thereby be effectively blocked from selling capacity in the PJM market. If the blocked plants nevertheless remain in operation (pursuant to the state policies) but utilities don’t receive capacity credit for their contributions to the system’s reliability, then the total amount of capacity customers pay for goes beyond what is necessary to reliably keep the electric system up and running. NRDC, together with a coalition of clean energy advocates that coordinate with one another through the Sustainable FERC Project, are opposing FERC’s order and urging the agency to reconsider its action. (Read more about that effort here.)
While FERC focused on state climate policies, it left open whether federal subsidies should be treated in the same manner. The PJM grid operator recently revealed that in the event of a coal/nuclear bailout, it plans to treat funds flowing to eligible plants under the program as subsidies, through which capacity bids from the affected power plants would be adjusted to cancel out those subsidies in the same manner as PJM plans to do for emissions avoidance revenues paid to wind, solar, and nuclear generators under state policies. PJM’s logic on this point holds: surely if economically efficient climate policies are “subsidies,” then completely unjustified payments to coal and nuclear must also be. But the potential result—an even bigger bill for customers to support even more unnecessary power plants – is absurd. FERC must soon decide whether to accept PJM's proposed interpretation.
There's still time to prevent the bailouts
An important caveat to all of this is that for now, FERC’s order only creates the potential for an additional bailout above and beyond the one proposed for coal and nuclear, because FERC is still considering rules that would reduce the amount of capacity utilities must buy through the PJM capacity market if they rely on capacity from the “subsidized” resources blocked from selling in the market. NRDC, Sierra Club, American Council on Renewable Energy, and D.C. Office of the People’s Counsel are working on a proposal, to be filed at FERC, that would facilitate this and thereby 1) prevent customers from being forced to buy far more capacity than necessary, and 2) prevent the bailout of the natural gas and other fossil fuel-fired power plants not subject to the potential coal/nuclear bailout. Meanwhile, Trump's first coal/nuclear bailout attempt was rejected and any similar attempt will surely be met with a legal challenge.
In all, it’s enough to make one’s head spin. None of this was necessary. As explained in this excellent report from the Institute for Policy Integrity, the PJM capacity market would work fine without adjustments for “subsidized” resources, and allowing state climate policies to affect the market would produce more efficient market outcomes. In his dissent to the FERC order, Commissioner Richard Glick noted that protecting the so-called “integrity” of capacity markets from state or federal policies is a fool’s errand that, if applied consistently, would require adjusting for a far broader range of policies, leaving few or no “unsubsidized” resources and producing a completely unworkable market. And as convoluted as FERC’s plans are, a coal/nuclear bailout is even worse—a blatant attempt to channel billions of consumer dollars to political allies under the guise of reliability or resilience despite no demonstrated need to support the affected plants. As long as Trump and FERC are embarking on these ridiculous enterprises, NRDC will work with states and consumer advocates to ensure that customers are protected, and that clean, renewable energy resources aren’t treated unfairly.
Finally, it should be noted that some have suggested that these bailout proposals (and in particular FERC’s action with regard to the PJM market) are a reason to press pause on Western regional grid integration efforts. They are not. FERC alreadyregulates California’s regional grid operator, which has been protected from PJM-style bailout attempts for reasons unrelated to the number of states participating in the regional grid. AB 813, a bill to advance Western grid integration by enabling the California grid operator to expand, contains important safeguards against the very types of overreach that FERC is engaged in with regard to PJM, which would provide greater protection against such a bailout that the status quo. NRDC will continue to champion enhanced Western grid integration and AB 813, which are important steps toward renewable energy integration, cost reductions, and reliability improvements.