Perry tries to pick winners, but consumers, climate and grid resiliency lose out

Hurricane Harvey was notable for dumping record levels of rain in Houston and across Texas.

Hurricane season was still in full swing when the US Energy Secretary Rick Perry announced a proposal that could increase carbon emissions from the power sector and in turn accelerate global warming.

If you haven’t been following this story, all you need to know is that essentially what Perry asked staff at the Federal Energy Regulatory Commission (FERC) to do would result in a tariff levied on consumers which recovers costs for power plants, including the stockpiling of 90 days’ worth of fuel on-site to ensure grid stability during an emergency.

Competitive wholesale electricity markets. Source: Sustainable FERC

In reality, this would amount to a subsidy for coal and nuclear plants in the four competitive wholesale markets (those in which power plants compete to sell power) that incorporate capacity market mechanisms — Midcontinent ISO, PJM Interconnection, New York ISO, and ISO New England.

So citing this year’s hurricanes Harvey, Maria and Irma as evidence that the coal industry needs protection against the dual market forces of a switch to natural gas and low prices for wind energy, all in the name of keeping the lights on and maintaining national security stretches the imagination somewhat.

Ensuring that American families and businesses have access to reliable, resilient and affordable electricity is vital to the economy, national security, and quality of life. [Notice of Federal Register Publication, 11 October 2017]

In a joint analysis by CPI Energy Finance and Energy Innovation, we found that this plan could cost consumers in the markets covered by the Notice of Proposed Rulemaking up to $10.6bn a year. In the PJM area alone this would equate to $112 annually for each of the 65 million people served by that market.

Total costs of a system almost entirely run on solar and wind could be cheaper than one run on all gas from 2030.

But it doesn’t have to be this way: the transition to a low-carbon energy system doesn’t have to cost more. In fact, our previous analysis shows that it could be cheaper than a fossil-based system in future.

The US is currently experiencing a historic period of energy prosperity and independence that was unimaginable a few years ago. Cheap and abundant natural gas supplies and world-class renewable energy resources combined with rapidly declining wind and solar technology costs have turned electricity markets on their head. Once the cornerstone of the power sector, coal and nuclear plants find themselves struggling to compete with cheaper technologies at a time when advances in energy efficiency are causing electricity demand to fall or remain flat.

Added to which are the cost declines for existing and emerging flexibility technologies which will enable us to decarbonize the power sector cheaply, while maintaining system reliability and resilience.

During the course of this work we also struggled to find any link between stockpiling fuel and grid reliability. Moreover, the Department of Energy’s proposal does not attempt to define what reliability and resiliency metrics stockpiling fuel for 90 days would satisfy.

That’s probably because there is no industry agreement yet on what resiliency means. Alison Silverstein, an independent consultant who drafted the technical portions of the DOE grid study used in the current proposal, wrote, “the characteristics, metrics, benefits and compensation for essential resilience and reliability services are not yet fully understood”. DOE is prescribing a remedy to a problem that hasn’t been fully diagnosed.

Lights go out in Manhattan in the aftermath of superstorm Sandy in 2012.

In addition to this season of hurricanes, the proposal cites the 2014 polar vortex and superstorm Sandy in 2012. However, many of the same plants that would receive subsidies under the DOE proposal were inoperable during the polar vortex because temperatures fell below operating limits. About 50% of plant outages in the PJM market were attributed to coal plants and instead distributed resources played a huge role in maintaining essential services at hospitals.

A market distorting proposal

Coal and nuclear retirements are being driven by changing market conditions, primarily low natural gas prices and low electric demand growth. The DOE proposal is an anti-competitive subsidy that undermines the efficient allocation of resources the wholesale markets are designed to create. Instead, it will likely allow coal plants to act as price-takers, knowing all their operating and capital costs are covered.

Such a scenario would not only discourage new, low-cost renewables from entering the markets — making future electricity more expensive — but it would negatively impact the profitability of existing gas and renewable generators without providing any savings to consumers.

Everywhere that coal and nuclear plants are being challenged in the marketplace by cheaper alternatives there is a tension around companies needing cost recovery to be made whole on their investments.

In Ohio and New York similar subsidy schemes for coal and nuclear generation motivated, at least partially in the case of New York, by concerns around grid reliability have been developed. In competitive markets, what the DOE’s proposal and these other schemes accomplish is to transfer the burden of unrecovered plant costs — sometimes referred to as stranded assets or stranded costs — from shareholders to consumers.

A solution to stranded assets

The phenomenon of stranded assets isn’t limited to competitive markets, however. In Colorado, bringing new wind power online is in most cases less expensive than operating existing coal plants and it’s putting the owners of those coal plants in a challenging position.

CPI Energy Finance has been working with partners in Colorado on refinancing strategies using securitization to divert regulated utility capital locked up in uneconomic coal plants to cheaper, clean renewable energy. All while directing a portion of the energy savings to communities who are feeling the social impacts of the energy system transition from fossil-based to renewable.

If we are concerned about the communities impacted by plant and coal mine closures — about the politics of the energy system transition — then we must find more sustainable ways to address that problem than propping up uneconomic plants with subsidies.

If we are concerned about reliability and resilience then we should instead focus on improving market design to incentivize the necessary types of grid services. And we should continue working to drive down the costs of technologies that can better provide those services to the future low-carbon grid.

Those conversations are essential if we are to make an efficient transition to a low-cost, low-carbon grid and hopefully FERC takes this opportunity to drive them forward.

Andrew Goggins is an energy finance consultant at Climate Policy Initiative.