President Donald Trump recently ordered Energy Secretary Rick Perry to take “immediate steps” to stop the closure of coal and nuclear power plants.
And according to a draft memo that surfaced the same day, the federal government may establish a “Strategic Electric Generation Reserve” to purchase electricity from coal and nuclear plants for two years.
Both proposals, which have garnered little support, are premised on these power plants being essential to national security. If implemented, the government would be activating emergency powers rarely tapped before for any purpose.
Based on my four decades of experience as a utility regulatory attorney and law professor, I can see why this proposal has caused much controversy, partly because of how energy markets work.
No credible evidence
To be sure, these industries are in trouble.
The share of U.S. power derived from coal has fallen from about one-half in 2000 to less than one-third in 2017. Despite Trump’s full-throated support for the coal industry, another roughly 12 gigawatts of coal-fired capacity, or about 4 percent of the American coal fleet, is slated for retirement in 2018. According to a tally from environmental advocacy group the Sierra Club, 36 coal plants have retired since Trump was elected and according to various announcements, another 30 will close and few new coal plants are being planned or built.
The share of power generated by nuclear reactors, despite holding steady at about one-fifth of the national grid since 2000, is about to slide. More than 1 in 10 of the nation’s nuclear reactors are likely to be decommissioned by 2025. If completed, the only two large-scale ones under construction will cost far more than originally planned.
But are experts worried about any electricity shortages or outages between now and 2025? Well, no. Other alternatives, mainly natural gas, wind and solar energy are poised to keep filling the gaps created in recent years by other coal plant closures.
Disregarding the findings of its own study, the agency proceeded to ask the Federal Energy Regulatory Commission, an independent federal agency known as FERC that regulates energy rates and policies, for permission to subsidize coal and nuclear plants. The agency unanimously rejected that proposal.
More recently, PJM Interconnection – the nation’s biggest grid operator – declared that its power supply is not in jeopardy and that there is no reason to take this anticipated policy move.
The North American Reliability Corporation, the federal entity responsible for power reliability, has reached similar conclusions.
In short, there is no emergency that justifies this unprecedented intrusion into the electricity markets that would warrant forcing taxpayers and utilities to pay a premium to keep coal and nuclear plants online.
But the Trump administration appears to be arguing that a provision known as Section 202(c) of the Federal Power Act and the Defense Production Act grant the secretary of energy the power to nationalize parts of the power sector during wartime or amid other emergencies.
I believe that the sole rationale for this new policy is as a way for Trump to keep his campaign promise to revive the ailing coal industry.
How America’s power markets work
The nation’s regional power markets operate much like an auction to cover the constantly changing, hour-by-hour demand for electricity from consumers large and small. Procedures vary in different parts of the country, but typically electricity producers “bid” into the market based on what it costs them to operate. The rules generally require regional grid operators to dispatch the lowest-cost power available.
Companies selling power generated in natural gas-fired power plants have managed to lower their costs considerably in recent years because of low natural gas prices, a result of increased drilling from the spread of hydraulic fracturing, or fracking.
The cost of electricity powered by wind and solar energy has also declined sharply due to technological advances and tax credits which are being phased out. Those changes have made the competition stiffer. Meanwhile, the costs of producing power in coal and nuclear plants have gotten higher.
In many cases, the power generated by coal and nuclear power plants sells at prices that are too low to cover operating costs. The federal government does not typically intervene in wholesale electricity markets, other than to enforce rules intended to ensure that the competition is fair.
Because it would override the results of competition, I have no doubt that the Trump administration’s proposals would mark a radical intervention by the government into the electricity markets.
Winners and losers
Shareholders of the energy companies that own money-losing coal and nuclear plants stand to gain if this policy gets implemented because they are unable to compete in the wholesale power markets without this kind of assist.
Other power companies, utilities, taxpayers and electric ratepayers – meaning homeowners, businesses and anyone else who pays to keep the lights on – would lose out. We’d all have to pay a premium to pay for this unprecedented form of government intervention.
As former FERC Chairman Jon Wellinghoff has said, this departure from a historically market-driven system would drive up rates. Kevin McIntyre, the current FERC chairman, says his independent panel may not have any say over whether the administration can move ahead with this policy.
For what it’s worth, this policy would do little in terms of climate action. While nuclear power does generate largely carbon-free electricity, the older coal-fired power plants that would otherwise stop operating are among the dirtiest and least efficient units on the grid.
What’s more, there’s no clear legal rationale for this kind of policy. Like most scholars of law and energy, I’ll be shocked if it doesn’t usher in a wave of lawsuits filed by the oil, natural gas and renewable energy industries, utilities and even irked homeowners.