The U.S. Department of Energy’s new initiative to subsidize coal and nuclear generation could cost U.S. businesses and households up to $10.6 billion annually, writes Silvio Marcacci, Communications Director at think tank Energy Innovation. This money would go to about 10 companies.
The U.S. Department of Energy’s Notice of Proposed Rulemaking (NOPR) directing the Federal Energy Regulatory Commission (FERC) to subsidize coal and nuclear generation is opposed by nearly every side of America’s electricity industry – from market operators and conservative analysts to a bipartisan group of former FERC commissioners – except for those who would directly benefit from it.
Reasons for opposing the NOPR range from potentially destroying wholesale power markets, to free trade principles, or insufficient review time, but beyond Rick Perry suggesting the proposal’s price was equal to “the cost of freedom,” DOE hasn’t quantified the NOPR’s economic impact or which plants it would subsidize.
What the NOPR would do, however, is upend America’s wholesale power markets
Research from Energy Innovation (EI) and the Climate Policy Initiative (CPI) finds DOE’s NOPR could cost up to $10.6 billion annually, and would be paid by U.S. businesses and residents. This subsidy would flow to roughly 10 companies and 90 power plants, and harm cheaper generation from natural gas and renewables.
Wrecking U.S. power markets won’t improve grid resilience
DOE’s NOPR is the latest Trump Administration attempt to prop up older, inefficient coal and nuclear generation that utilities find increasingly uneconomic to operate against cleaner, cheaper generation and efficiency resources.
The NOPR directs FERC to develop new tariffs compensating generating units with a 90-day on-site fuel supply for “operating and fuel expenses, costs of capital and debt, and a fair return on equity and investment” – i.e. coal and nuclear facilities.
The motivation for this subsidy is establishing grid “resilience” to ensure electricity service during emergencies, extreme weather, or disasters – but the NOPR wouldn’t improve power supplies. Recent analysis shows fuel supply issues were responsible for only 0.00007% of power outage hours between 2012 and 2016. Consider 2014’s Polar Vortex and 2017’s Hurricanes Harvey and Irma, when fossil fuel and nuclear generation was forced offline despite ample supplies of on-site fuel supplies.
Exelon would be the biggest beneficiary of the NOPR’s nuclear subsidies, receiving up to $3.6 billion per year
What the NOPR would do, however, is upend America’s wholesale power markets. In these markets, electricity demand is met by the cheapest-available supplies, but under DOE’s proposal, power plants would recover costs through subsidies instead of through energy market sales, and consumers would pay billions in subsidies for generation units that are too expensive to operate at today’s prices. Perhaps most troubling, the NOPR’s vague language could lead to consumers being forced to not only cover coal and nuclear plant operating costs, but also ensure they remain profitable.
“The DOE proposal…will likely allow coal plants to act as price-takers, knowing all their operating and capital costs are covered,” said CPI co-author Andrew Goggins. “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.”
Subsidy sticker shock for businesses and households to subsidize coal and nuclear
The EI-CPI research finds that electricity consumers in four wholesale power markets covering the Mid-Atlantic, Northeast, and Midwest regions would have to pay up to $10.6 billion in new subsidy costs under the NOPR. Commercial and industrial electricity customers, which represent 62% of America’s power use, would primarily bear that burden with the remainder paid by households across the country.
Customers in PJM Interconnection, America’s largest wholesale market serving customers in 13 states and the District of Columbia, would receive the biggest bill – up to $7.3 billion per year. The Midcontinent ISO, which serves customers in 16 states, would be hit with up to $1.6 billion in annual costs. New York ISO, which serves New York State, would see up to $1.1 billion in annual costs. New England ISO, which serves six northeast states, would see up to $700 million in added costs per year.
An additional 2-4 gigawatts retired coal generation capacity could be brought back online, creating capital addition costs of $113-$228 million per year
These subsides would be paid to just a handful of companies: More than 80% of the increased costs customers would pay to subsidize coal generation would go to just five companies, and nearly 90% of the increased costs to subsidize nuclear would go to just five (or fewer) companies.
NRG would be the biggest beneficiary of the NOPR’s coal subsidies, netting up to $1.2 billion per year, while FirstEnergy and Dynegy would receive up to $500 million in annual subsidies.
Exelon would be the biggest beneficiary of the NOPR’s nuclear subsidies, receiving up to $3.6 billion per year; Entergy, PSEG, FirstEnergy, and NextEra could all receive between $500 million and $1 billion in annual subsidies.
Unnecessary economic impacts to solve a non-existent problem
While the NOPR would create clear economic costs for businesses and homeowners across the U.S., it could also significantly increase costs in myriad unexpected ways.
For instance, an additional 2-4 gigawatts of retired coal generation capacity could be brought back online, creating capital addition costs of $113-$228 million per year. Or, coal plants contemplating retirement might keep running but require significant environmental retrofits, significantly increasing operating costs and associated consumer impacts. Meanwhile, would coal plants have to increase operational and maintenance costs to store the additional days’ worth of fuel? Could natural gas generation qualify for subsidies if they can meet the 90 days’ requirement? What about hydropower facilities if their reservoirs are large enough?
“If you want to tax customers to do favors for friends, be honest about it”
DOE Secretary Rick Perry has asked FERC to expedite its NOPR ruling and FERC Chairman Neil Chatterjee, who suggested the agency “cast a lifeline” to struggling coal and nuclear assets “so they can stay afloat,” says FERC will make its decision by December 11 – but such a significant proposal warrants a much more robust rulemaking process and a much longer timeline.
The NOPR would completely roil U.S. wholesale power markets by requiring customers to pay for revenue shortfalls at coal and nuclear plants with a guaranteed profit. “It’s really just a tax on customers,” said former FERC Commissioner (and President George W. Bush appointee) Nora Mead Brownell. “And if you want to tax customers to do favors for friends, be honest about it.”
These billions in subsidies are not needed because markets are operating reliably with record low consumer costs, and many markets are already working to improve reliability on their own. Add it all up, and the NOPR is an unnecessary $10 billion subsidy for uneconomic power plants, borne on the backs of American consumers.
Silvio Marcacci, Communications Director at Energy Innovation, where he leads all public relations and communications efforts.