Electricity Customers in 31 States Could Foot the Bill for Perry’s Coal Bailout
This column contains a correction.
On September 29, 2017, U.S. Department of Energy (DOE) Secretary Rick Perry announced a proposal to bail out uneconomic coal and nuclear power plants—a move that could raise utility bills in many states. Experts have responded to the proposal with sharp criticism, expressing concern that the rule would blow up U.S. electricity markets and run up consumers’ electricity costs. The Center for American Progress analyzed the proposal and found that electricity customers in 31 states* across four electricity markets are at risk of bearing the brunt of its costs.** Launched within weeks of the Trump administration’s proposal to repeal the Clean Power Plan, Perry’s coal bailout would, in essence, replace the first carbon pollution standards for power plants with a proposal to subsidize these same carbon-emitting plants—paid for by electricity customers.
Perry’s coal bailout proposal skips over the facts
In April 2017, Secretary Perry requested that the DOE study the role of “baseload power,” which is shorthand for power plants—including coal and nuclear—that run continuously in order to meet the nation’s minimum level of electricity demand. Given past and planned power plant retirements, Perry raised concerns about the reliability of the U.S. electricity grid. The resulting study outlined several market-based reasons why utilities have recently retired some coal and nuclear power plants: cheap natural gas, low demand growth, cheap renewables, investments needed to cut air pollution, and policy decisions regarding nuclear plants—particularly, those that followed the Fukushima disaster. The study also described the reality of grid management: utilities and grid operators manage a network of electricity generators, transmission and distribution wires, energy storage, and other technologies, matching the different services each provides with the needs of the grid in order to maintain reliability and to respond to grid disruptions.
The DOE grid study and several other recent reports provide strong evidence that the ongoing fuel shift from coal and nuclear to natural gas and renewables has not compromised the reliability of the U.S. electricity grid. Secretary Perry’s proposed rule disregards this evidence, charging ahead to argue that so-called fuel-secure coal and nuclear power plants provide grid services so critical that they require subsidies. Perry’s proposal invents the term “fuel-secure” in an effort to restrict bailout eligibility to power plants—such as coal and nuclear—that typically store physical fuel onsite. By doing so, it selectively highlights fuel attributes that experts have argued may be a vulnerability rather than a benefit.
How Perry’s coal bailout would work and who would pay the bill
The decision-making process surrounding the proposal has now moved to the Federal Energy Regulatory Commission (FERC), which responded to Perry’s request for urgent action and has authority over the proposed rule. Before the FERC takes final action, however, it is crucial to know who the coal bailout may affect as well as the nature of these potential impacts.
In effect, Secretary Perry has manufactured a resilience and reliability problem—one that the experts who manage the electric grid argue does not actually exist. The proposed rule would pay power plants to address resilience and reliability problems, which Perry claims exist in ways so specific that only coal and nuclear plants would qualify. If the proposal is enacted, it may ultimately erase the costs these plants incur, thus charging electricity customers to bail out coal and nuclear power plants that are being outcompeted by cleaner, cheaper, and more resilient alternatives, including natural gas, renewables, and energy storage.
Due to the laws governing the U.S. electricity markets as well as the geographic location of coal and nuclear power plants, businesses and residents in certain states may incur higher electricity costs from Perry’s bailout proposal. The proposal applies to wholesale electricity markets under the FERC’s jurisdiction, also known as independent system operators (ISO) and regional transmission organizations (RTO). These designations immediately exclude states outside of the FERC’s authority, such as Texas, and those not served by an ISO or RTO, such as Georgia, with its traditional vertically integrated utilities. They also exclude parts of Tennessee and certain states in the Southwest and Northwest, where federal power authorities operate the grid, plus Alaska and Hawaii due to their isolation from the continental United States. Finally, the proposal further specifies that only coal and nuclear plants in RTOs and ISOs with capacity markets—those in which utilities buy and sell resources that guarantee electricity generation capacity in the future—would qualify for the bailout, thus excluding California ISO and the Southwest Power Pool. It is unclear as to what extent the proposal will affect power plants in the Midcontinent Independent System Operator (MISO), which has a voluntary capacity market. New York may see less of an impact if the proposal is enacted because it has set in motion the retirement of one nuclear plant for policy reasons, but its remaining coal and nuclear plants would likely profit.
If the FERC enacts Secretary Perry’s coal bailout, more than 147 million ratepayers in four RTOs or ISOs covering parts of 30 states** and the District of Columbia may see their electricity bills increase. Electricity consumers in the PJM Interconnection—the RTO serving all or parts of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia, and the District of Columbia—are at greatest risk for significant rate increases. This electricity market is home to a high concentration of coal power plants that would qualify for the ratepayer-subsidized bailout.
Estimating the bill for Perry’s coal bailout
Secretary Perry’s coal bailout proposal provides so few details on how it will operate that it is challenging to estimate costs to ratepayers. Analysts have indicated that the FERC has flexibility to apply the proposal to different aspects of the electricity markets, and the proposal’s vague language makes it difficult to ascertain the full extent of its coverage. An initial estimate of the coal bailout’s cost to ratepayers accounts for both high- and low-cost natural gas scenarios—utilities’ alternative fuel of choice—and ranges between $800 million and $3.8 billion, respectively. As additional experts weigh in on cost estimates, these are numbers to watch.
With the FERC taking swift action to open public comments on Perry’s proposal, the window for stakeholders to provide input is narrow and closing. This far-reaching proposal may affect areas that disprove Perry’s argument, such as where wind generation and grid management are setting new records; where piles of coal froze during winter and grid operators relied on demand response and other new technologies to prevent shortages; and where reliability has improved on nearly every metric—essentially, everywhere. By subsidizing coal and nuclear power plants, Secretary Perry’s bailout would reshape the nation’s electricity markets, making them less competitive and more expensive. His proposal raises questions that grid operators and other experts have already answered; it overstates threats to the grid; and it makes utility customers responsible for the burden of bailing out power plants no longer well-suited to the needs of the electric grid.
*Author’s note: The list of states includes the District of Columbia.
**Correction, November 6, 2017: This column has been corrected to account for its earlier omission of Wisconsin, which is part of the MISO electricity market.
Luke H. Bassett is the associate director of Domestic Energy Policy at the Center for American Progress.
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Associate Director, Domestic Energy and Environment Policy