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Conflicting outlooks emerge on action to save at-risk US coal, nuclear plants

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Essential Energy Insights - November 2021


Conflicting outlooks emerge on action to save at-risk US coal, nuclear plants

Despite reports to the contrary, investment firm Morgan Stanley & Co. said a "significant probability" exists that the U.S. Department of Energy will issue an order to prop up merchant coal-fired and nuclear plants at risk of premature retirement.

Morgan Stanley's research note came out the same day Politico reported the White House had shelved a DOE proposal to rescue vulnerable coal and nuclear plants amid opposition from advisers on the National Security Council and National Economic Council. Among other challenges, Politico said the DOE has struggled to figure out which plants would receive funding and who would pay for the potentially multibillion-dollar "bailout," raising the potential for electric customers to cover the costs of the relief.

Morgan Stanley equity analyst Stephen Byrd, one of the authors of the research note, was unavailable for further comment, and neither the White House nor the DOE responded to inquiries on possible coal and nuclear aid plans.

The Morgan Stanley memo said that if the DOE were to issue a bailout order, it would most likely do so before the November midterm elections, although "alternative views" suggest the order could be released in the second half of 2019 or even never.

"There is a significant probability that the Department of Energy institutes an order that would provide cost-of-service (essentially regulated utility) treatment for merchant coal and nuclear plants that face a significant risk of shutdown," Morgan Stanley said in the Oct. 15 research note.

The firm said its outlook was based on several recent meetings in Washington, D.C., but did not specify with whom Morgan Stanley's analysts met. If the DOE requires cost-of-service payments for struggling coal and nuclear plants, Morgan Stanley said Exelon Corp. would be the "biggest beneficiary" because several of the company's nuclear plants have failed to clear in recent capacity auctions.

Energy Secretary Rick Perry has struggled in his mission to support the U.S. coal-fired and nuclear generation fleets, which have faced intense competition in recent years from new natural gas-fired and renewable generation and weak demand growth.

In January, the Federal Energy Regulatory Commission rejected a Perry proposal that would have required grid operators to ensure full cost recovery plus a return on investment for plants in wholesale markets that stored at least 90 days of fuel on-site. The White House has yet to formally respond to a draft DOE plan leaked in late May that would invoke the Defense Production Act of 1950 and Section 202(c) of the Federal Power Act to prop up certain at-risk coal, nuclear and other "fuel-secure" plants for two years while the federal government determines which power assets may be critical to national defense.

The DOE has also not officially responded to an emergency request by merchant generator FirstEnergy Solutions Corp. to issue an order directing the PJM Interconnection to enter into contracts with certain nuclear and coal-fired power plants to avoid their early closure.