New York — Providing financial support to uneconomic US coal and nuclear power plants, as the Trump administration has ordered, could cost $16.7 billion annually, according to a study commissioned by a group of renewable energy, oil and gas trade associations and released Thursday.
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The report written by consulting firm Brattle Group was commissioned by the American Petroleum Institute, Advanced Energy Economy, the American Wind Energy Association, the Electricity Consumers Resource Council, the Electric Power Supply Association and the Natural Gas Supply Association, all of which represent businesses that would be disadvantaged by the potential out-of-market support for coal and nuclear plants.
"This report sheds light on how costly the Administration's coal and nuclear bailout could be," Amy Farrell, senior vice president for government and public affairs at AWEA, said in a statement.
"The $10 to $35 billion this policy would take from American taxpayers to keep failing businesses open each year for the next two years is just the down payment - this misguided bailout would also completely upend the competitive electricity markets that are delivering billions in consumer savings," she said.
The US Department of Energy issued a Notice of Proposed Rulemaking in September 2017 that instructed the Federal Energy Regulatory Commission to consider a rule to prevent retirement of power plants that can store 90 days of fuel onsite. FERC unanimously rejected the proposal in January.
However, coal and nuclear power interests continued pressing for support. FirstEnergy Solutions filed a request under Section 202(c) of the Federal Power Act and Section 301(b) of the DOE Organization Act to declare an emergency in the PJM Interconnection that would require the DOE to arrange contracts and provide compensation to coal and nuclear plants.
A draft DOE memo was leaked on May 31, 2018 that revealed DOE's potential plans to use its powers under Section 202(c) of the FPA and the Defense Production Act of 1950 to prevent early retirement of certain generation plants. On June 1, the White House called on Energy Secretary Rick Perry to take immediate steps to keep coal and nuclear power plants operating.
The DOE memo specified that support should be given to "Subject Generation Facilities," but did not include a list of these plants. The Brattle Study derived cost estimates based on the entire US coal and nuclear power plant fleet, though analysts suggested that a bailout would probably involve a subset of the whole fleet.
COST COULD BE OVERSTATED
"I don't think there's a question that such out-of-market actions come at an added cost," Manan Ahuja, senior director of North American power markets at S&P Global Platts Analytics, said in an email Thursday.
"The magnitude of the bailout amount might be overstated here though," he said. "The $16.75 billion/year is based on the entire fleet of coal and nuclear receiving such a payment - this is unlikely to be the case."
Brattle estimated approximately 334.9 GW of operating plants might be eligible under the proposal in the draft memo, "i.e., the entire existing coal and nuclear fleet for which we have sufficient data to analyze," the report said.
That breaks down to 235.8 GW of coal-fired plants and 99.1 GW of nuclear plants, with 67% of that capacity located in RTO regions. Brattle determined the average annual earning shortfall for units that experienced negative operating margins in 2017 was $43-$58/kW. To estimate the impacts of a uniform capacity payment approach, they used a $50/kW per year payment, which works out to $16.7 billion.
Brattle also considered "a less expansive and less uniform" approach that would tailor out-of-market payments to "exactly cover estimated operating shortfalls." If that were applied to all coal and nuclear plants that they estimate currently experience operating shortfalls -- plants with a total capacity between 226.6 GW and 297.4 GW -- the policy cost would be between $9.7 billion and $17.2 billion annually.
MARKET IMPACTS WOULD VARY
Regardless of which approach the DOE might take, subsidizing coal and nuclear plants would affect power markets in different ways.
"In terms of impact, nuclear plants that are kept in the market through such payments, would likely also operate and drive energy prices down due to their low variable costs," Ahuja said. However, many coal units cannot compete on a variable cost basis with natural gas-fired units and hence coal units that get such payments may just keep a coal stockpile and not burn it. "So, the impact on energy prices may not be large from coal units," he said.
There is also uncertainty regarding capacity market impacts because of policies in the works at the ISO level.
These payments and thus the extended life of plants receiving them, would work to lower capacity market prices, and there are already active attempts in various ISOs to tweak capacity market design to address such payments, Ahuja said. --Jared Anderson, email@example.com
--Edited by Richard Rubin, firstname.lastname@example.org