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Energy Guide

Why are Energy Markets so Freaked about Trump’s Proposed Bailout of Failing Power Plants?

In what few would call a national security issue many are calling the end to wholesale power markets as we know them. In a leaked Dept. of Energy (DOE) memo, it seems the Trump administration is looking to breathe life in the form of bailouts to uneconomic coal and nuclear power plants for a period of two years. Where there is a will there is a way and the FirstEnergy lobbyists found it in Section 202(c) of the Federal Power Act by proposing the transition to lower cost generation a national security issue.

 

The concept of nuclear bailouts is certainly not new. In fact, states including Illinois and New York and have already implemented some form of bailouts with little market disruption. Why is this latest proposal so concerning to those in the energy markets?

 

First, is the use of the Defense of Production Act of 1950 which was enacted to aid in civil defenses at the onset of the Korean War. Section 202(c) specifically allows the secretary to issue temporary orders in wartime or other “emergency reasons of a sudden increase in demand for electric energy or a shortage of electric energy…”. This section, which undoubtedly is being interpreted broadly, has never been used to financially aid ailing, uneconomic assets. Calling the market transition to more economic generation a “national security emergency” offends most sensibilities especially given the pace and volume of new installed power generation.

 

Second, the 41-page leaked draft DOE memo calls for the federal government to purchase electricity from a set list of coal and nuclear plants for only two years. During this two-year period the DOE will continue to study the issue. (Two years also allows plenty of lobbying opportunity). The temporary nature of the directive alone is unsettling as it is difficult to establish new market protocols and procedures on a temporary basis. The market will be unclear about its risks which will mean higher prices for consumers.

 

Third, the number of facilities on the DOE’s list could be enough to skew the economic dispatch of the existing power fleet and stymy new generation. Existing economic generators may be squeezed out as rescued uneconomic plants take precedence in the dispatch order. This will certainly impact the hourly energy prices and influence the forward markets but nobody knows by how much. Not knowing how these “rescued” plants will participate in the capacity and energy markets leaves existing participants holding a gigantic bag full of risk and new money seeking more stable investments. As such, money that was once pouring into energy innovation could trickle to a slow drip.

 

Finally, having the federal government pick the winners and the losers is not comfortable for most stakeholders.  The Federal Energy Regulatory Commission (FERC), who has a history of rejecting prior attempts by DOE to prop up uneconomic plants, will be called upon to figure out who pays the money and who gets the money even though they don’t agree with the plan.  FERC publically rejected the idea of a “national security emergency” in a recent Senate committee hearing meeting but that may not matter. By using Section 202(c), the Secretary of Energy sidesteps FERC approval and forces their hand to implement.  This will be a complicated contentious rate making process that could take the entire two years to figure out.

 

There must be a better way. The CEO of Exelon, the largest nuclear generator in the U.S. and a huge beneficiary of the bailout, thinks the idea of a “national security emergency” can not be supported given the current generous capacity reserves. The capacity reserves in PJM (the transmission grid operator for Ohio, plus 12 other states and D.C.),  is over 21% for the foreseeable future which is hardly a scarcity of power resulting in a national security emergency. With all the uncertainty one thing is certain, the markets would not be the same if the DOE bailout scheme is implemented.

Leading the Way