By Dr. David P. Tuttle
Subsidizing coal and nuclear plants, as has been proposed by the Trump Administration’s Department of Energy (DoE), will only increase costs and fail to improve reliability.
In a proposed rule before the Federal Energy Regulatory Commission (FERC), the DoE advocates a subsidy to compensate power plants that maintain a 90-day onsite supply of fuel. There is no data proving a 90-day onsite supply has meaningfully contributed to increased grid reliability or that it would enhance grid resilience in the future. Indeed, the vast majority of grid interruptions are caused by problems in the distribution power lines near customers. Storms, animals, equipment failures, lightning strikes, or inadequately trimmed trees are the usual culprits behind electricity service outages.
For many years, policymakers have designed electricity markets so that the most efficient forms of generation are tapped to create cheaper electricity for businesses and consumers. Reliable and less expensive electricity helps businesses create jobs and maintain global competitiveness. Cheaper electricity allows families to have more money in their pockets. And, as technology progresses it is expected that older, less efficient, and hence less cost-competitive generation plants will be replaced by newer and typically cleaner technologies.
The recent DoE report, “Staff Report on Electricity Markets and Reliability,” states that the addition of new wind and solar power to the grid may have exacerbated the competitive cost pressures on coal in wholesale electricity markets, but they were not the main factor leading to recent coal and nuclear retirements. Inexpensive natural gas, improved efficiency in natural gas generation technologies, and low electricity demand have conspired to make coal and nuclear power less competitive. Most of the plants that retired between 2002 and 2016 were small, old, inefficient and high-cost. In other words, for the most part, markets are operating as desired and designed.
Grid operators have always dealt with the changes in the demand for electricity (aka ‘load’) that naturally occur every hour of every day, plus the contingencies of sudden generator and transmission failures. Operators deal with constantly varying load by adjusting the output levels and mix of generators, have shown to be adept at handling almost any event, and have acquired expertise in forecasting and integrating wind and solar generation into their traditional load forecasts. These operational improvements have impressively maintained grid reliability even with significant additions of intermittent wind and solar generation. ERCOT, the Texas grid operator, has managed over 19,000MW of wind generation capacity and provides a prime example.
Remarkably, there have been times when wind plants have generated one-half of the electricity on the Texas ERCOT grid. These new wind resources have reduced emissions, created jobs in West Texas and coastal wind development areas, and helped maintain competitive wholesale electricity prices throughout the entire ERCOT market.
Wind, solar, and natural gas plants compete, but they also complement each other. Flexible natural gas plants fill in the gaps for wind and solar output (as well as filling in the gaps for inflexible baseload generators like coal and nuclear), while wind and solar provide a financial hedge against an increase in natural gas prices. Coal and nuclear generation that operate at baseload constant levels need complementary flexible generation just as wind and solar do. Overall, it is better for the grid to have flexible capacity, particularly if these flexible plants are reliable, lower cost, and cleaner.
In truth, the DoE proposal could actually have the unintended consequence of delaying capital investments needed to improve grid reliability. Markets and investors don’t like regulatory uncertainty that come with proposals that run counter to effective and long-standing market designs and objectives.
Changing market rules or creating new subsidies to reward power plants that maintain 90-day onsite fuel supplies is antithetical to open markets, particularly when those units are inflexible and reside primarily in oversupplied regions. If enacted, the DoE rule would likely result in increased electricity costs for consumers and businesses while not improving reliability. What’s worse, if the market distortions they engender linger on and freeze key investments, they could actually harm overall grid reliability.
Dr. David P. Tuttle is a research fellow at UT Austin’s Energy Institute.