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Leonard Hyman & William Tilles

Leonard Hyman & William Tilles

Leonard S. Hyman is an economist and financial analyst specializing in the energy sector. He headed utility equity research at a major brokerage house and…

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U.S. Department Of Energy Looks To Subsidize Coal Plants

In a Canute-like move, On September 29, the US Department of Energy sent a proposal to the Federal Energy Regulatory Commission (FERC) that would, if adopted, significantly increase the value of aging coal and nuclear power plants.

There are a number of interesting aspects to the DOE’s directive to the FERC. First, what surprised us was the tone of imminent crisis. “In light of these threats to grid reliability and resiliency it is the Commission’s immediate responsibility to take action….” But the only actual “threat” of any validity cited was the Polar Vortex of 2014 where natural gas supplies were limited in the U.S. north east.

The language of crisis, whether valid or not, also allows something else--the expedited regulatory and administrative treatment of this proposal. The DOE is asking the FERC to adopt sweeping rate making proposals in a relatively brief period of time, 60 days. We’d be surprised if the expedited calendar alone didn’t provide grounds for legal challenge and delay.

The DOE is directing FERC to make sure that it fully values a particular aspect of wholesale electricity power generation: the ability to keep 90 days of fuel supply on site. Only coal and nuclear plants can do that, not gas plants. The DOE’s language directs the FERC to value the reliability and resiliency features of generation with an onsite fuel supply.

Related: U.S. Shale Isn’t As Strong As It Appears

Not to rain on DOE's parade, but we remember instances of coal-based utilities in trouble because their coal inventory was frozen in huge, unusable piles on site. But it was in inventory. And do we really want to rely on aging nuclear power stations to boost resilience? Operating malfunctions often close down nuclear plants for months.

Ultimately, the FERC retains legal responsibility for setting wholesale electricity rates. Whether they simply adopt the DOE’s plan remains to be seen. But DOE’s goal is to “eliminate the need for the commission to order and publish its own separate rulemaking proposal.”

You can find Leonard Hyman's lastest book ‘Electricity Acts’ on Amazon

While we're not sticklers for administrative procedure, we should point out that this tactic by the DOE has not been employed since the late 1970s and early 1980s when a frustrated Washington felt the need to get a handle on unruly natural gas markets in the U.S.

Now this is not to say that the present markets, set up to determine next day’s best price, do not have flaws. They do not take into account externalities. There is no cost to consumers at present for their increasing reliance on a product, electricity, responsible in part for climate changing emissions. Reliability of fuel supplies is another so called externality that power markets do not price in.

But what's really interesting is that the so called efficient market for wholesale electric power has not proven able to price its product high enough so as to attract long term investment.

  Related: Saudi Compliance To OPEC Deal Comes At A Price

And the proposed rules do little to attract capital and encourage better markets, either.

If there is a resilience problem in the U.S. electrical grid, why would a pro-free-market administration require a significant economic intervention to improve resilience? This proposed rulemaking looks more like another instance of a central planning with the federal government (again) providing bail outs or heavy subsidies to failing industries.

But it matters little how the federal government places its thumbs on the scales of the wholesale electric power market. The fact remains that a combination of inexpensive natural gas from the U.S. shale boom and the relentless decline in the cost of renewables together spell eventual economic doom for aging base load coal and nuclear power plants. Right now we're just haggling about the glide path to obsolescence.

You can find Leonard Hyman's lastest book ‘Electricity Acts’ on Amazon

By Leonard Hyman and Bill Tilles

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