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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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Subsidies For Coal, Nuclear In The Latest Federal Budget

Coal

The two year spending bill just passed by Congress and signed by the President attempts to make good on the administration's promised tilt towards coal and nuclear power. For the energy industry the bill contains an assortment of subsidies, emergency assistance for hurricane damaged regions and rewards for failure. 

The biggest sum is the $2 billion dedicated to restore Puerto Rico’s electric grid. Not much debate on that and a long time in coming.

The next $2 billion will go to Southern Company’s over budget and behind schedule Vogtle nuclear project. The two unit AP1000 plant, designed by the ill-fated Westinghouse Corp., is the only new nuclear construction project remaining in the United States. Southern Company will receive a subsidy of 1.8¢ per kWh generated.

A previous subsidy for new nuclear construction had been approved by Congress in 2005. However, new plants had to be in service by the end of 2020 to collect. We should point out that when the Vogtle project began construction, Southern’ s management was certain the project would meet the 2020 deadline. As it turns out they were not even close.

Georgia’s regulators recently voted to continue to permit Georgia Power to charge its customers for the Vogtle project with the understanding that the builder’s tax credit would be extended. Congress has lifted the deadline. Apparently the government is ready to advance another $3.7 billion of loan guarantees as well.

It is nice to know our government is being generous. There are financial rewards for company's performing as specified. And there are commensurate rewards even for those not remotely performing or meeting the specs so to speak. It's kind of like TeeBall were every kid gets a hit and a trophy at year end. Nice. Or certain corporate boards that pay departing executives a considerable sum merely to leave--after the "new strategic direction" these managers plotted wrecked the business. That we believe is the definition of crony capitalism.

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The third item of note may not have a price tag because it is so iffy. But the Trump administration has made no secret of its attempts to rehabilitate coal as a boiler fuel for electric power generation in the US. To this end it is    encouraging carbon capture and sequestration (CCS). This technology would have made enormous sense a decade or two ago. Renewable energy was expensive then and people had dreams of making coal clean by stripping out the carbon emissions from the generating process and entombing the carbon dioxide underground or using it in enhanced oil recovery operations.

The carbon capture procedure involves building a chemical processing plant on the so called front end of an already large, complex electric power generating station. These plant modifications reduced electrical output by a quarter. They also posed some interesting liability dilemmas. For example, what if the stored carbon dioxide escaped?

But considerable sound research suggested this CCS technology would work to decarbonize coal. And more importantly several electric utility companies, notably Duke Power and again Southern Company, invested in this promising technology. Due to cost overruns and subpar operating performance and the ensuing regulatory disallowances, money invested in these projects has been either written off or will earn a meaningfully subpar return.

The question now is whether we can expect utilities to build expensive CCS-equipped coal-fired power stations. The only clear economic use is for enhanced oil recovery where CO2 is pumped into old, uneconomic oil fields. Due to the CO2 injection these aging oil fields begin once again to produce at commercial volumes. Or is this just a payment for the benefit of the several utilities that have money in these projects?

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The law contains additional subsidies and benefits for fortunate energy producers. But, as far as we can tell, it lacks any money for the key technology that could truly change the electric power business--storage.

F.A. Hayek, the economist most favored by conservatives, warned about the perils for the economy if the government persisted in picking winners and losers from among various competing technologies and industries. Worse, the government could support failing industries which still however retained considerable political clout.

Peter Drucker, the legendary management guru, exhorted managers to put their resources with the winners rather than try to improve the performance of the losers.  We’re not sure what that duo of Austrians would make of Congress’ latest foray into energy policy.  But we doubt they'd wholeheartedly approve.

By Leonard Hyman and William Tilles

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