How Trump’s ‘Soviet-style’ coal directive would upend power markets

Source: By Gavin Bade, Utility Dive • Posted: Tuesday, June 5, 2018

President Trump’s directive to save coal and nuclear plants from retirement could reshape the federal government’s relationship with the U.S. power sector and lead to an unraveling of wholesale power markets, energy researchers and former regulators say.

On Friday, Trump directed Secretary of Energy Rick Perry to prepare recommendations to keep at-risk generators, pushed offline by cheaper power from natural gas and renewables, from retiring. The order came the same day as the release of a White House memo advocating for the Department of Energy to use its emergency powers and a Cold War-era nationalization law to keep the plants online.

The memo, reportedly reviewed by the National Security Council, is not a final plan, but if the administration follows its outlines, power sector veterans say it could bring an end to competitive electricity markets as they exist today.

“What Trump’s doing is going back to a Soviet-style system,” said former FERC Chairman Jon Wellinghoff, a Democrat appointed by President George W. Bush. “This will blow the market up.”

Market upheavals ahead

The White House memo, first reported by Bloomberg on Thursday, advocates that DOE save at-risk generators using its emergency powers under Section 202(c) of the Federal Power Act, as well as the Defense Production Act (DPA), a 1950s law that allows DOE to nationalize parts of the power sector during wartime.

If that happens, Wellinghoff said it could have a similar impact to a White House proposal to FERC last year, which would have provided cost recovery to coal and nuclear generators in competitive electricity markets.

At the time, the former FERC chair and other analysts said subsidizing that many plants could depress prices in the rest of the market, driving other generators out of business or forcing them to pursue financial support of their own.

“Having a significant number of subsidized generating facilities will cause market prices to fall substantially and cause other plants to become uneconomic,” Wellinghoff said, “So they may prop up one segment of the market and the other segment of the market could go bankrupt.”

Exactly how DOE will pursue the bailout package remains unclear. Under 202(c), the DOE can order that certain generators be able to recover their costs from ratepayers in the case of a grid emergency, while the DPA provides the agency wider control over power production and fuels when the president declares a national security risk.

The White House will likely combine the two strategies to save generators they label as essential for national security or grid resilience, said Mike McKenna, an energy consultant who led Trump’s DOE transition team.

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“The 202(c) is the most legally and economically sturdy mechanism; plants that are operating under financial arrangements will keep operating under those arrangements,” he said via email. “The DPA approach is a bit more challenging because the Act seems to indicate that the federal government will pay for what it requires.”

The environmental and financial impacts of Trump’s directive will depend on which plants are slated for cost recovery, analysts said. The White House memo advocates the creation of a “Strategic Electric Generation Reserve,” leading some observers to speculate that plants could be paid for their capacity, and not necessarily need to generate electricity to receive subsidies.

Either way, Wellinghoff said, keeping generators online that would otherwise retire in wholesale power markets is likely to raise prices for customers.

“I can’t tell you precisely how much,” he said, “but if you go from a market system to a non-market system, your rates are going to go up.”

Legal fights likely

If Perry recommends action similar to the White House memo, energy lawyers say the most likely avenue to block the subsidies is through the courts.

Action under Section 202(c) of the Federal Power Act would require the involvement of FERC, which would have to approve cost recovery rates from customers, noted Joel Eisen, an energy law professor at the University of Richmond. FERC unanimously rejected DOE’s last subsidy proposal in January.

But Wellinghoff said FERC’s approval authority over cost recovery rates under 202(c) is more of an implementation step and would not allow the commission to block any proposed subsidies.

“It’s a very formulaic process. It’s not like there’s a lot of discretion when they get to that point,” he said.

Whatever the DOE strategy, court challenges are likely immediately. A coalition of oil, natural gas and renewable energy groups wrote to Perry last month, saying no grid emergency exists to justify implementing 202(c) or the DPA.

That line of reasoning was key to FERC’s rejection of DOE’s subsidy proposal in January and could form the foundation of a legal challenge to any eventual subsidies. Federal electric reliability authorities and regional grid operators all say the grid is reliable today, and future issues can be handled through established policymaking processes, rather than emergency tariffs.

“There is no need for such drastic action,” PJM Interconnect, the nation’s largest electricity market and site of many retiring coal and nuclear plants, said in a Friday statement. The grid operator last month opened a fuel security proceeding that it says will handle issues presented by retiring coal and nuclear generators.

“What would happen here is that it would be a straight up challenge to the order as arbitrary and capricious under the [Administrative Procedure Act], and the basis for such a challenge would be, among other things, saying that a grid emergency does not exist,” said Eisen. “No one has identified [an emergency] and the findings in this memo don’t support any conclusion that there is such an emergency.”

Beyond Section 202(c), the national security implications of the Defense Production Act could give the White House a more solid legal foundation. Courts are often hesitant to question presidential national security designations, but Eisen said the administration’s case could be a stretch even with that deference.

“They are using two different statutes that come into play at times of emergencies under specific criteria and neither one of [the statutes] speaks to a broad national security or emergency authority,” Eisen said. “Just because they put a lot of [national security and emergency] findings out there doesn’t mean that they’re going to be supportable in a court of law.”

Valuing resilience

Not all observers were as pessimistic about the administration’s case for action. The White House memo was “a pretty solid argument for why we should value coal and nuclear on the basis of attributes in addition to prices,” McKenna said.

“It was also an excellent (although unintentional) argument for why we need more gas pipelines,” he emailed.

Debate over the presidential directive comes as FERC and energy stakeholders attempt to define attributes of power sector resilience — the ability to bounce back from outages — in a proceeding set up by the regulators’ rejection of DOE’s original subsidy plan.

There, a number of power sector experts argue the government could make the system more secure by investing in power grid upgrades and more distributed energy, rather than subsidizing older, centralized generators. Alison Silverstein, a former advisor to Republican FERC Chair Pat Wood III, said the same argument applies to the White House’s emergency directive.

“We know that at least for the coal plants in PJM, many of them that are sought to be protected under this order are older and have lower availability factors and lower capacity factors” than other plants,” Silverstein said. “The capacity factor is based on economic stuff, but the lower availability factor is [because] these plants are old and they’re less capable and they break more often.”

Silverstein, author of a high-profile grid reliability study for DOE last summer, said the agency would do better for grid security by incentivizing investment in critical grid equipment, hardening and communications upgrades with first responders.

“Let’s build a strategic reserve of grid transformers, not a strategic reserve of coal plants,” she said.