Energy Regulator's Order Could Boost Coal Over Renewables, Raising Costs for Consumers

The only Democrat on the commission called FERC's move 'illegal, illogical and truly bad public policy.'

Dec 20, 2019
Coal train in Virginia. Credit: Benjamin Lowy/Getty Images

The Trump administration has taken other high-profile steps to try to boost the coal industry, but many of them are tied up in legal challenges. The new order from the Federal Energy Regulatory Commission aims to accomplish many of the same goals. Credit: Benjamin Lowy/Getty Images

Federal energy regulators issued an order Thursday that likely will tilt the market to favor coal and natural gas power plants in the nation's largest power grid region, stretching from New Jersey to Illinois. 

Critics say that it effectively creates a new subsidy to prop up uneconomical fossil fuel plants and that it will hurt renewable energy growth and, ultimately, consumers.

The new rules, approved by the Federal Energy Regulatory Commission, are designed to counteract state subsidies that support the growth of renewable energy and use of nuclear power. The rules involve what are known as "capacity markets," where power plants bid to provide electricity to the grid. The change would require higher minimum bids for power plants that receive such subsidies, giving fossil fuel plants an advantage.

The FERC order, passed 2-1, is a response to complaints from operators of coal and natural gas power plants who say that state subsidies have led to unfair competition in the grid region managed by PJM Interconnection.

Richard Glick, the panel's lone Democrat, cast the dissenting vote and said during the commission meeting that his Republican colleagues were trying to "stunt transition to a clean energy future that states are pursuing and consumers are pursuing."

In his written dissent, he called the order "illegal, illogical and truly bad public policy."

Environmental groups and clean energy advocates have long criticized PJM for rules that provide an economic lifeline to old fossil fuel plants, which produce greenhouse gases that drive climate change.

"Today's order erects a major new barrier to clean energy, undercutting efforts by states to slash pollution and address climate change," Tom Rutigliano, a senior advocate for the Natural Resources Defense Council's Sustainable FERC Project, said in a statement. "Federal regulators are forcing customers to pay for dirty power they don't want or need."

Expect Court Challenges

The Trump administration has taken other high-profile steps to try to boost the coal industry, but many of them are tied up in legal challenges. The new FERC order accomplishes many of the same goals.

But FERC's action also is likely heading to court, where opponents will argue that the regulator has overstepped its authority and is now dictating state policy.

One issue going forward is that the order has a broad definition of "subsidy," saying this includes direct or indirect payments, concessions and rebates, among other things. Glick said the definition is so broad that it may end up affecting many more power plants than the other commissioners intended.

In the meantime, PJM has 90 days to say how it will implement the rules, and power plant operators will need to figure out what this means for them.

Map: PJM Interconnection's Power Grid Area

The vote on Thursday follows years of debate as some power plant operators have argued that state subsidies for renewable energy and nuclear had distorted the competitive balance with other power sources.

Calpine, a Houston-based power producer, was one of several companies that filed a complaint with FERC in 2016, which opened the docket that led to Thursday's order.

FERC Chairman Neil Chatterjee, a former energy policy advisor to Senate Majority Leader Mitch McConnell of Kentucky, said the result will be fairer competition.

"In my view, the choice we have before us is whether or not we allow increasing state subsidies to undermine the competitive capacity market," he said. "The majority today says no."

'The Major Loser Here Is Consumers'

Illinois's legislature in 2016 approved subsidies for two nuclear plants along with policies and programs to promote renewable energy and energy conservation. Other states followed with their own legislation to help nuclear plants, often accompanied with new targets and funding for renewable energy.

Ohio was an exception this year, passing a measure to subsidize two coal-fired power plants along with aid for nuclear and some money that could be used for solar development.

Those state programs are paid for by consumers through their utility bills. And, the FERC order—in response to the state programs—will lead to an increase in charges that utilities pay to PJM.

Ultimately, consumers will pay several times over, said Ari Peskoe, director of the Electricity Law Initiative at Harvard Law School.

"The major loser here is consumers," he said.

Glick pointed to an estimate from a team of his advisers that puts the cost of the new rule at about $2.4 billion per year.

How It Changes PJM's Capacity Market

PJM, based in the Philadelphia suburbs, is a quasi-governmental organization that manages the flow of electricity in parts of 13 states and the District of Columbia.

With its status as the largest grid operator in the country, PJM often is at the center of controversy. Much of the conflict in recent years—including in this FERC case—has been tied to an annual auction in which power plant owners compete against each other to sell contracts to PJM for something called "capacity."

Capacity, at the regional scale, is how much power can be generated if every power plant is operating. A grid operator needs assurance that it will have enough capacity available to handle times of highest demand, which usually happens on the hottest days of summer. The capacity auction sets the price that power plant owners are paid for being contractually obligated to be available when called upon by PJM.

For those plants whose bids are low enough to be selected, PJM's system provides additional income that may be the difference between staying open and needing to close.

In recent years, the number of power plants and amount of capacity in the market has grown substantially as developers have built new natural gas plants, wind farms and solar arrays. The result is many more plants competing in the capacity auction, which increases the chances that some older plants will not be selected.

The new FERC rule says that subsidized resources will need to increase their bids in the auction, with the amounts specified in a formula in the rule. This makes it easier for other bidders to compete.

Opponents of this approach see it as hypocrisy that FERC is aiming to counteract subsidies while failing to recognize all the ways that old fossil fuel plants get government help.

"PJM is pretending there aren't subsidies in the markets they run, but the irony is they're everywhere," said Mike Jacobs, senior energy analyst at the Union of Concerned Scientists, in a statement. "Now, FERC is rounding up the usual suspects—wind and solar power—but are ignoring the obvious ones under their nose."

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