Trump's War on Progressive, Competitive Energy Markets

by Hannah Wiseman

It is widely recognized that President Trump has pushed an aggressive anti-regulatory agenda on the environmental front, but this agenda often hides a second, anti-free-market battle waged in the energy context.

For decades, Congress and the Federal Energy Regulatory Commission (FERC) have worked to move the country toward competitive markets in the sale of wholesale energy – energy that generators sell to utilities, or which utilities sell to each other, and then to retail customers. Congress and FERC believed that introducing more competition into wholesale markets would reduce the cost of electricity for retail consumers because increased generation and access to generation would open up a previously limited supply. In staking out this approach, policymakers and administrators also recognized that competitive markets could encourage the construction of cleaner domestic energy resources.

In large part, this move has been successful. Deregulation of retail electricity markets has in some cases been plagued with serious problems, including higher prices for low-income consumers. But opening up wholesale electricity markets has, as anticipated, given utilities more access to a wider variety of lower-cost energy. (Much progress remains to be made in ensuring that lower wholesale prices filter through to retail consumers. This will require smarter, targeted infrastructure investments in transmission and distribution – the wires needed to deliver electricity to consumers.)

With respect to encouraging the production of cleaner, affordable domestic sources of energy, competitive markets have had a huge and positive impact. Renewable sources of electricity have become increasingly common and affordable thanks to early governmental subsidies (similar to those that have long been provided in larger amounts to the oil and gas industry), as well as technological progress and growing economies of scale.

In the competitive wholesale electricity markets that serve two-thirds of the U.S. population, natural gas and some renewable energy sources tend to economically outcompete dirtier sources like coal-fired power. For example, wind energy is now one of the cheapest sources of electricity in some parts of the country. This is part of the reason many U.S. coal companies have declared bankruptcy.

Furthermore, electricity "non-use" (demand response) can now be bid into wholesale markets in lieu of generation, displacing higher-cost generation during periods of high electricity demand. The displacement of coal by sources like natural gas, renewables, and demand response is good news, since coal-fired power – along with other sources like transportation – causes thousands of illnesses and premature deaths in the United States each year.

But Trump wants to put an end to these progressive, competitive markets. Bowing to the demands of coal companies, he has proposed using a rarely invoked emergency provision of federal law that could require utilities to purchase power from coal, nuclear, and even oil-fired power plants at a price set by the government. This would essentially put an end to competitive power markets.

Trump first tried to circumvent competitive markets more openly, through a Notice of Proposed Rulemaking. Trump's Department of Energy (DOE) argued that we have an energy resilience crisis in this country and that power plants like coal and nuclear plants, which store fuel on site, are essential to keeping the lights on during crises like cold snaps. It accordingly proposed that coal and nuclear plants should receive a special "cost-of-service" rate, which means a non-competitive rate that is established by a government agency (in this case, FERC) and is designed to allow the utility to cover its costs and make profits, thus providing returns to investors. This fundamentally anti-market proposal was particularly strange because it came from Secretary of Energy Rick Perry, former governor of a state that has championed a highly competitive electricity market in which wind energy and natural gas generation have thrived.

FERC, which has decades of experience overseeing energy markets and ensuring that the lights stay on, soundly rejected the proposal. The agency agreed with DOE that energy resilience is an important issue and committed to further study it. But it emphasized that the grid operators who have long run competitive wholesale markets did not point to "any past or planned generator retirements that may be a threat to grid resilience." In other words, DOE was inventing a crisis where there was none. FERC also suggested that providing coal and nuclear plants with government-established payments in an amount higher than the market rate would not be a just and reasonable practice for consumers – indeed, DOE had problematically proposed that these rates should be guaranteed to coal and nuclear producers "regardless of need or cost to the system," as summarized by FERC.

That effort having failed, Trump is now using a different route to subsidize coal – one that will largely evade notice and comment from the public. Under a rarely used portion of the Federal Power Act, section 202(c), if the president determines that there is an "emergency" due to war or an inadequate supply of electricity, the president may issue an order, "with or without notice, hearing, or report." This order may require a particular power plant to operate and be connected to certain other plants. If the parties who have to purchase power from the plant receiving the bailout cannot agree upon a rate, the government may establish the rate at which the power will be sold.

Trump has already used this provision in Oklahoma and Virginia. In Oklahoma, a coal-fired power plant was scheduled to be shut down because it released too many toxic pollutants into the air, thus violating federal environmental standards. Rather than allowing the shutdown, Trump's DOE determined that there was an "emergency" and ordered the coal-fired unit to "generate electricity," although only for "reactive power support," not as a constantly running source.

In Virginia, the same scenario occurred. A coal plant could not meet federal air toxics limits and received a 202(c) bailout, which only directed the plant to run when needed for reliability purposes.

Notably, in both these cases, the regional operators of the competitive grid supported each of these bailouts, saying that they needed these plants to run in limited circumstances. That is not the case with Trump's broader proposals for bailouts of coal and nuclear; the regional operators of competitive markets have made clear that they do not see a widespread reliability or resilience issue.

Now Trump has upped the ante, indicating he will use the emergency power, and powers under the Defense Production Act of 1950, much more broadly, thus instituting a large-scale coal bailout. DOE has set up a special e-mail address devoted solely to companies requesting bailouts. In a leaked memo obtained by Bloomberg, the DOE concedes that coal plants, as well as nuclear, oil-fired, and dual-fueled units, are retiring in part due to economic factors, although it also blames regulation. The memo also admits that we have a very reliable supply of electricity in the United States, but it argues that resilience is what it is focused on – that events like hurricanes and terrorist attacks mean that we need plants with fuel on site, like coal plants.

The bailout would last for two years, and the extent to which it erases traditional market forces is astounding. The memo indicates: "The Department [of Energy] is  . . . directing System Operators [grid operators] . . . for a period of twenty-four (24) months, to purchase or arrange the purchase of electric energy or electric generation capacity from a designated list of Subject Generation Facilities (SGFs) sufficient to forestall any further actions toward retirement, decommissioning, or deactivation of such facilities . . . ." SGFs are plants that the government describes as "fuel-secure," such as coal, nuclear, and oil-fired plants. In other words, the government is ordering utilities to purchase electricity from plants that otherwise would be shutting down due to economic forces. The government admits in the memo that "the lost megawatts of power are often replaced by new generation from natural gas and renewable sources" but concludes that there is nonetheless a resilience crisis.

The memo fails to mention that in recent catastrophic events, like Hurricane Sandy in 2012, some of the places where the lights stayed on were "islanded" systems – those that had their own non-coal generation and grid. For example, one part of New York that weathered Sandy well was Co-Op City, which has a highly efficient natural gas-fired combined heat and power plant. Combined heat and power plants use the waste heat from electrical generation for the purposes of heating or cooling buildings. Co-Op City did not rely on coal, nuclear, or oil-fired power to keep its lights on. Nor did New York University, which similarly kept the lights and heat on for parts of campus using a natural gas-fired cogeneration plant.

The resilience of our electricity supply is a very real issue – as is an aging transmission grid – but coal plants have not been, and will not be, the right solution for resilience. Rather than dragging our country back into long-abandoned government-regulated wholesale markets and back to a dirty fuel source that is rapidly losing its competitive edge, it's time to recognize the real solutions for grid resilience: Islanded microgrids, distributed generation, improved distribution and transmission infrastructure, and a host of other measures that have no relation to coal-fired power.

© 2016 The Center for Progressive Reform