A few weeks ago, Secretary of Energy Rick Perry proposed a new rule in the electricity sector that would fundamentally change how generators...
A few weeks ago, Secretary of Energy Rick Perry proposed a new rule in the electricity sector that would fundamentally change how generators, and more specifically coal and nuclear generators, are paid. This rulemaking, the “Grid Resiliency Pricing Rule,” proposes to have bail out coal and nuclear energy at the expense of the taxpayer. It has pitted coal and nuclear generators against nearly every other party in the energy sector. The proposed rule guarantees coal and nuclear power plants will be paid for what they spend. The proposal, if accepted, will lead to higher prices of electricity, undermine the competitive electricity market, and have ratepayers (you if you pay for electricity) foot yet another bill for failing companies.
One speculation is that this proposal stems from a promise by the Trump administration made during the election to “save coal.” Could it be that the Trump administration is just trying to check off all the boxes that they promised in their election process? Trump claimed that he would save coal, but like with Blockbuster and Netflix, sometimes the free market demands that old business models simply need to be replaced by better ones.
The energy market is extremely complex, but the fact that well-respected energy leaders across the nation are uniting against a foolhardy policy that could derail electricity markets is something that we should stop and think about.
It is worth discussing the fundamental argument of the proposal – that different “energy products” are needed to better accurately price the needs of the electricity grid, as discussed below.
Most of us are familiar with the idea of paying for electricity by each unit of electricity used, in kilowatt-hours, or kWh. In general, homes use an average of 1-3 kWh each hour in a day. For perspective, over the course of an hour a 60W light bulb will use 0.06 kWh and an A/C unit will use 1-4 kWh. This kWh electricity usage is called energy, and the market accurately represents the cost of each kWh by allowing prices to fluctuate based on the variable cost of generating energy during the day. Usually, if you pay an electricity bill, this is the variable cost of your electricity bill on a daily basis.
The reliability of the grid can be thought of like insurance. This insurance plan values the ability to produce energy at any given moment, measured in kilowatts, or kW. The same 60W light bulb will use 0.06 kW at any given time, meaning it has an “insurance” of 0.06 kW.
One product that pays for this reliability is termed “resource adequacy,” or “capacity.” The capacity product pays power plants just to be available to meet any potential insurance needs. These plants do not actually have to generate electricity to earn money for capacity, but merely need to be available.
Energy and capacity in electricity pricing
Electricity markets price both capacity and energy just like they would price a stock on the stock market. Participants can buy and sell energy or capacity, regardless of whether those products come from coal, nuclear, solar, storage, demand response or gas. The importance of this approach is that the government does not choose the winners; the market chooses the winners.
Proposed Rule on Grid Resilience
The purpose of the Grid Resiliency Pricing Rule is to pay coal and nuclear power plants, even if the energy or capacity they produce is economically uncompetitive. The name itself is misleading and does not reflect what is needed for the grid to be “resilient.”
If you were to brainstorm ideas of resiliency, you might think of diversifying your portfolio or increase visibility into issues. People who study energy markets for a living come up with similar ideas of smartening the grid, hardening the grid, diversifying the grid via distribution, and making demand responsive. However, the proposed rule defines resiliency as ensuring power plants that stockpile solid fuel for 90 days to be fully paid for all costs, regardless of how much they spend. This flawed reasoning would be as if the government decided that stocks that start with the letter “F” should never lose any money. Continuing this analogy, the proposal is saying we, the taxpayers, should collectively pay for any company losses if the company made the great decision to start their company name with the letter “F.”
In other words, this is a bailout. And note that because the only power plants that stockpile solid fuel are coal and nuclear power plants, this is a bailout for coal and nuclear power plants. What the reason is for “solid fuel” is unclear. It could be that the Department of Energy believes renewable resources like solar or wind are not reliable because the sun could stop shining or the wind stop blowing in the next 90 days. It is also unclear on why 90 days is necessary – it could be that the Department of Energy does not anticipate any major events, such as a war, that last 91 days or longer. Needless to say, the only thing this rulemaking ensures is resilient is the bottomline of nuclear and coal power plants.
We have seen massive efficiencies created by electricity markets over the past few decades. As the ex-FERC chairman Jon Wellinghoff put it, this proposed rule will “blow up the markets.” What that means is that we lose the gains that we have made from competitive electricity markets. Which means prices go up and so will your electricity bills. Why? Because we would be paying for something that does not make sense economically. We are bailing out the coal and nuclear generators.
Contact your local representative and ask them to oppose the “Grid Resiliency Pricing Rule”. Cite any of the following reasons: