FERC’s decision: The coal industry lost and the nation’s consumers won

FERC’s decision: The coal industry lost and the nation’s consumers won
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The coal industry came away with nothing last week when the Federal Energy Regulatory Commission (FERC) unanimously rejected a Department of Energy proposal — pushed by the industry — to provide huge subsidies to coal-fired power plants in the United States. FERC protected the interests of consumers by standing in favor of market competition — more evidence that coal can no longer compete with natural gas, wind, and solar power.

The Energy Department proposal would have required regional electricity markets to guarantee full recovery costs and profits for power generators that maintain 90-day on-site fuel supplies. Since only coal and nuclear power plants could meet that standard, the plan would have resulted in huge subsidies to many coal plants and coal producers, and increased electricity costs for consumers across the country.

Bob Murray, CEO of Murray Energy, promoted the plan, saying it would stave off potential bankruptcies of both his own company and FirstEnergy, the Ohio-based utility that buys coal from some of Murray’s mines.

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But the coal industry — which arguably now holds the keys to the kingdom in Washington under the Trump administration — miscalculated badly in betting on this proposal, which proved to be unrealistic for three major reasons:

 

Economics

The Energy Department plan ignored the importance of competitive markets. Energy prices in the U.S. have been going down in recent years as natural gas, wind, and solar have become more price competitive, taking market share from more expensive coal-fired generation. Over time, as wind and solar have grown, their prices have become even lower, and they have no fuel costs since access to the sun and wind is free. Subsidizing coal would have created unnecessary upward price pressure and then compounded the distortion each year with coal’s need for annual price increases. FERC also rejected outright the Energy Department’s arguments that coal subsidies would strengthen the resiliency of the grid.

Regulatory Policy

The last time the federal government made a large and successful policy intervention to support the coal industry was the enactment of the coal leasing reforms in the 1980’s, which provided a subsidy to the coal industry by allowing it to sell coal mined on federal lands in the West at below fair market value. At the time, coal’s competitors in the electricity market were, like coal, high-priced, and the demand for energy was growing. The overall economy benefited when the market was flooded with cheap coal.

None of these conditions exist today. FERC was clear that it made no sense to weight its market based pricing in favor of expensive coal when cheaper forms of energy are available. The proposal would have been a direct cash handout from ratepayers to the coal industry (unlike the coal lease program, which gave away a valuable publicly owned asset, but was not a cash handout).

Politics

In advocating for the proposal, Energy Secretary Rick PerryJames (Rick) Richard PerryTrump names Mulvaney acting chief of staff Chris Christie declines White House chief of staff role Trump says he's down to five candidates for chief of staff MORE failed to heed the advice of his own professional staff. An Energy Department study, done by experienced energy analysts, did not establish that resiliency was a problem for the nation’s grid — it basically said the opposite.

As a governor who had presided over a large build up in wind capacity in his own state of Texas, Perry knew the score here before he got involved. It is one thing for a politician to help a well-regarded constituency when the help also solves a broader problem for the country. It is quite another when the initiative will create problems for the economy as a whole, as was the case here.

A second recent FERC decision also protected consumers at the expense of coal. FERC rejected a request by Ohio-based FirstEnergy to bail out its deregulated generation business by transferring its uncompetitive coal-fired Pleasants Power Station to West Virginia regulated subsidiaries Mon Power and Potomac Edison, which would have imposed on customers hundreds of millions of dollars of unnecessary costs over the next 15 years.

Now that FERC has spoken so clearly, it’s time for the federal government — and the coal industry — to recognize that the transformation of the U.S. electricity sector is well underway. The government should recognize market, regulatory, and political realities and enact policies, such as those IEEFA has recommended, aimed at supporting mineworkers, communities, coal producers and regional economies during this time of economic transition.

Tom Sanzillo is the director of finance for The Institute for Energy Economics and Financial Analysis (IEEFA). Cathy Kunkel is an IEEFA energy analyst.