Politically-connected companies shouldn't get special treatment

Politically-connected companies shouldn't get special treatment
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Should coal and nuclear power plants get special treatment from the federal government for economic hardship? FirstEnergy Solutions, an Akron, Ohio-based power company, is trying to convince the Energy Department to say yes.

On March 29, FirstEnergy petitioned the Energy Department to use its emergency powers to arrange special contracts for its coal and nuclear power plants and others in the Mid-Atlantic reegion’s competitive electricity markets. To top it off, FirstEnergy Solutions is in the midst of a Chapter 11 bankruptcy reorganization.

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The desired contracts would shelter the ailing company with price guarantees and last for four years. That would be far longer than prior uses of Energy Department emergency powers.

 

Under economic pressure, FirstEnergy says that it will have to shutter its coal and nuclear plants if the price guarantees aren’t arranged quickly. Those additional closures, it argues, would put the entire mid-Atlantic grid at risk of failure — especially in times of extreme heat or cold.

Considered in a vacuum, FirstEnergy’s case for DOE interference in competitive electricity markets may seem compelling. In reality, however, the requested bailout is unnecessary and economically damaging. Here’s why.

The untold part of FirstEnergy’s story is the amount of new energy coming online from other suppliers. Competitive electricity markets use price signals to incentivize the efficient exit and entry of electricity providers to meet customers’ needs. 99,452 megawatts are queued up for construction between now and 2024, roughly 18,000 megawatts  are currently under construction. It may be that more than half will not be built, but even that is far more production than will be lost by FirstEnergy’s projected closures or others anticipated by PJM, the entity responsible for coordinating electricity markets and safeguarding reliability in the Mid-Atlantic.  

Consequently, PJM, the independent market monitor for PJM, and the Federal Energy Regulatory Commission have all said there is no grid resiliency emergency on hand.

In fact, the four nuclear plants scheduled to close over the next several years under PJM’s jurisdiction are on the ropes because they are no longer cost-efficient. Their operating costs are $25.95/MWh, compared to PJM’s other 15 nuclear plants, which run at $18.73/MWh.  

Granting subsidies or other special government favors to a utility creates a system in which the company profits more by influencing politics than by actually meeting customer needs. By making companies compete on equal footing for supplies and customers, markets efficiently align incentives and force companies to adapt to ever-changing market conditions.

FirstEnergy blames much of its problems on PJM’s lack of concern for generation diversity coal and nuclear power plants provide. Yet fuel diversity does not necessarily mean improved grid reliability. As R Street electricity expert Devin Hartman writes, “There is little empirical evidence to support the claimed association between supply diversity and electricity-market performance. The record shows that policy interventions to promote greater diversity typically undermine market performance.”

Moreover, PJM’s region has become increasingly fuel diverse since 2008. So, even if it were a goal or a concern, it’s already happening.

Besides being unnecessary, there are significant costs should the Energy Department interfere like FirstEnergy is asking. Adding new subsidies for nuclear power in competitive markets won’t make up for old/existing renewable subsidies. It will only make consumers pay more and make it harder for existing and new suppliers to meet customer needs. As Alison Silverstein, the consultant responsible for drafting the technical portions of the highly anticipated 2017 DOE grid study,noted: “new subsidies for coal and nuclear plants won’t level the playing field relative to renewables nor undo the impact of old subsidies—they’ll just make the playing field even bumpier.”

Rather than subsidize coal and nuclear plants, Texas took a far better approach when Energy Secretary Rick PerryJames (Rick) Richard PerryConservative policy adviser says judge's move to strike down ObamaCare was a 'case of judicial activism' Trump names Mulvaney acting chief of staff Chris Christie declines White House chief of staff role MORE was governor. The state transformed what had been a typical monopoly-run electricity sector into what is now the freest, most competitive electricity market in the country. The change has sparked tremendous energy innovation in the energy sector, benefitting millions of Texan households and businesses.

Certainly, it is hard to watch major local employers like power plants close their doors. But just as Netflix led to the closures of Blockbuster and Hollywood Video, competition — while sometimes painful — rewards consumers with a better product.

Government subsidies for non-competitive companies will hurt more than they help. Major energy-using industries will be hurt. Small businesses will be hurt. Every family who pays an electric bill will be hurt. Innovative energy companies have less incentive to enter a market where their competitors are guaranteed prices.

When politicians say “yes” to bailouts and subsidies for a select few politically-connected companies, they disregard the needs and desires of the rest of their constituents.

Katie Tubb is a policy analyst in The Heritage Foundation’s Roe Institute for Economic Policy Studies. Nicolas Loris is the think tank’s Morgan Fellow in Energy and Environmental Policy.