Feud of the Year: Nuclear and coal vs. competitive markets
Coal & nuclear vs. competitive markets
What Started the Feud:
New York became the first state to pass nuclear subsidies in 2016.
How things heated up:
Merchant generators first challenged the subsidies in New York state.
The latest salvo:
DOE issued proposed rulemaking for cost recovery of nuclear and coal in September 2017.
Over the past several years, coal and nuclear plants in deregulated markets have battled to remain financially viable. That battle has risen to national prominence, engaging federal regulators and even action from the Secretary of Energy.
On Oct. 24, the Fort Calhoun nuclear plant near Omaha, Nebraska, closed, becoming the fifth nuclear plant to retire in the past five years. In June, Exelon said it would close Three Mile Island in Pennsylvania by 2019, bringing to six the total number of nuclear plants scheduled to retire in the next nine years. And the Nuclear Energy Institute (NEI) says there are a total of 15 to 20 nuclear plants that are at risk of early retirement.
Coal plants have not fared any better. If anything, they face even tougher challenges because they do not share nuclear plants’ zero emission profile. A recent study by the Union of Concerned Scientists reported that about 25% of the operating coal plants in the U.S. are slated to close or convert to burn natural gas.
Another common theme underlying the coal and nuclear closures is that cheap natural gas is flooding the markets thanks to advances in hydraulic fracturing.
As a consequence, coal and nuclear plants are having a tough time competing in organized wholesale markets, such as the PJM Interconnection, the Electric Reliability Council of Texas and the New England ISO, where gas-fired generation often sets the market price.
But some owners of these baseload plants are fighting back. Companion bills in Ohio, HB 239 and SB 155, would provide perpetual subsidies for two coal-fired plants: the 1,100 MW Kyger Creek in Cheshire and the 1,300 MW Clifty Creek in Madison, Indiana jointly owned by a group of utilities that includes American Electric Power, FirstEnergy and Duke Energy.
And in mid-October, the Ohio legislature took another try at legislation that would prop up two struggling FirstEnergy nuclear plants. The bill, HB 381, proposes a Zero Emission Nuclear Resource (ZEN) program to support the North Perry and Oak Harbor plants.
Ohio’s efforts were emboldened by the success of a similar program in Illinois. The Illinois Legislature in late December 2016 passed the Future Energy Jobs Act, the centerpiece which was a measure that supported Exelon’s ailing Quad Cities and Clinton nuclear plants. Prior to the bill’s passage, Exelon had said it would be forced to close those plants, which were under economic pressure from lower cost gas-fired and renewable resources.
New York took a different route to the same end, when the state’s Public Service Commission approved a Clean Energy Standard that included subsidies for the state’s nuclear power plants.
With the successes in New York and Illinois, states such as Pennsylvania, Connecticut and Ohio began studying those programs to design plans in their states that would shore up nuclear plants and the jobs and tax revenues associated with them.
Critics were equally quick to condemn the programs. The Electric Power Supply Association and other independent generators challenged the Illinois Zero Emission Credit (ZEC) program in court as unlawful. They argued that the subsidies violate the Constitution because they interfere with the operation of wholesale power markets, which fall under the jurisdiction of the Federal Energy Regulatory Commission.
EPSA and owners of natural gas fired plants also filed in New York, calling the state’s nuclear subsidies “an existential threat” to wholesale power markets.
Despite the challenges, federal courts in Illinois and New York separately upheld the subsidy programs in those states.
Gas-fired generators could be seen as the natural opponent of nuclear and coal generators. Both compete in the same wholesale markets, which are designed to reward the lowest cost generation. But even market operators, such as the PJM Interconnection, that are charged with maintaining those competitive markets, have expressed concerns, saying that out-of-market solutions such as ZECs could “threaten the foundations” of competitive power markets.
PJM successfully fought off threats from out-of-market constructs in New Jersey and Maryland. The ISO also filed amicus briefs in support of EPSA’s position on ZECs, but with the courts upholding the subsidies, the ISO is also looking at changing its rules to adapt to the threat.
Competitive energy markets have long been a key component of federal energy policy, and the ZEC threat is seen as potent enough at FERC for the federal regulator to call for a technical workshop on the issue.
The first workshop, held in May, ended with little consensus, which was not surprising. The conference was mostly a fact-finding mission, and FERC in the spring still lacked a quorum.
Since then quorum has been restored, but the agency’s backing of competitive markets has been put on a possible collision course with Trump administration’s backing of the coal industry.
The Department of Energy in September filed a Notice of Proposed Rulemaking (NOPR), directing FERC to look for mechanisms to compensate baseload power supplies, such as coal and nuclear power, for their reliability and resiliency attributes.
DOE’s announcement sparked a firestorm. Opponents argue that the NOPR does not face the fact that market forces, not excessive regulations, are driving coal and nuclear generation out of the market, even as new studies come to the same conclusion.
Energy Secretary Rick Perry defended the NOPR before Congress, portraying the action as the “cost of freedom.” At FERC, however, Acting FERC Chairman Neil Chatterjee tried to calm stakeholders, pledging that the NOPR would not “blow up the market.”
The NOPR is unlikely to pass muster as written, based on comments from Commissioners Robert Powelson and Cheryl LaFleur. But whatever emerges from the proceeding will likely set the tone for which resources compete in the competitive market in years to come.
Follow Peter Maloney on Twitter