How Trump's Coal Aid Plan Will Raise Power Bills: QuickTake Q&A

(Bloomberg) -- Electricity may flow like water but the process of getting it into your home or office is more complicated than gravity pulling liquid downhill from reservoir to tap. In between power plants and electric outlets lie complicated regional markets where prices are shaped by factors that go beyond daily supply and demand. Those wholesale markets were designed so consumers benefit from competition while ensuring the lights stay on. They’re also where U.S. President Donald Trump is turning as his administration tries to figure out ways of keeping financially ailing coal power plants from closing. Proponents of the idea say it would mean a more resilient grid. Critics -- who include most of the industry and even some coal companies -- say it would amount to a multimillion-dollar, possibly even multibillion-dollar, tax on consumers to bail out some big Trump supporters.

1. Why are coal plants being shut?

Coal, once the largest source of U.S. electricity generation, has seen its share of the power market dwindle to less than a third as natural gas emerged as a less expensive alternative. Between 2002 and 2016, more than 59 gigawatts of coal-fired power – enough to supply 59 million homes a year – went offline, thinning the economic prospects for coal producers. Trump has blamed what he called President Barack Obama’s “war on coal.” But the steep drop of the price of natural gas, which fracking has made abundant, is generally seen as more to blame. Cheap natural gas is also crushing nuclear plants. Some have shut and others are being kept afloat by state subsidies.

2. What has the Trump administration proposed?

Energy Secretary Rick Perry is trying to get utilities and their ratepayers to provide financial assistance to coal and nuclear plants. He wants to rewrite the rules governing wholesale power markets to reward power producers that are able to store enough fuel for 90 days of generation on-site -- a condition coal, nuclear and certain hydropower plants can meet. Perry directed the Federal Energy Regulatory Commission, which oversees U.S. electricity markets, to implement his plan by Dec. 11.

3. How would that work?

There are a few ways this could happen. The approach favored by the energy commission’s interim chairman, Neil Chatterjee, would require grid operators to enter into financial agreements with power plants that the commission deems necessary to keep the grid “resilient.” (It’s not clear yet how plants would be deemed resilient.) Those that qualify would receive monthly payments to stay online, regardless of whether they are being used. Under that plan, generators could begin receiving payments as soon as next spring. The commission could also punt to regional grid operators by asking them to develop their own criteria for “resilience” and craft their own programs for compensating eligible plants. That would take longer, potentially delaying payouts until 2019, according to the Washington-based energy consultancy ClearView Energy Partners.

4. Why focus on resilience?

Resilience has become a focal point in the U.S. power industry after a series of severe weather events, from Superstorm Sandy in 2012 and the deep winter chill of early 2014 -- when the regional grid covering much of the Midwest saw a fifth of its plants forced offline -- to the back-to-back hurricanes slamming the U.S. in 2017. A recent staff report by the Energy Department said that the country’s increased reliance on gas to produce electricity has increased vulnerabilities because of potential bottlenecks in the pipelines that deliver gas across the country. It called having a diverse and secure set of supplies "the best assurance for resilience.”

5. Who would pay?

Consumers, but not everywhere. Perry’s plan applies only to regional, wholesale power markets that already conduct so-called capacity auctions every year. In those auctions, power producers bid to guarantee certain amounts of energy to meet demand peaks during heat waves, cold snaps or other emergencies. In return they receive extra payments every month. That would limit the impact of Perry’s plan to three regions: the 11-state region managed by PJM Interconnection LLC that stretches from Illinois to Virginia; the six New England states managed by ISO New England Inc., and New York’s grid, managed by New York Independent System Operator Inc. New York and New England have few coal plants, so the bulk of the rule’s effect would be felt by PJM’s customers, who make up almost 20 percent of the country’s population.

6. How much would it cost?

Neither the Energy Department nor FERC have released official estimates. But three different groups have conducted studies that found a wide range of possible costs depending on which plants are eligible and how the payments are structured. Monitoring Analytics LLC, the market monitor for grid operator PJM, estimates it would cost customers between $18 billion and $288 billion over 10 years. The Brattle Group, a consulting firm, put the cost at between $3.7 billion and $11.2 billion a year. And Energy Innovation: Policy and Technology LLC, a clean energy firm, estimates it would cost between $311 million and $10.6 billion a year.

7. Who’s in favor of the plan?

Murray Energy Corp., the third-largest U.S. coal producer, and its big customer, power generator FirstEnergy Corp., are two of the loudest voices behind the push. Murray has said that, without immediate government intervention, it could be forced into bankruptcy. FirstEnergy subsidiary FirstEnergy Solutions also claims to be facing financial risk. Other companies in favor of the plan are Exelon Corp., which has sought subsidies for its money-losing nuclear plants in New York and Illinois, and Public Service Enterprise Group Inc., which runs nuclear reactors in New Jersey.

8. Who’s against it?

The Energy Department plan has drawn widespread opposition from all parts of the energy industry, even uniting oil and natural gas companies with renewable generators and utilities. Their argument: The proposal would upend competitive power markets by propping up uneconomic plants that should retire. Even some coal-fired electricity generators poised to benefit from the plan don’t support it. Dynegy Inc., with about 9.5 gigawatts of coal-fired capacity, and NRG Energy Inc., with nearly 9 gigawatts of coal capacity as of August, have criticized the measure.

9. What happens next?

Chatterjee has said he plans to unveil a stopgap plan to keep coal plants online by Dec. 11, but he still needs to persuade two of his four fellow commissioners to vote for his proposal. If he fails to get the votes, the commission could instead extend the deadline.

The Reference Shelf

  • U.S. Energy Secretary Rick Perry’s letter laying out the idea. 
  • Trump’s coal guy is racing against the clock to bail out power plants.
  • The proposal being weighed by at FERC.
  • A staff report from the Department of Energy on reliability in electricity markets. 

©2017 Bloomberg L.P.

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