Event Recap

The U.S. Department of Energy (DOE) recently proposed a rule that would subsidize the ailing coal and nuclear industries, arguing that these sources of electricity are needed to ensure grid reliability as renewable fuels gain market share. Critics of the proposed rule say it is an unnecessary bailout of uncompetitive and dirty energy sources, and that renewables pose no threat to grid reliability. What are the major factors driving change in the U.S. grid? What are the challenges facing regulators?

A panel hosted on November 10th by the Harris Energy and Environmental Association and the Energy Policy Institute at the University of Chicago (EPIC) took up these questions in a discussion on the recent proposal, the underlying “Staff Report on Electricity Markets and Reliability,” and the possible impacts to the future of U.S. energy. The panel was moderated by EPIC Executive Director Sam Ori.

Alison Silverstein, a consultant who was a co-author on the staff report and former chief of staff at the Federal Energy Regulatory Commission (FERC) under President George W. Bush, laid out the major findings from the report. Namely, that the wholesale electricity market—which favored cheaper natural gas and was balancing flattened demand—was the main cause of coal and nuclear plant retirements.

“Wholesale competition works. It did exactly what it was supposed to do. It shut down inefficient plants,” Silverstein said. “The coal and nuclear plants that retired were old, really old, and really inefficient, and they had earned their AARP cards, and it was time for them to get off the playing field and go enjoy a nice retirement somewhere.”

By “getting off the playing field” coal and nuclear plants have made room for renewables.

Greg Gershuny, the managing director of the Energy and Environment Program at the Aspen Institute and former associate director of the DOE Office of Energy Policy and Systems Analysis, said that over the last seven to eight years renewables came into their own.

“It’s now cheaper to build new wind plants than it is to build coal and natural gas plants. It’s now just as cheap to build a utility scale solar plant as it is to build a fossil fuel plant,” he said.

But, Silverstein cautions that a lot of coal retirements occurred before renewables “got big.” Instead, renewables’ greatest impact has been their speed—combined with advances in information technology and communications such as smart meters.

“We now have a much faster moving grid and coal and nuclear can’t move that fast,” Silverstein said.
“Coal and nuclear plants are just not good at anything but spinning reserve. They can’t do anything except generate electricity that was once cheap and now ain’t so cheap relative to the other stuff.”

Having shown renewables are not a major factor for the demise of coal and nuclear, Silverstein turned to the other major cause often cited: regulations. After analyzing EIA data since 2002, she found significantly fewer plants closed than predicted and the modifications plants needed to make to comply with new regulations set forth by the Obama Administration—like the Mercury and Air Toxics Standards—cost less and took less time than anticipated.

“It turns out that when people have to actually do a job they find cheaper ways to do it,” Silverstein said.

Silverstein finished the report on July 7th. Under usual order, Gershuny explained that from there DOE staff would read the report and use it to draft policy recommendations. Those recommendations would be formed by talking with FERC about what is reasonable and rational and talking with the Office of Management and Budget about what it would cost.

Instead, DOE wrote recommendations that Silverstein called “kind of related” to the report. About a month later, Secretary Perry sent a proposal to FERC, citing the staff report. The proposal asked the commission to set up a regulation whereby plants that had 90 days of fuel on site received a subsidy. The proposal claimed coal and nuclear were essential to the reliability of the grid, though the report did not lay out these facts. When asked why Secretary Perry would make this unusual move, Silverstein called it a “Hail Mary” that struck the right cord politically and gave FERC the “dirty work” of deciding if they would implement it.

Looking to the future, Ori asked the panelists what they thought would be the challenges for the grid. Mark Templeton, the director of the Abrams Environmental Law Clinic at UChicago, said a patchwork of policies would be problematic, citing zero emissions credits set out by states such as Illinois and New York to support nuclear power plants.

Gershuny said the patchwork of state policies wouldn’t be enough to achieve the level of decarbonization that was needed.

“We as a country and a planet have to decarbonize, especially in the electricity sector,” he said. “If we’re going to get to deep decarbonization…then you’ve got to get the electricity sector down to zero sooner. And I don’t think that state level policies can get us there. There has to be some kind of federal policy whether it’s a regulation or whether it’s a fee or a tax.”

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The U.S. Department of Energy recently proposed a rule that would subsidize the ailing coal and nuclear industries, arguing that these sources of electricity are needed to ensure grid reliability as renewable fuels gain market share. Critics of the proposed rule say it is an unnecessary bailout of uncompetitive and dirty energy sources, and that renewables pose no threat to grid reliability. What are the major factors driving change in the U.S. grid? What are the challenges facing regulators? If Secretary Perry’s proposal is adopted, what effect will it actually have?
Areas of Focus: Energy Markets
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Energy Markets
Well-functioning markets are essential for providing access to reliable, affordable energy. EPIC research is uncovering the policies, prices and information needed to help energy markets work efficiently.
Renewable Energy
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Renewable Energy
Lower technology costs and supportive public policies are driving an increase in renewable energy in markets around the world. EPIC research is assessing the costs, benefits, and efficiency of policies...
Fossil Fuels
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Fossil Fuels
Under current policies, fossil fuels will play an important role in the energy system for the foreseeable future. EPIC research is exploring the costs and benefits of these fuels as...
Electric Power
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Electric Power
As the electric power system faces new pressures and opportunities, EPIC research is working to identify the mix of policies needed to accelerate the global transition to clean, reliable, affordable...