NASHVILLE, Tenn. — It’s a topic the electric industry has debated and litigated for years: Can state policy and free markets play nice together?
It’s also a question that’s never been as relevant as it is now following key rulings by the U.S. Supreme Court and the Federal Energy Regulatory Commission and pleas to state legislatures and regulators for subsidies to keep open older nuclear and coal plants in the face of competition from cheap shale gas.
Among those pleading for help is Exelon Corp., the nation’s largest nuclear operator. The Chicago-based company is lobbying lawmakers in Illinois and New York for policies that would inject hundreds of millions of dollars in annual revenue to prop up struggling nuclear reactors (EnergyWire, June 3).
"There’s a lot of stresses in that business right now," Exelon CEO Christopher Crane said during a keynote discussion at the National Association of Regulatory Utility Commissioners (NARUC) annual summer meeting. "We’re at a critical point."
Without help from policymakers, Exelon will shut nuclear plants in Illinois and New York, working against efforts to slash carbon dioxide emissions at a time when the states are seeking to do the opposite.
Crane counts himself as an advocate of free markets. He sees the simplest solution as a policy that puts a price on CO2.
But while Democrats and Republicans in Congress agreed to extend wind and solar tax credits, a political logjam has for years stymied efforts to adopt the kind of federal cap-and-trade legislation advocated by Exelon. Meanwhile, the two Illinois nuclear plants that the company plans to close have lost $800 million over the last seven years, and the meter is running.
Exelon took its argument to the states, Crane said, because "we cannot sustain those losses and we are not seeing the right leadership or dialogue at the national level."
Not everyone agrees the existing market is broken or that creating subsidies to keep aging coal and nuclear plants alive is a good idea.
A consumer advocate and rival power industry executive at yesterday’s NARUC conference cited trends across the Northeast as proof that regional markets are working as intended. Throughout the 13-state PJM Interconnection, thousands of megawatts of older coal plants have been shut down and replaced mostly by cleaner natural gas plants being developed to take advantage of the Marcellus and Utica shale plays.
Michael Haugh, assistant director of analytics for the Ohio Consumers’ Counsel, said wholesale markets have enabled reliability to be maintained even as some older power plants are shut down.
"I’d like to think that we’re no longer putting a fence around our states," Haugh said. "We’re thinking about this from a regional level."
In the last PJM capacity auction for 2019-2020, more than 5,000 megawatts of new natural-gas-fueled generation cleared while some existing nuclear generation — including Exelon’s Quad Cities plant — did not. The 1,800-MW Quad Cities plant is slated to close in mid-2018 unless Illinois lawmakers approved a plan to keep it running.
Ohio, meanwhile, has been ground zero for the clash between state policy and wholesale electricity markets over the last two years.
The Public Utilities Commission of Ohio this spring approved settlements that would subsidize aging coal and nuclear plants on grounds that the plans would ultimately pay off for consumers and preserve local jobs and taxes.
Rival generators and consumer advocates including Ohio Consumers’ Counsel disputed the supposed benefits and said the plans were nothing short of bailouts that would enrich shareholders of the utilities, American Electric Power Co. and FirstEnergy Corp.
FERC ultimately blocked the plans, setting up another showdown at the state level over modified versions of the proposals. PUCO is expected to rule in the coming weeks (EnergyWire, May 4).
Among those who have argued against the plans is Houston-based Calpine Corp., which owns thousands of megawatts of natural-gas-fired generation across PJM.
Sarah Novosel, Calpine’s senior vice president for government affairs, said the transition to cleaner energy across PJM, New York and New England has come even as energy prices have fallen. Risk has been shifted onto investors and away from consumers, she said.
While it’s legitimate for states to seek policies to help slash carbon emissions, especially with U.S. EPA’s Clean Power Plan still pending, she said mechanisms proposed in states like New York, Illinois and elsewhere in the Northeast are problematic and would shift that risk back onto ratepayers.
They include not only fossil and nuclear proposals in Ohio, New York and Illinois, but also plans in New England to subsidize imported Canadian hydropower or offshore winds, she said.
"Were troubled by all of these proposals because all of them are going to undermine wholesale markets which competitive generators rely on for their revenue," Novosel said. "Once you start to pull the string and unravel these wholesale markets, you’re going to end up with other generators in wholesale markets needing a subsidy or a long-term contract in order for them also to receive sufficient revenue."
Can states make the rules?
The debates playing out across the Northeast and Midwest are happening in the aftermath of a series of three Supreme Court rulings dealing with variations of the same theme. Perhaps most notable was the April decision in Hughes v. Talen Energy Marketing LLC and CPV Maryland LLC v. Talen Energy Marketing LLC.
In that case, the court ruled 8-0 that Maryland’s incentive program for new gas-fired generation strayed into FERC’s jurisdiction over wholesale electricity markets (EnergyWire, April 20).
Allison Clements, director of the Natural Resources Defense Council’s Sustainable FERC Project, urged regulators not to read too much into the Hughes decision, which was decided on technical grounds. She said FERC’s objection in the case shouldn’t be perceived as a power grab, and that states can drive their own energy futures.
Clements said states can’t target wholesale electric rates and FERC can’t target retail rates. But it would be difficult if not impossible to regulate without having some effect, given the interconnectedness of transmission and distribution grids.
Meanwhile, William Hogan, a professor of global energy policy at Harvard University’s Kennedy School of Government, cautioned against letting short-term market dynamics cloud thinking about how to solve the power sector’s long-term objectives of carbon reduction.
For example, the shale gas revolution that’s unfolded over the last decade was a surprise that no one saw coming.
"It transformed geopolitics, not to mention the energy markets," Hogan said. "And I’d be surprised if that’s the last surprise."