President Trump is reportedly considering using his emergency powers to intervene in electricity markets and prop up failing coal and nuclear power plants. Bloomberg reports that the plan would force utility companies to buy power from “fuel secure” coal and nuclear plants in order to stop their “premature retirement,” and the administration is further considering the creation of a “Strategic Electric Generation Reserve” like the Strategic Petroleum Reserve. Unfortunately, this policy threatens to impose numerous costs while offering no benefits.
The argument behind the proposal is that natural gas and renewable energy may struggle to provide electricity during extreme weather events, and that the market does not incentivize power companies sufficiently to maintain reliability.
But this argument does not square with the facts on the ground. “Fuel secure” coal and nuclear have their own reliability problems; coal piles froze during the 2014 Polar Vortex, and a nuclear plant was forced to shut down during the last “bomb cyclone.” Further, prices during extreme events already offer huge incentives for reliability, and extreme weather events in the Northeast and Texas (regions with competitive electricity markets) demonstrated their reliability. Even when outages do occur, the vast majority are due to transmission problems, not a lack of capacity.
Fundamentally, where the administration’s proposal goes astray is that it is underpinned by an idea of “premature” retirements of coal and nuclear power plants. There is no such thing as a “premature” retirement. The retirement is triggered by market forces — a recognition by buyers that they can get the same product elsewhere for less — and that’s a good thing.
Even if one was convinced that there were issues with scarcity in electricity generating capacity that demanded remedy, the federal government should not be the one to deliver such a proposal. Competitive markets rely on grid operators that carefully assess projections of capacity supply and demand. It is those entities that would offer warnings if there is a problem. The PJM Interconnection, a grid operator where a power company requested government intervention to protect its failing nuclear plants, said retirements could “proceed as scheduled without compromising reliability.” There is simply no need to force customers to buy from failing coal and nuclear power plants.
The idea of a “strategic electric generation reserve” is perhaps even more baffling. Such a reserve makes sense for oil, which is amassable and fungible — you can keep the oil in a tank until it is needed, and somebody will be able to use it. But who will keep the coal plant open and operational until it is needed to produce more electricity using the “strategic reserve” of coal — especially when the coal plant isn’t profitable most of the time?
This proposal amounts to a massive government intervention in the electricity market. Many will contend that the U.S. electricity market is not free, and this point certainly is correct. Yet, there is a market, and the forces, such as they are, make such an intervention unnecessary. The market rewards reliability, and if it was true that coal and nuclear could satisfy a niche for reliability, then they would not need an intervention to remain competitive.
Such a market intervention is reminiscent of President Richard Nixon’s 1971 attempt to halt inflation by capping prices and earnings — an economically disastrous policy. Price controls under Nixon undercut the incentives for production, and farmers began drowning their chickens as there was no profit to be had from keeping them. Chickens likely won’t drown under this policy, but the mindset that the government can freeze the market in place or preserve the status quo is still present, and just as misguided.
In the near term, customers in the mid-Atlantic and Midwest would face higher electricity prices under this proposal as they will be required to buy more expensive electricity from unprofitable power plants. In the long term, all Americans will be harmed as the administration signals to power providers that cost-effectively providing a product is less important than government relationships.
The policy under consideration by the Trump administration, while likely well-intentioned, simply has no good in it. It is not conservative, it is not market-based, and it offers no benefit to the public. It should be abandoned.
