Opinion: Government should stay out of energy market
The Trump administration is considering policies that would keep coal-fired and nuclear power plants from closing. In what Bloomberg has called “an unprecedented intervention into U.S. energy markets” the Department of Energy would require grid operators to purchase electricity from coal-fired and nuclear power plants in order to keep these plants from being retired.
This would be an attempt to overcome the effects of substantial declines in natural gas prices and the cost of renewable energy on the economic viability of coal and nuclear power. Such government intervention will certainly be inefficient from an economic standpoint, and will be costly to consumers of electricity. It is questionable whether there will be any benefits from the subsidization of this particular method of producing electricity, much less whether such benefits will exceed the substantial costs.
It is first worth noting that indeed coal-fired and nuclear plants are being retired with little prospect of new ones opening. The primary reason for such closures is the reality that natural gas offers a more competitive and cost-effective form of electricity generation. Natural gas spot prices were above $10 per million BTU ten years ago, and have rarely been above $4 since and are currently slightly less than $3. The DOE has claimed that facilities that have the power source stored on site are more reliable than those powered by natural gas because the natural gas facilities rely on gas being transported through a pipeline. In the case of a pipeline failure or cyber-attack, the natural gas facility may not have a source of fuel.
While it is indeed possible that there may be future cyber-attack attempts on pipelines, there are multiple pipelines, redundancies, and safety mechanisms that would allow a continuing flow of natural gas and prevent successful intrusions. The North American Reliability Corp.’s 2018 Summer Reliability Assessment found grid resilience is improving despite growing cyber threats.
As with any policy issue, one must examine the benefits with the cost. First, is there truly a benefit in keeping uneconomical coal-fired and nuclear plants in service through government intervention at prices higher than other methods of generating electricity? The Institute for Policy Integrity at New York University School of Law found: “There are no well-established studies that, relying on realistic assumptions, show that increasing the availability of generators with ‘fuel security’ attributes will enhance the resilience of the electric system.” What has been analyzed is the costs of forcing the purchase of power from coal and nuclear plants. And it is substantial.
The Brattle Group has done a sophisticated study under various assumptions of how the Administration’s plan would be developed, but a reasonable estimate is between nearly $10 billion and $17 billion per year. A higher end cost estimate would put the total price tag at $34 billion over the program’s duration over two years.
Rather than using resources to subsidize economically failing coal and nuclear power, these resources would be better used in improving the grid so power can be obtained from a variety of areas and sources, thus reducing the probability that a particular generating facility would lose its fuel supply or that the closure of a particular facility would affect the grid.
If would be more effective to develop hardware that improves the ability to use peak load pricing, or for creating incentives to innovate in the production of electricity. Improving the legislative structure in various states to allow for consumers to choose power from a variety of sources will improve resiliency.
Government intervention that keeps uneconomic production of electricity in place is a burden on consumers of electricity and distracts us from using more efficient ways of improving reliability and resiliency of the grid.
Gary Wolfram is the William Simon Professor of Economics and Public Policy at Hillsdale College.