Coal Bailout: Low on Benefits, but High on Costs

July 20, 2018 | 9:43 am
black and white photo of a coal-fired power plant with two tall smokestacks releasing large plumes of smoke into the skyPDTillman/Wikimedia Commons
Mike Jacobs
Senior Energy Analyst

More indications that there is no national reason for a proposed financial rescue of coal plants came out this week. Power grid operator PJM says there is no emergency; a leading coal industry representative says we don’t have any measure or understanding of what is gained in terms of reliability; and financial estimates are reported at $17 – 35 billion per year.

A hand holding a bag of money

Handouts are not as simple as this. If they were, everyone would get in line. Source:

Plenty of money at stake

In the energy industry, the costs of decisions are often very substantial. Economics, policy, and engineering are all relevant. There’s usually a lot of emphasis on costs and benefits, with the expectation that the benefits are larger than the costs. In this case, we have an active debate about paying old coal plants to keep operating at a loss, without an indication of who pays, what benefits are gained, or who can qualify for government-ordered payouts.

At a national meeting this week of utility regulators, who would normally review the costs of the grid and electricity supplies, we heard from Andy Ott, CEO of the regional grid PJM Interconnection; Michelle Bloodworth, COO of the American Coalition for Clean Coal Electricity which represents coal plant owners and their supporting industry; Kristin Munsch, Deputy Director, Illinois Citizens Utility Board; and Neal Cohen, Senior Vice President for External Affairs, Nuclear Energy Institute.

Plenty of safety margin available

When the CEO of PJM says they have looked, and can’t find an emergency, that means something. PJM operates the largest electricity market in the world ,serving the area from Chicago to New Jersey and south from Pennsylvania to the North Carolina coast. PJM has plenty of procedures for dealing with uneconomic power plants, planned as well as sudden power plant retirements, and how to keep the lights on across the region. If you haven’t spent time with a regional transmission organization, you can’t imagine how careful these organizations are to maintain the supply of electricity.  PJM presently has a reserve margin that is twice as large as its target reserve margin. From the 2018 Summer Reliability Assessment: “The PJM reserve margin for this summer is 32.8 percent with a requirement of 16.1 percent. With this level of surplus, PJM has not identified any emerging reliability issues regarding resource adequacy.” In other words, PJM is well-prepared and has the means to provide for our electricity needs.

Nothing clear from coal perspective

Perhaps more astounding was the perspective of the coal industry representative. The American Coalition for Clean Coal Electricity acknowledged that the defined standards for reliability are all being met. While acknowledging that they don’t have a definition of the need or benefits, the coalition still claims that in the future there will be a need. Compounding this problem, this speaker said we really don’t know what plants will be affected by a federal rescue or “where the money will come from.” With that, the coal industry assured the audience that the cost figure they selected, $4 billion per year for needy coal plants, isn’t much to ask.

Making estimates of the costs of this bailout is an educated guess at this point since details have not been offered to the public. (No one is making estimates of the benefits, because no one has defined the problem or need.) News came out today of a few cost estimates for a federal bailout. These numbers range from $17 billion per year for unprofitable coal and nuclear plants to continue running with an annual payment of $50 per kilowatt of capacity, which translates to $50 million per year for a large plant with 1,000 MW capacity. Paying the profits as well as the costs could push the number to between $20 billion and $35 billion per year. But remember: we don’t know who gets this payout, or what other revenues will no longer be available once the federal payments kick in.

Not coincidentally, there was already a debate within grid operators and the Federal Energy Regulatory Commission about the practices of individual states making payments for the operational characteristics that lawmakers in those states approved. These have a few flavors, but they came out of debates and votes that identified benefits. In our federal system, the states’ authority to select power plants hasn’t been revoked by economists or other ideologically driven actors.

Consumers’ voice

At the utility regulators meeting, Kristen Munsch, a leader among consumer advocates in the PJM region, reminded us that markets and prices are doing what they were designed to do. “Operational characteristics” that are not recognized by the market are being selected by state policies, where they are valued. But that is limited, same as a bailout of coal plants is limited, to what the poles and wires can transfer from power plant to user. The power grid is a system, and a rush to define the security of the system from only the perspective of fuel for the plants is not useful. The consumers’ perspective, as the user of energy, needs to be included. If the debate is framed so as to squelch discussion, we are likely to overpay for stuff that under delivers.

Oh, one more thing. Andy Ott of PJM said to the gathered state officials that if this proposed bailout comes with a justification of “national defense” then he will ensure that the revenue is collected from the whole nation.