Facts still matter: FERC saves US energy consumer $1.4b pa by rejecting NOPR
18th January 2018 by CMIA
The Federal Energy Regulatory Commission (FERC) announced on 8 January that it would reject the Notice of Proposed Rulemaking (NOPR) published in September last year, which would have granted coal and nuclear units operating in organised markets full cost recovery.
In a unanimous order on 8 January, FERC rejected Rick Perry’s NOPR to subsidise coal and nuclear plants in the name of grid resilience. Instead, FERC has proposed their own definition of resilience and have directed grid operators (termed RTO/ISOs) to submit information on resilience issues and concerns. Highlights of FERC’s order are stated below.
Neither the Proposed Rule nor the record in this proceeding has satisfied the threshold statutory requirement of demonstrating that the RTO/ISO tariffs are unjust and unreasonable.
In fact, initial reports indicate that coal-fired facilities accounted for nearly half of all forced outages in PJM during last week’s period of extreme temperatures.
It is not without irony that the Department’s Proposed Rule would exacerbate the intensity and frequency of these extreme weather events by helping to forestall the retirement of coal-fired generators, which emit significant quantities of greenhouse gases that contribute to anthropogenic climate change.
Given those legal requirements, we have no choice but to terminate Docket No. RM18-1-000.
A win for the US energy consumer
As detailed in a previous analyst note, if approved by FERC, the NOPR could have cost the US energy consumer an additional $1.4b pa from 2018-30. This analysis assumed the EIA’s high resource scenario (average gas and coal prices of $4.50/mmbtu and $2.20/mmbtu respectively) and the modelling methodology outlined in our recent report, no country for coal gen. The beneficiaries of the NOPR are loss-making coal and nuclear generators operating in organised markets. With regards to listed companies, the biggest beneficiaries of the subsidy would likely be NRG, Dynergy and FirstEnergy who would be incentivised to halt coal unit retirements and seek to recover costs.
Regulatory risk remains
While the NOPR was nothing more than another subsidy for a sunset industry – and therefore FERC’s order should continue to incentivise merchant generators to retire high cost coal units – it highlights a wider problem with US power market regulation. Of the 270 GW of operating coal capacity, two thirds are regulated units. Regulated units are not directly subjected to market forces, due to their ability to hide behind a regulatory framework that passes on the cost to a captive consumer base.
This form of corporate welfare is stifling the energy transition at the expense of consumers. As detailed in no country for coal gen, phasing-out coal could save the US energy consumer $10b per year by 2021, with Kentucky, Indiana and Michigan households saving on average 10%, 9% and 7%, respectively on their electricity bills. As cheap gas and renewables become more prevalent in coal dependent parts of the US, regulators will increasingly be called upon to justify the continued operation of high cost coal units.
As detailed in no country for coal gen, if regulated coal units were valued based on their merchant or market value, they could be worth 74% less than their book value. The difference between book value and market value is what we call “regulatory risk”, which we estimate could be as high as $185b for all regulated coal units (projected out to 2035).
While regulation of US power leaves a lot to be desired, yesterday’s announcement from FERC proves facts still matter in US policy-making and evidence can still trump politics.