(this post is coauthored with the great Meredith Fowlie and appeared in a much toned down version on The Conversation)
Economics humbly suggests addressing all externalities from coal combustion.
The Trump administration just dropped a pro-coal bombshell which could have legs. Energy Secretary Rick Perry has asked federal regulators to subsidize coal and nuclear plants (and send the bill to ratepayers). Under the proposed regulation, “fuel secure” plants supplying deregulated electricity markets would be guaranteed profits, so long as they stockpile 90 days worth of fuel on site.
To rationalize this nutty proposal, which a former FERC Commissioner has dubbed “the antithesis of good economics” , the administration points to uncompensated benefits generated by coal and nuclear plants. Uncompensated benefits are not usually what come to mind when we think of coal-fired electricity generation. So let’s back up a second and examine what’s behind these claims.
We should tax bads and subsidize goods.
When we teach the concept of externalities (i.e. uncompensated costs or benefits) in our undergraduate classrooms, we often use coal markets as a textbook example of negative externalities. The mining, transport, storage, and combustion of coal has all kinds of negative health and environmental consequences that are not reflected in coal market prices. Yes, coal burning fueled the industrial revolution and has helped to propel emerging economies to modern-day heights, but it has also enjoyed a massive and illusory cost-advantage both domestically and internationally.
What’s so bad about old King Coal? Let’s start with local and regional pollutants like mercury, nitrogen oxides, sulfur dioxide, particulate matter. Taken together, these pollutants are associated with increased mortality, cancer, respiratory ailments, stroke, acid rain, environmental degradation, to name just a few. Even more significant from an economic perspective are the estimated global consequences of domestic coal combustion. Almost a quarter of US greenhouse gas emissions come from coal.
The nonpartisan National Academy of Sciences estimates that the health and environmental damages per MMBtu of coal consumed amount to $6.60. To put this into some kind of perspective, the delivered coal price in 2016 averaged $2.15 per MMBtu. Coal looks awfully cheap, but we’re paying a hefty hidden price.
Are we being overly hard on this ubiquitous fuel? Heck yes, according to coal proponents who contend that coal provides reliability and resilience benefits that are not being properly compensated. And they want to be paid cold hard cash for these.
We see great irony in these “bacon has vitamins too” arguments. The coal industry has historically fought any pollution regulation that would account for the negative impacts of mining, transport and combustion of coal like cats fight a bath. But coal proponents are now clamoring to internalize positive externalities having to do with reliability, resiliency, or national security. Irony aside, the idea that coal plants uniquely provide benefits that are not adequately compensated is an emerging narrative that’s worth unpacking.
How did we get here?
Back in April, Energy Secretary Rick Perry issued a memo commissioning a study to “explore critical issues central to protecting the long-term reliability of the electric grid”. The memo also foreshadowed some anticipated conclusions, namely the recent decline in coal-fired generation is undermining grid reliability and “threaten(ing) to undercut the performance of the grid well into the future”. So the stage was set for a study that could lend support a pro-coal agenda going forward.
But a draft leaked in July (and quickly retracted by the DOE press office) reached a very different conclusion. The report provided no evidence that the retirement of baseload plants had compromised grid reliability. On the contrary, the study concluded, “the power system is more reliable today due to better planning, market discipline, and better operating rules and standards.”
This conclusion (consistent with our understanding that system reliability has improved, coal plants retirements notwithstanding) was not what the Energy Secretary ordered. The summary statement about the grid being more reliable than ever was removed. But the substance of the report was unchanged. It offered no evidence that coal plant retirements are undermining grid reliability.
Lest you think that this substantive and sensible report would inform the policy directions of this administration, think again. Last week, in the name of reliability and resilience, Secretary Perry directed federal energy regulators to guarantee full cost recovery for plants who store 90 days of fuel onsite. As far as we can tell, the 90 day rule was chosen not because it is a good indicator of reliability benefits, but because it is a perfect indicator for the plants this administration wants to prop up.
Does Coal Keep the Lights On?
The proposed regulation is premised on some key arguments that contradict DOE’s own expert analysis. The first is that coal plants are indispensable for reliability.
In the electric sector, reliability amounts to keeping the lights on – and all of our other electricity demands met – all the time. Electric grids need to balance supply and demand in real time or risk cascading blackouts. To assure reliability, we need power supply that’s ready to run whenever we need it. One supplier shirking its responsibilities can lead to problems for all users of the grid. So reliability of supply, like pollution, can be considered an externality (although one that is positive rather than negative).
Unlike pollutants such as CO2, the external costs and benefits of reliability have, to a significant extent, been internalized by electricity markets. The extensive rules and regulations governing power grid operations require multiple redundancies and compensate generators for standing by in case of emergencies. Power markets compensate producers for providing reliable capacity, execute reliability “must-run” contracts with pivotal resources, and penalize plants when they fail to meet their obligations.
The proposed regulation is also premised on the argument that the resiliency of the nation’s electric grid is “threatened by premature retirements of power plants that can withstand major fuel supply disruptions caused by natural or man-made disasters”.
What kind of disasters are we talking about here? Two come immediately to mind. One top-of-mind disruptive event is a cyber attack. Neither of us is an expert hacker, but again there is no evidence that coal fired power plants are less likely to be hacked (or quicker to recover) than say natural gas fired power plants or wind/solar generators.
The second are large scale environmental events such as hurricanes, floods and Polar Vortices. In order to justify a subsidy for coal on resilience grounds, coal plants have to bounce back significantly more quickly than alternatives like natural gas. There is redundant natural gas pipeline transportation capacity in much of the country which reduces fuel supply risks substantially. But there will be some weather disruptions, like extreme winter events in the Northeast, where coal rail networks could be more reliable than gas pipelines.
But after Hurricane Harvey, flooded coal piles forced one of America’s largest coal plants in Texas to close two of its units and convert others to natural gas. Frozen coal piles and train derailments have kept coal plants elsewhere from operating during cold winter weather. A recent report by the Rhodium Group states:
“Of all the major power disruptions, nation-wide over the past five years, only 0.0007 percent were due to fuel supply problems. The vast majority were the result of severe weather knocking down power lines.”
Subsidizing utilities to burn more coal would worsen coal’s major negative externalities in the name of some dubious positive externalities. Deregulated power markets already have measures in place to support efficient levels of investment in reliability and resilience. There is surely room for refinement, but Perry’s proposal is the opposite of refined. It asks government to interfere in well-functioning markets, which is not something Republicans usually support – especially since it will come at great expense to ratepayers.
Subsidizing coal for its reliability attributes is like subsidizing bacon for its nutritional content. There are better ways to get your vitamins, and better ways to keep the lights on.
Maximilian Auffhammer is the George Pardee Professor of International Sustainable Development at the University of California Berkeley. His fields of expertise are environmental and energy economics, with a specific focus on the impacts and regulation of climate change and air pollution.