Bacon Has Vitamins Too: Why Rick Perry Failed Econ 101 – Again.
(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.
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Maximilian Auffhammer View All
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.
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It is unfortunate that DoE lumped together coal and nuclear in their thinking. Coal has real baggage, as Max notes; the externalities from Nuclear (risk of disaster, issues related to storage) are not trivial but they are small in comparison to the externalities from coal. And there is that issue of carbon-free energy. I never bought the reliability argument, but I do think there is another benefit (that doesn’t get much play). When I was asked to co-author a white paper for DoE under the Obama regime I stressed the option value from nuclear: there is a probability that the US will adopt some sort of meaningful carbon policy; if that happens nuclear will immediately become more valuable; keeping an active stock allows us to retain an option on that potential.
All agreed, except that reliability is a public good in the power grid. It is not an externality.
(This does not change the idiocy of Perry’s plan.)
Hi,
Please send a link to the NAS study that Maximilian referenced today.
Thanks!
Steve Huntoon 703-627-9547 cell
I am on a plane. I think it is this. https://www.nap.edu/catalog/12794/hidden-costs-of-energy-unpriced-consequences-of-energy-production-and
These arguments appear logical for coal, but what about nuclear? Nuclear provides fuel stability and has low carbon emissions. Nuclear plants are being shut down in some markets where they are competing with subsidized intermittent renewables that create periods of negative electricity pricing (these subsidizes are not efficient economic policies either), and in the remaining time require rapid ramping of natural gas plants which have low efficiency and higher emissions when used for firming electricity supply from intermittent renewables. Clearly nuclear is different from coal, and it would be great to discuss the wisdom of this new policy with respect to nuclear, not just coal.
Per, I need to learn more about nuclear power. Lucas is great here though. He might have some thoughtful things to say.
Max, I understand. Today, the incumbent firms in the U.S. and Europe are having extraordinary difficulty in building new nuclear reactors on schedule and at anything resembling a reasonable cost. Probably the most important question we face is whether these problems are intrinsic to the technology, or whether alternative approaches could result in disruptive improvement. We have a pretty cool panel session we conducted in April at UCB on advanced nuclear technologies that included Dr. Daniel Rasky, who helped start up NASA’s Commercial Orbital Transportation Services program back in 2006 (e.g., SpaceX). The interesting conclusion is that similar models may work for advanced nuclear energy technologies. DOE-NE started a new program modeled after COTS two years ago. To say that UC Berkeley is deeply involved in advanced nuclear would be an understatement. But in 2006, it was not easy to predict whether any of the start-ups that COTS supported would be successful. Today we face a similar question about advanced nuclear technology. Very interesting. Per
Note that nuclear power is also heavily subsidized, although not so much through tax policy. Rather the insurance subsidy, and the ongoing failure to develop a permanent spent fuel storage facility are just two of the more salient elements. In addition, the large size (usually 1000 MW) of each unit actually increase reliability risk as these are often an N-1 loss risk in many balance authorities.
When I take the total quantity of coal burned each year in the world, and multiply by the external costs of burning this coal, the numbers are enormous. And these costs of burning more fossil fuels do not quantify the future potential impacts of climate disruption and extinctions driven by ocean acidification. I’m not going to attempt to defend the incumbent nuclear industry, nor criticize the fact that today’s intermittent renewables cannot function without fossil back-up. The most interesting point is that in the U.S. the Nuclear Waste Fund now contains almost $40 billion. Because the Yucca Mountain Project was stopped, in 2013 U.S. courts ceased the collection of ~$700 million per year in NWF fees from nuclear utilities. But with a balance of almost $40 billion, the interest payments to the NWF are around $2B per year, 3 times larger than the $0.7 billion/yr revenues that the previous NWF fee generated. So we may have passed the tipping point where the cost of managing spent nuclear fuel has become negative, just like the cost for managing spent aluminum cans today is negative.
That assumes that $40 billion is sufficient funding. The last cost estimate was $96 billion in 2008, and those have not been updated since. Given the huge cost overruns on the nuclear plants in the Southeast, it’s not unreasonable to expect similar cost overruns at Yucca Mountain. https://www.reviewjournal.com/news/politics-and-government/nevada/cbo-finds-long-term-costs-of-reviving-yucca-mountain-hard-to-predict/
I’m no expert on these matters, but I think NY and New England may need some help during the winter months. There appears to be a gas supply issue during intermittent periods of high demand. Until they resolve this supply issue, perhaps they should be given some slack. And by resolve, I don’t necessarily mean increase gas supply. DSM, and the long fabled DC line accessing Canadian Hydro come to mind. Central and Midwest ISO’s artificially supporting Nuclear and Coal? Not so much-
Interesting that the proponents of the NOPR are already arguing that the electricity markets are already riddled with subsidies for renewables and gas. One went to on say to it would be ‘criminal’ if coal and nuclear didn’t pursue getting their own additional subsidies.
Anyway, even if nothing is done in this case, Coal and Nuclear is going to fade away in the next few years.
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Wind and solar do not have ’90 days of fuel on-site” but they receive regular (free) deliveries of (free) fuel pretty much on a daily basis, so they don’t need to store fuel on site. They will not qualify for the subsidies, even though they provide the fuel supply interruption benefits that are the asserted target.
Meanwhile, during many extreme weather events, coal piles freeze and nuclear plant cooling water intakes fail, making these facilities unable to provide the “resilience” that the system values. In earthquakes, nuclear plants automatically scram, placing gigantic contingencies (3600 MW in the event of an earthquake affecting Palo Verde) on the system, while wind turbines keep spinning (and solar panels loll in the sun) as long as there’s a load for them to serve.
The Alison Silverstein draft report made clear that resiliency was a multi-faceted challenge, and a diverse resource mix of thermal, solar, and wind provided good balance.
But, the current administration was not put in office to be rational, but rather to “drain the swamp” and doing so may enable multiple swamp creatures to be exposed. Get ready for what may be a very scary movie.
Thanks Max – I suspect this one will not be picked up by Heritage Foundation or ALEC
Maybe by the Bacon Foundation.