The Brattle Group recently released a report outlining the estimated cost of the administration’s most recent proposal to prop up some uneconomic coal and nuclear power plants. Please find included below, a reaction statement from Affordable Energy Coalition spokesman Michael Steel and key takeaways from the report.
AEC Spokesperson Michael Steel: “This proposal is anti-consumer, anti-markets, and offers no benefit to the resilience of the electric grid. Americans should not be forced to pay $35 billion each year for the failed business decisions of a handful of companies.”
Main takeaway? This will be expensive:
In a scenario where all coal and nuclear plants receive an out-of-market annual payment of $50 per kilowatt of capacity — the average operating shortfall for plants operating at a deficit — the direct cost of the policy would be $16.7 billion dollars per year.
Should out-of-market payments be tailored to cover plants’ projected operating shortfalls, the policy cost would rise to $17.2 billion per year. If the DOE fails to accurately craft a “nuanced payment scheme” for each of the plants it targets, the costs could easily skyrocket.
Should the administration attempt to also cover returns on investment, as it did in the 2017 NOPR proposal, the policy cost would double to $20-$35 billion per year.
As FERC Commissioner LaFleur stated in a recent Politico interview, there is likely no scenario in which such a policy does not come before FERC for approval. (You’ll remember the last proposal to bail out uneconomic plants before FERC was unanimously rejected in January.)
Direct quotes from the report are included below.
Complexities Surrounding How The DOE Would Calculate Plant’s Operating Costs Suggests The Bailout Cost Could Be “Much Higher Than The Estimates Provided.” “These results arise from an idealized set of assumptions where DOE would be able to obtain the necessary information from unit owners to 1) identify which plants would receive payments and 2) compute the precise amount of payments required to compensate for earning shortfalls. The range of operating costs we use—which lead to significant differences in the number of units involved and the overall size of the payments—illustrate one dimension of the challenge involved. If DOE were to pursue such a policy, we expect that overall costs would be much higher than the estimates presented here, unless some unit-by-unit analysis were pursued with much more information that is publicly available.” (Metin Celebi, Marc Chupka, Kelly Oh, Richard Sweet, “The Cost Of Preventing Baseload Retirements,” The Brattle Group, 7/19/18)
Should The Administration Include Capital Cost Recovery In Its Plan, As It Did In NOPR, The Cost Of Such A Policy Would Double To $20-$35 Billion Annually. “These figures represent a very conservative estimate of potential policy cost where actual program costs could be much higher depending on how the policy is defined and implemented. Estimating the amount by which costs would increase under a policy that included compensation for embedded capital cost recovery in addition to operating margin shortfalls would require detailed analysis. We can impute some of the likely magnitudes from the October 2017 analysis of the DOE NOPR under reasonable assumptions regarding the representativeness of the units covered in that study. Thus, we conclude that the impact of including returns on previously invested capital would likely at least double the cost estimate to roughly $20 to $35 billion per year in out-of market payments to plant owners across the U.S.” (Metin Celebi, Marc Chupka, Kelly Oh, Richard Sweet, “The Cost Of Preventing Baseload Retirements,” The Brattle Group, 7/19/18)
An Out-Of Market Payments Scheme Tailored To Cover Plants’ Projected Operating Shortfalls Would Cost Between $9.7 Billion and $17.2 Billion Per Year. “In the Low Cost Case, units totaling 226.6 GW earn market revenues less than their going forward cost (68% of overall capacity of 334.9 GW). For those units, the estimated annual out of-market payment is $9.7 billion, which translates into an average payment of $43/kW-year. In the High Cost Case, a case where higher costs implied more capacity would experience operating deficits, about 297.4 GW would receive payments (89% percent of the overall capacity). The estimated annual cost of the out-of-market payment would be $17.2 billion, this translates into $58/kW-year on average for the affected coal and nuclear units.” (Metin Celebi, Marc Chupka, Kelly Oh, Richard Sweet, “The Cost Of Preventing Baseload Retirements,” The Brattle Group, 7/19/18)
Implementing A Uniform, Out-Of Market Capacity Payment Scheme For Coal And Nuclear Plants Would Cost Taxpayers $16.7 Billion Dollars Per Year. “We first estimate the impacts of a policy that would give all coal and nuclear plants an out-of market annual payment of $50 per kilowatt of capacity (which is roughly the average operating shortfall for plants that operate at a deficit) if they continue to operate. Assuming that the entire current fleet of coal (235.8 GW) and nuclear (99.1 GW) would continue to operate and receive such a capacity payment of $50/kW-year, that would imply a direct cost of $16.7 billion dollars per year in the form of out-of market payments via contracts or other mechanisms.” (Metin Celebi, Marc Chupka, Kelly Oh, Richard Sweet, “The Cost Of Preventing Baseload Retirements,” The Brattle Group, 7/19/18)
Even With Government Subsidies, “Wholesale Market Conditions” Will Continue To Push Uneconomic Coal And Nuclear Plants To Retire. “Current and likely future wholesale market conditions will continue to add pressure on some coal and nuclear plants to retire even if a financial support mechanism is put in place.” (Metin Celebi, Marc Chupka, Kelly Oh, Richard Sweet, “The Cost Of Preventing Baseload Retirements,” The Brattle Group, 7/19/18) p.2
The Administration’s View On Grid Reliability Sharply Contrasts With A Number Of Electricity Organizations. “While regional grid authorities, reliability organizations and integrated electricity companies have indicated that these pending retirements do not threaten the reliable provision of electric power, the Administration has taken a different view.” (Metin Celebi, Marc Chupka, Kelly Oh, Richard Sweet, “The Cost Of Preventing Baseload Retirements,” The Brattle Group, 7/19/18) p.3
Brattle Group Calculations Suggest A Uniform Capacity Payment Would Do Little To Save Failing Coal And Nuclear Plants. “Despite the costs, however, this policy might have limited impact on stopping or deferring actual retirements regardless of the level of SGF payments. That is due to the presence of units that a) currently are experiencing operating surpluses that do not require subsidy to encourage their continued operation and b) are experiencing annual shortfalls well in excess of $50/kW, and might retire regardless of the capacity payment.” (Metin Celebi, Marc Chupka, Kelly Oh, Richard Sweet, “The Cost Of Preventing Baseload Retirements,” The Brattle Group, 7/19/18) p.13