Picking winners and losers in the energy industry was a hallmark of the Obama administration. But it seems that pattern isn’t quite gone under Energy Secretary Rick Perry’s department.
In late September, Perry directed the Federal Energy Regulatory Commission to develop new standards to set prices for “resiliency” in competitive electricity markets, giving them a deadline of Dec. 11.
The Energy Department seems to be defining resiliency as a fuel-secure power plant—namely, one that has 90 days of fuel on-site in the case of power outages.
Perry’s proposal would guarantee recovery of costs for power plants that meet this definition of “resiliency,” a definition that only coal, nuclear, and hydropower plants would likely meet.
This would be a massive subsidy. For perspective, coal and nuclear supply about 50 percent of the electricity generated in competitive markets serving the Midwest and New England.
Perry’s proposal met criticism from a wide spectrum of stakeholders, who argued that the rule would distort energy markets and harm consumers while doing little to improve the energy grid’s resilience.
Even the e-commerce website Etsy, which sells homemade crafts, has come out against the proposed rule that would subsidize certain electricity providers.
The secretary’s rare request for an expedited rule is intended to counteract price distortions in electricity markets stemming from state and federal subsidies for renewables. Undoubtedly, these subsidies have done harm to electricity markets, politically manipulated infrastructure investments, and cost taxpayers.
But correcting these distortions with another distortion is hardly a solution. Should the Federal Energy Regulatory Commission follow suit, the rule as conceived by Perry is antithetical to the free market and its benefits, and ignores the fact that the electricity sector has an incentive to be resilient and reliable.
One of the key factors driving Perry’s request for the rule is that competitive markets are facing an emergency situation this winter regarding grid resiliency. But there is market disagreement about this.
Undoubtedly, coal and nuclear plants have been declining and closing over the last several years, particularly due to Obama administration regulations.
But regional grid operators and standard setters for the industry certainly have their own incentive to study and discover any such emergency this might cause. In fact, it is this kind of risk aversion and planning that makes utilities a reliable, secure financial investment for many.
Contrary to Perry’s concerns, fuel supply problems are actually relatively rare. The Rhodium Group illustrated this by compiling U.S. Energy Information Administration data from service disruption reports. It found that fuel supply emergencies amounted to 0.00007 percent of total outages from 2012 to 2016.
In a properly operating market, the electricity sector—whose businesses and bottom lines depend on power generation and distribution—have plenty of incentive to plan for and provide reliability. For example, peak load plants and load following plants, which are generally more expensive to run but can be brought online in short order, are used to cover periods of high electricity demand.
Policies that skew this incentive by forcing the use of certain kinds of energy resources should be removed, not doubled down on as Perry is recommending.
The reality is that competition in electricity services has served customers well. For example, customers in the mid-Atlantic area served by competitive markets have saved roughly $3 billion annually since 1997. Customers in the Midwest have saved similarly, resulting in some $17.5 billion in savings over the last 10 years.
It can hardly be called market competition anymore when certain players can count on the federal government to prop up their bottom line, as Perry proposes. As one commissioner from the Federal Energy Regulatory Commission described it, this would “blow up the market.”
Competitive markets have also allowed innovative technologies and services to prove that they can better meet customer needs. As the president and CEO of a regional transmission organization described, “The impact of the markets was to open up the power industry to a much broader group of potential participants—many with new and more efficient technologies.”
Almost nothing chills innovation more quickly than a government subsidy like the one being proposed. If subsidized electricity plants can operate with their full operating costs guaranteed, the benefits of competition will be lost to innovators, investors, and customers.
According to Perry, this “immediate responsibility” to price resiliency in energy markets is simply part of the administration’s “all of the above approach to energy development and use.” But it is nothing more than the classic special-interest politics of D.C.
Rather than acquiesce, the Federal Energy Regulatory Commission should decline Perry’s request to subsidize select energy plants, as it can rightfully do under the Federal Power Act. The commission should stick to the plain meaning of “all of the above” and support unbiased market competition.
