October 4, 2017
Opinions, U.S.

Perry’s proposed grid rule scrambles energy alliances

COLUMN-Perry's proposed grid rule scrambles energy alliances: Kemp | By John Kemp | Reuters | Oct 3 | www.reuters.com

U.S. Energy Secretary Rick Perry’s attempt to save the coal and nuclear industries by proposing a new grid resiliency rule is making for some odd bedfellows across the energy sector.

The proposed grid resiliency rule threatens to turn two of the Trump administration’s most loyal groups of supporters against one another, as the gas and coal industries square off for a fight over market share.

The disagreement over grid resiliency highlights some of the central tensions within the Trump administration’s energy policy:

* The White House has celebrated the growth in domestic gas production and associated reduction in greenhouse emissions but also wants to rescue coal and nuclear producers.

* The White House wants cheap electricity for households and manufacturing companies but needs higher prices in the power market to support coal-fired and nuclear power plants.

* The White House draws support from pro-business groups that support a free-market approach to energy production as well as those that want a more interventionist and protectionist strategy.

As a result, the president’s coalition of energy supporters is deeply divided over the proposed grid rule, with many of the administration’s most prominent supporters remaining silent or issuing only noncommittal statements.

Lobbyists and journalists tend to write about energy policy as if it was a Manichean struggle between clean energy (wind, solar) and dirty energy (oil, gas, coal) with nuclear somewhere between (depending on the observer’s viewpoint).

But the reality is much more complicated and the proposed grid resiliency rule pits the coal and nuclear sectors against an eclectic alliance of wind, solar and gas companies as well as rural electric cooperatives and major energy consumers.

Perry’s proposed rule has been warmly welcomed by the Nuclear Energy Institute and the American Coalition for Clean Coal Energy as well as power generators with lots of coal and nuclear plants.

But it has already drawn fierce push back from the American Council on Renewable Energy (ACORE), the American Petroleum Institute (API) and nine other energy industry associations from across the spectrum.

ACORE and API have sent a joint letter to the Federal Energy Regulatory Commission asking it to reject the secretary’s request for an expedited rulemaking and allow more time for input (“Joint motion of the energy industry associations”, Oct 2).

The letter’s other signatories included the American Wind Energy Association, the Solar Energy Industries Association, the American Public Power Association, the Electric Power Supply Association, the National Rural Electric Cooperative Association, the Natural Gas Supply Association, the Interstate Natural Gas Association of America, the Electricity Consumers Resource Council, and the Advanced Energy Economy.

The proposed rule is so divisive that the Edison Electric Institute, the top lobbying group for investor-owned electric companies, has remained silent on the issue (“FERC seeks fast track on DOE baseload compensation proposal”, Utility Dive, Oct. 2).

Growing financial problems for coal-fired and nuclear power plants are often blamed on the proliferation of wind and solar farms (a straight fight between clean and dirty energy).

In practice, coal and nuclear power producers are struggling in the face of growing competition from cheap natural gas as well as renewables.

Since 2010, coal-fired generation capacity has declined by around 54.5 gigawatts (GW), while nuclear capacity has fallen by 1.7 GW, according to data from the U.S. Energy Information Administration (EIA).

Over the same period, gas-fired capacity increased by 46.4 GW, wind rose by 44.8 GW and solar was up by 23 GW (“Electric Power Annual”, EIA, 2016).

Coal and gas-fired power plants produce at full output for more hours per year than wind and solar farms so it makes more sense to compare actual generation rather than just capacity.

Coal-fired generation declined by 607 terawatt-hours (TWh) between 2010 and 2016 while gas climbed by 392 TWh, wind increased by 131 TWh and solar was up by just 35 TWh.

The biggest challenge to coal and nuclear has therefore come from gas-fired plants rather than wind and solar farms, with gas making up almost two-thirds of the lost coal output (tmsnrt.rs/2ylyRBs).

The trend is expected to continue, with coal and nuclear accounting for most of the power stations scheduled for closure over the next three years, while two-thirds of the new capacity in the pipeline is gas and most of the rest is wind and solar.

The problems of coal-fired and nuclear power plants are a direct consequence of the fracking revolution that has transformed the U.S. oil and gas industry and made gas much more abundant and cheaper.

So gas-fired power plants as well as the U.S. gas producers would be the biggest losers from Perry’s grid resiliency rule that seeks to protect remaining coal capacity by altering the structure of power market prices.

The threat to the gas industry has drawn in the influential American Petroleum Institute, which is close to the Trump administration and congressional Republicans, as well as the various gas industry associations.

“We support efforts to ensure reliability,” the API said in response to the secretary’s announcement (“Take the smart approach for electricity grid resiliency, consumers and the U.S. economy”, API, Sept. 29).

“However … we are concerned the agency has mischaracterised the lessons learned from past weather-related events and appears to suggest that additional regulation is the answer where markets have already proved the ability to great benefit consumers.”

“Over the last decade, competitive forces in natural gas markets have resulted in the shale gas boom currently providing numerous benefits for the nation, driving down prices for American consumers and further increasing the reliability and resiliency of supply.”

“We need to be careful that government doesn’t put its thumb on the scale. It’s better to let markets choose,” API warned and called for a “smart approach” to grid resiliency.

The grid resiliency rule is simply the latest manifestation of a long-running battle between the coal industry and its competitors in oil and gas.

Richard Vietor, a professor at Harvard Business School, described the fierce inter-fuel competition between domestic energy producers more than 30 years ago (“Energy Policy in America since 1945”, Vietor, 1984).

“Interfuel politics pits industry against industry (for example, coal versus natural gas), in efforts to use the government to bestow or revoke competitive advantages on one or the other,” Vietor explained.

In the 1950s and 1960s, the coal industry lost market share to cheap fuel oil, and expended enormous effort lobbying the federal government to protect it from cheap oil imports.

In 1950, the National Bituminous Coal Advisory Council complained to the Secretary of Interior about the “dumping” of cheap Venezuelan fuel oil on the U.S. market.

The council warned that imported fuel oil was displacing coal as a source of power generation and heating fuel and warned of the threat to national security if imports were cut off for any reason.

The oil shocks of 1973/74 and 1979/80 temporarily reprieved the coal industry by making oil and gas much more expensive.

More recently, the surge in gas prices in 2005/06 and the peak in oil prices in 2007/08 helped stem coal’s loss of market share.

But the fracking revolution has once again put the squeeze on coal producers and provoked another round of lobbying.

Perry’s proposed grid resiliency rule has now wandered into this minefield, almost absentmindedly, with unpredictable consequences.