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November 30, 2017
Brattle Economists Discuss the Future of U.S. Coal Generation Fleet in ABA Article

Brattle Principals Metin Celebi, Marc Chupka, Dean Murphy, Sam Newell, and Ira Shavel recently co-authored an article that analyzes the decline in coal-generated electricity in North America and discusses the implication of a recently-proposed U.S. Department of Energy (DOE) rule that could shield certain coal and nuclear plants from competitive market forces. The article, “The Future of the U.S. Coal Generation Fleet,” has been published in the Fall 2017 edition of the American Bar Association’s (ABA) Transportation and Energy Industries (TEI) Committees’ newsletter. The authors find that coal generation economics are likely to remain weak as long as gas prices continue to be low and total system generating capacity remains plentiful relative to demand.

According to the authors, the market and regulatory outlook was favorable for the existing coal and nuclear fleet about a decade ago. Wholesale electric energy prices were buoyed by then-high natural gas prices, which were expected to increase, while load growth was moderate, but steady, and renewables such as solar and wind had not yet made significant inroads. However, things have changed dramatically since 2010, driven by low natural gas prices, stagnant demand, new gas-fired generation, new renewable generation, and environmental regulations. These changes have made the last decade extremely challenging for nuclear and coal generators, as well as coal producers.

Given these stresses, the Trump Administration has proposed providing direct financial support to merchant coal and nuclear plants. The Secretary of Energy invoked a seldom-used provision to initiate a U.S. Federal Energy Regulatory Commission (FERC) rulemaking process (Notice of Proposed Rulemaking, or “NOPR”) in September 2017. The DOE NOPR calls for the immediate creation of a tariff in some FERC-regulated RTOs to provide cost-of-service equivalent net revenues for merchant coal and nuclear generating units that have 90-days of onsite fuel storage and, according to the DOE, are needed to maintain the resilience of the grid. Alternative views emerged during the comment period, including comments submitted by a coalition that spanned a broad range of industry participants that featured a Brattle analysis of the NOPR.

The Brattle analysis examined the emerging concept of resilience, how it fits into the traditional framework of reliability, and whether it is materially dependent on or improved by fuel assurance at baseload coal and nuclear plants. The study concluded that 1) there is no evidence supporting the premise that 90 days of on-site fuel at individual power generating plants would improve the resilience of the grid in the regions where the rule would apply, and that 2) implementing the proposed rule would undermine core market principles and diminish some of the most important advantages of competitive wholesale power markets. The Brattle study estimated additional payments to cover the shortfall from market energy margins up to the full cost of service to eligible generating units would likely range from $3.7 billion to $11.2 billion per year, based on 2016 market conditions. The authors noted that while power system resilience is an important and multi-faceted issue that the industry must still analyze and address, all available evidence from multiple industry studies do not show an imminent threat that would warrant immediate action.

The article can be accessed using the link below. It is an excerpt from the Fall 2017 newsletter for the ABA Antitrust Section, Transportation and Energy Industries Committee.