The shifting fortunes of large-scale coal and nuclear power plants prompted President Trump in early June to direct Energy Secretary Rick Perry to come up with a plan that would compel utilities to buy output from those plants for national security reasons.

Opposition to the idea was swift. Some expressed outrage that the federal government would insert itself into market operations to help certain types of power plants. Critics charged that the move was an attempt to prop up uneconomic generating assets.

The Dave Johnson coal-fired power plant in Wyoming. Credit: WikipediaA congressional oversight committee took up the debate. On June 12, commissioners from the Federal Energy Regulatory Commission (FERC) told members of the Senate Energy and Natural Resources Committee that the grid does not face a national security emergency requiring action by the feds. Their testimony was all the more noteworthy because it marked the first time in a decade that all five FERC commissioners had testified before the committee.

Moving On

Sen. Martin Heinrich, D-N.M., asked the five whether any of them believed a national security emergency existed in the wholesale power markets.

“I do not, senator,” Commissioner Cheryl LaFleur, the FERC’s longest-serving member, said.

“Anyone answer that with a yes?” Heinrich asked, according to news reports. None of the other commissioners spoke. “Let’s move on, then,” Heinrich said.

Well, maybe not so fast. The question of whether, and to what extent, the government should insert itself into power markets is an old one. State and federal agencies have long fiddled with energy markets to achieve a broad range of goals. As a result, power plants are as much a part of public policy as precision pieces of engineering.

“Electricity has never been seen as an end product in itself like an automobile,” says Kenneth Rose, a Chicago-based PhD. economist who consults with regulatory agencies on market structures. Policy makers historically have viewed electricity as an economic development tool.

Economist Kenneth Rose. Credit: MSU IPUHistory validates that viewpoint. The Tennessee Valley Authority and the Bonneville Power Administration were formed decades ago to build and deliver hydroelectric dams and power plants, bringing low-cost electricity to rural parts of the U.S. and spurring economic growth.

The Rural Electrification Act of 1936 offered federal loans for electrical distribution systems to serve isolated, rural areas of the United States. It led to the rise of hundreds of cooperative electric power companies, many of which still exist today.

In the 1950s, the federal government offered support to develop nuclear energy as a source of domestic electric power. Within the last decade, Congress offered up billions of dollars of loan guarantees to help utilities build new nuclear power plants. The only two nuclear reactors under construction in the U.S. at present are at Southern Company’s Vogtle station in Georgia, and are beneficiaries of federal loan support.

Coal producers long have benefited from tax credits and other breaks targeted to support mining operations and coal jobs. More recently, tax breaks like the Production Tax Credit and the Investment Tax Credit have jet-fueled investments in wind and solar technologies.

“Every resource receives a benefit,” says Richard Sedano, a former Vermont utility regulator and president of the Regulatory Assistance Project. “Energy policy is not a strategic thing but an agglomeration” of the “wisdom of collective governments.”

Slices of the Pie

In April, the Energy Department’s Energy Information Administration released its annual report on federal subsidies and support for all forms of energy across the U.S. economy. It showed that subsidies had fallen from nearly $38 billion in fiscal year 2010 to slightly less than $15 billion in 2016.

RAP President Richard Sedano. Credit: RAPIn 2010 for instance, about $875 million worth of subsidies went to coal, around two percent of the total. Renewable energy subsidies totaled nearly $15.8 billion, a 42 percent slice of the pie. By 2016, by contrast, coal subsidies had risen to nearly $1.3 billion, around eight percent of the total. Renewable energy subsidies meanwhile fell to $6.7 billion, around 45 percent of the total.

The biggest jump involved subsidies for programs that encourage consumers to reduce their energy use. So-called “demand response programs,” among others, saw their share of the pie grow from 22 percent of the total in 2010 to 42 percent by 2016.

When it comes to deciding if a market is working properly, regulators and economists look at the overall cost of electricity - the lower the better. After all, consumers of all shapes and sizes benefit from cheap power, the argument goes.

In fact, competitive power markets are a relatively recent addition to the nation’s energy landscape. The same arguments that led to the deregulation of airlines, telecommunications and natural gas in the 1980s found their way into the power sector. Deregulation’s advance, however, was piecemeal. Some states opted to deregulate their energy sector and others elected to keep them closed and subject to full monopoly regulation. In some places, regional transmission operators took on an expanded role by managing electric power supplies to ensure that least-cost resources are available first.

Archaic

Underlying both models is a system known as economic dispatch, Sedano says. That system favors generating units that are able to provide the lowest-cost electricity ahead of more expensive resources.

Detroit Edison's Monroe Generating Station. Credit: WikipediaFor decades, the calculus around economic dispatch had been pretty consistent. Utility-owned generating resources known as “baseload units” ran all the time. These units often were coal and nuclear units, which, once switched on, produced enormous amounts of low-cost power. Some nuclear power plants can run for up to 24 months between refueling outages.

At the other end of the spectrum, assets known as “peaking units” handle periods of high demand. They are akin to the acres of parking lots at the local shopping mall that are filled to capacity only a couple of times a year. A typical peaking unit is switched on to meet air conditioning demand on a hot summer afternoon. These resources almost always were natural gas-fired, with designs derived from aircraft jet engines that can rapidly deliver power to meet changing demand.

Midway between peaking and baseload units were intermediate generating resources that are able to ramp up and ramp down. Many hydroelectric power plants are used for intermediate purposes.

That structure is now “archaic,” Sedano declares, made so by the rapid growth of wind and solar, plus demand response initiatives. What is emerging is akin to what occurs in places like Denmark, Germany and Hawaii. These places have lots of wind generating capacity leading to a "dramatic difference" between how much electricity consumers use and what sort of resource mix the grid’s managers call on.

Favoring Flexibility

Instead of a known amount of demand that lends itself to baseload coal and nuclear power plants, wind and solar plus demand response means that the supply and demand equation is much more dynamic. Adding complexity is the proliferation of rooftop solar photovoltaic systems. These make it possible for everyone from homeowners to office parks to both consume and produce electricity.

As a result, power assets that can rapidly increase and throttle back their output - a characteristic known as “ramping” or “cycling” - have pushed aside many traditional baseload power plants like coal and nuclear. These more flexible power plants are fueled by natural gas.

This fundamental shift in how electricity is produced and consumed “disrupts traditional approaches to providing baseload resources,” Sedano says. While still mindful of price, market operators now rely more heavily on flexible resources that can ramp up and down as growing amount of intermittent renewable energy resources are added to the grid.

The Latest Distortion?

All of this leads back to the current debate over whether or not the federal government should intervene in power markets. Although the FERC commissioners agreed that no national security threat exists to support intervention, they also largely agreed that the administration has the power to intervene, if it chooses to do so.

That intervention, should it come, would be the latest in a long history of state and federal involvement in energy. Subsidies already create imperfections in power markets, says economist Kenneth Rose.

It’s not surprising, he says, that some coal and nuclear operators now are asking for a subsidy to preserve their generating assets and associated jobs. Any action, if it comes, may end up “fixing one distortion in the market with another.”