The Notice of Proposed Rulemaking (NOPR) announced on September 29 will grant coal and nuclear units operating in organised markets full cost recovery providing they hold 90 days of fuel. The estimated net impact of the NOPR is $1.4b pa for uncompetitive coal units, with NRG, Dynergy and FirstEnergy being the biggest beneficiaries. The NOPR will likely face significant legal challenges, but if implemented it could potentially mark the end of competitive power markets in the US.
A proposal to halt coal and nuclear retirements.
On September 29, Energy Secretary Rick Perry asked the Federal Energy Regulatory Commission (FERC) to consider an NOPR that would give certain coal and nuclear units full cost recovery, providing they keep 90 days of fuel on hand. In the absence of the NOPR, these units would have likely been retired and replaced with a combination of gas and renewables over the next ten years. FERC has 60 days to issue a final rule, but it has no legal obligation to act. The NOPR marks a significant move away from principals of competition. Future litigation is likely given its potential implications and lack of detail.
$1.4b pa subsidy to keep uncompetitive coal units afloat.
Our interpretation of the proposal is that it will effectively subsidise those loss-making coal and nuclear units operating in organised markets. According to our analysis, 48 GW or around 17% of total operating coal capacity would potentially be eligible under the NOPR. 90% of eligible units are based in PJM and MISO.[i] Of the 48 GW potentially eligible, 23 GW of coal could be loss-making from 2018-30. If these coal units continue to operate and recover loses it could cost the US energy consumer an additional $1.4b pa from 2018-30. This assumes the EIA’s high resource scenario (average gas and coal prices of $4.50/mmbtu and $2.20/mmbtu respectively) and the modelling methodology outlined in our recent report No Country for Old Coal Gen.
Who gets the coal subsidy? NRG, Dynegy and FirstEnergy.
The beneficiaries of the NOPR are loss-making coal and nuclear generators operating in organised markets. With regards to listed companies, the biggest beneficiaries of the subsidy would likely be NRG, Dynergy and FirstEnergy who would be incentivised to halt coal unit retirements and seek to recover costs. According to our analysis, NRG potentially has the largest amount of loss-making coal-fired generation. The net additional cost of keeping NRG’s uncompetitive units operating is potentially $404m pa from 2018-30. This is followed by Dynergy and FirstEnergy with $388m and $50m pa respectively (see Figure 1). Much of this cost is associated with capital additions to install control technologies to comply with regulations and lifetime extensions due to unit age. The NOPR may change NRG’s current strategy to strip itself back to focus on ERCOT.
Figure 1. Estimated net impact of the NOPR based on loss-making coal units operating in organised markets
Source: Carbon Tracker analysis
Losers: other merchant generators and the US energy consumer.
The losers of the NOPR are those merchant units which are still subject to competition and the US energy consumer. Notably, merchant generators operating in organised markets (except for ERCOT) face two issues:
- Lower power prices from overcapacity. US power markets will likely be oversupplied for longer as loss-making coal and nuclear units will continue to operate instead of retiring. This will likely result in lower wholesale power prices in organised markets due to significant and persistent overcapacity.
- Eligible units running ‘out of merit’. Another concern is that those coal and nuclear units eligible under the NOPR could be incentivised to run ‘out of merit’ i.e. selling into the market below their cash cost since those units would be protected from long-term losses. This would push otherwise competitive generators further up the dispatch curve.
Besides merchant generators, the US energy consumer will be effectively subsidising uncompetitive coal units to the order of $1.4b pa. As detailed in No Country for Old Coal Gen, by 2021 the US consumer could save $10b per year if coal power is phased-out. This announcement is a step in the opposite direction and is therefore a potential landmark for US power markets.
Matthew Gray, Senior Analyst, Utilities & Power, Carbon Tracker
Laurence Watson, Data Scientist, Carbon Tracker
[i] FERC’s jurisdiction primarily involves interstate trading of power and therefore ERCOT is exempt.