New Grid Study Finds Advantages of Coal -- If Taxpayers Foot The Bill

The U.S. Department of Energy has finally come out with a much-anticipated study of the nation's electricity grid, and it has some good news for the U.S. coal industry -- or not, as the case may be. As critics anticipated, the new grid study does make a partial case for the role of coal power plants in grid reliability and resiliency (one of the few advantages of coal). However, the report also notes that market forces and other factors put conventional coal power plants at a disadvantage.

Holy hot potato, Batman! That drops quite a challenge into the lap of President Trump and Republican leadership in Congress. Electricity costs have been falling at the wholesale level in recent years, even as coal has been squeezed out of the picture. Artificially propping up coal could translate into new burdens on ratepayers and/or taxpayers. That is political dynamite for a party organized around anti-government, anti-tax messaging.

So, what was the point of that new grid study?

What's wrong with the new grid study

Word of the new grid study broke last April, when Bloomberg obtained a memo from Energy Secretary Rick Perry ordering his staff to review the nation's grid from the perspective of baseload power. Generally speaking, those are large, central power plants that provide electricity 24/7 including nuclear and hydroelectric as well as coal and natural gas.

Baseload power plants of all types have been retiring at a rapid clip over the past several years. The question is what will replace them. Coal and nuclear stakeholders argue for more of the same, but a diverse, decentralized panoply of alternatives has emerged in recent years.

Critics of the new study quickly zeroed in on its apparent bias in favor of the coal industry. That's probably because Bloomberg kicked up a storm with this headline about the Perry memo:

Electric Grid Study Ordered by U.S. Energy Chief to Boost Coal

That raised reg flags all over the place, and not only on account of the implications for greenhouse gas emissions.

Conventional baseload coal power plants are not particularly appealing to the large and growing number of businesses eager to transition to renewable energy. A growing number of cities, counties and states are also aggressively seeking more renewables, prompted in part by a surge in community choice aggregation.

Even the natural gas industry put its weight against the study, arguing that baseload coal power plants are outdated.

Among other points raised by critics, one key issue was the Energy Department's decision not to enlist any outside grid stakeholders in the new grid study.

Perry appeared to accommodate that criticism in an introductory letter released with the study late Wednesday night (interestingly, there was no press release to announce the study).

In the letter, Perry describes the new study as a "staff report" to him (in other words, not to the White House) and a "starting point" for future conversations. That positioning seems to lower expectations regarding the force of the Energy Department's recommendations higher up the political food chain.

What's right with the new grid study

Though critics were concerned that the new study would be a thinly disguised shoutout to the coal industry, the Union of Concerned Scientists takes a look at the final version and reaches this conclusion:

The study cites overwhelming evidence from real-world experience, as well as multiple scientific studies by the department’s own national labs and regional grid operators, confirming that the U.S. can safely and reliably operate the electric grid with high levels of renewables.

USC lauds the report for projecting that the grid can support 80 percent renewables by 2050 without a loss of reliability, though the organization is concerned that the report did not include an depth assessment of climate change impacts on grid security.

Vox took a look at several other critiques of the report and provides this summary:

It has no legal force. It was only meant as advice and guidance to Perry and DOE. It mostly contains sensible recommendations that DOE, FERC, regional RTOs, and utilities have been working toward for a while.

As Vox sees it, the Energy Department was bound to "prioritize coal and nuclear plants" with or without the new report.

On the other hand, Perry's actions don't guarantee that coal and nuclear will get special treatment. As Energy Secretary he has taken great care to support Trump's rhetoric on coal and climate change in public, but he has also consistently -- and vigorously -- promoted the Energy Department's renewable energy programs.

Reading between the lines: bad news for coal

Regardless of its policy recommendations, the body of the report makes some observations about coal that put it at a sharp disadvantage in today's electricity market.

The full "Staff Report to the Secretary on Electricity Markets and Reliability" is well worth a read, and you can skip ahead to page 126 for the policy recommendations.

On your way, take a pause at page 60, where the report discusses several large coal plants set for retirement.

According to the report, environmental regulations are not the main force behind the decision to retire this group of plants. They were built under economic assumptions that were in place before the shale gas boom hit and wholesale electricity prices fell.

Therein lies the problem:

Although these plants were designed to operate around the clock, low wholesale electric prices tied to natural gas were a significant driver that caused them to operate at lower capacity factors.

The report provides this explanation from the Rhodium Group, which specializes in analyzing "disruptive global trends:"

For a power plant to make money today, it must be able to ramp up and down to coincide with the variable levels of renewable generation coming online. That makes combined cycle natural gas plants profitable, even at lower prices. [But] coal plants have relatively high and fixed operating costs and are relatively inflexible. They make their money by running full-out.

Against this backdrop, it's difficult to come up with a scenario that enables conventional coal power plants to continue operating without subsidies, either in the form of artificially higher electricity rates or taxpayer subsidies.

The report does provide a best-case model based on the continued operation of the existing fleet of coal power plants. However, the report essentially recommends more investment in efficiency improvements:

In a regulatory environment that would allow for improvement of the existing fleet, DOE should pursue a targeted R&D portfolio aiming at increasing efficiency.

It's not clear that efficiency improvements will enable the existing fleet to keep up, though the Energy Department has already put its money where its mouth is. On August 24, less than a day after releasing the new grid study, the agency announced a $50 million funding opportunity covering two coal power plants.

The aim is to demonstrate improvements in efficiency and emissions reduction, while also lowering the cost of coal-sourced electricity. That's quite a tall order, considering that coal will be chasing rapid drops in the cost of renewable energy even if natural gas goes up.

Not helping the grid study's case is a newly released Energy Department study that charts a path for halving the cost of wind energy by 2050.

Meanwhile the report recommends that the Energy Department focus its efforts on renewable energy integration:

Focus R&D on improving VRE [variable renewable energy, such as wind and solar] integration through grid modernization technologies that can increase grid operational flexibility and reliability through a variety of innovations in sensors and controls, storage technology, grid integration, and advanced power electronics.

In another bad indication for conventional coal power plants, the grid report recommends seeking new opportunities to apply the Energy Department's supercomputer resources in its on-going Grid Modernization Initiative. That program that places a strong emphasis on renewable energy as well as distributed generation and energy storage.

In his letter introducing the report, Perry also made it clear that there is no one size fits all solution for grid resiliency, a point of view that is tailor-made for renewables including hydro and geothermal as well as wind and solar:

America is also fortunate to have a variety of fuel sources. We need to consider how to use each effectively while recognizing our differences and unique state and regional circumstances.

In the same paragraph, Perry goes on to underscore the fact that someone, somewhere is going to have to pay for all this.

We also need to recognize the relationship between resiliency and the price of energy. Customers should know that a resilient electric grid does come with a price.

In other words, whoever has a plan to engineer new subsidies for baseload power plants should be prepared to assemble the political will to push it through Congress and any state-level barriers in the way, because it's going to cost.

Heads up, POTUS -- hot potato comin' at you!

Image (screenshot): US Department of Energy Staff Report, page 129.