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Illinois’ FERC Power Play

It is difficult for either the federal and local governments to avoid playing a role in American electricity markets. Every authority has a particular set of goals, and how each attempts to shape the market can be fraught with problems, as my home state of Illinois has discovered. 

The Illinois legislature and the Federal Energy Regulatory Commission are currently at odds over a new FERC rule that would hamper the state’s ability to continue subsidizing its nuclear power plants. Unfortunately, the state’s response may mean even higher energy prices for the state’s consumers without any commensurate reduction in carbon emissions or improvement in grid reliability.

Maintaining and expanding the power grid necessitates some level of government coordination, and there needs to be a modicum of ongoing oversight of its operation as well to ensure that energy providers are heeding the rules of the road, among other things.

These days, the efficiency improvements in wind and solar—abetted by federal tax breaks—have greatly increased the amount of intermittent power generation flowing onto the grid. While the reduced carbon emissions is a welcome outcome, it has created some problems for the grid’s operations. 

The fact that the amount of wind and solar energy being produced can vary wildly from moment to moment, and disappear with little notice due to vagaries of weather, means that grid operators need to ensure that there is a sufficient base load of energy from dependable sources such as coal, natural gas, hydro, or nuclear power in order to avoid brownouts.

FERC recently issued a rule called the Minimum Offer Price Rule in order to ensure that PJM Interconnection, which operates the grid in a dozen midwestern states, has sufficient baseload energy being produced at any time. The rule took aim at state subsidies for preferred energy sources, which it felt had the potential to threaten the integrity and effectiveness of PJM’s capacity market. 

A problem for some traditional electric generators in recent years has been that the increased production of natural gas—as well as increases in wind and energy power—has boosted the market share of gas-fired plants. Low gas prices have served to crater power prices, eroding utility profits. Many older coal-fired plants have been forced to shut down because of this (with a nudge from emissions rules enacted in the Obama administration) and nuclear plants have seen their profits disappear as well.

While nuclear energy remains cheap to produce because the cost of its fuel remains low, the cost of maintaining aging nuclear plants has increased relative to the cost of gas-fired power, rendering them marginally profitable in a world where natural gas prices set the market. 

Illinois provides its nuclear producers a subsidy of nearly $250 million a year, and Ohio, New Jersey, Connecticut and New York also provide subsidies for nuclear power, which they often couch in terms of wanting to protect emissions-free energy sources and fight climate change. However, the primary motivation of this largesse is to protect entrenched businesses and their well-paying jobs, which are often located in low-income, rural areas. 

Illinois strenuously objected to the FERC rule and it is considering leaving the PJM altogether and handling the capacity task itself. Legislation under consideration in the Illinois General Assembly would do precisely that, as well as ostensibly transition the state to carbon-free energy by 2050 and enact myriad other initiatives that would boost energy prices by as much as $400 million a year. 

However, many renewable advocates do not support the legislation, seeing it as a boon for existing nuclear energy plants in the state but doing nothing to increase the creation of more wind and solar production. When environmentalists and capitalists oppose a piece of legislation that’s a sign that it may be problematic.

The lesson should be that the right way to transition towards a low-carbon economy is to impose a carbon tax and let the incentives it would engender work their way through the economy. The states’ attempts to subsidize favored technologies can be hijacked by narrow political purposes and create problems elsewhere, as the electric grid travails in Illinois demonstrates.

Source: Forbes Business

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