Coal's Best Bet for a Bailout May Now Come From Rust Belt
After Washington Snub, Best Bet for Coal Bailout Is in Rust Belt
(Bloomberg) -- The U.S. coal industry’s best hope for a bailout may lie in the Rust Belt now that Washington’s plan has fizzled.
The largest U.S. power grid -- covering Pennsylvania, Ohio and other states -- has been considering an initiative that may keep struggling coal plants afloat.
The idea, which would boost revenue for generators including coal and nuclear plants, has drawn skepticism from analysts and isn’t nearly as sweeping as the White House plan rejected Monday by regulators. But at least two coal miners say it could aid their industry.
“It certainly sounds like it’s in the same direction,” Murray Energy Corp. Chief Executive Officer Robert E. Murray said in an interview. “We have to see what they’re proposing.”
Dozens of U.S. coal plants have closed in recent years as they’ve struggled to compete with low natural gas prices and a flood of wind and solar farms. Energy Secretary Rick Perry’s proposal would have paid coal and nuclear plants extra to store fuel on site in the name of making grids more “resilient.” But the Federal Energy Regulatory Commission rejected the idea after it drew criticism from gas producers, grid operators and others who argued it would undermine competition.
The proposal from the regional power grid, PJM Interconnection LLC, was formally introduced in November. It aims to revamp the way generators are paid during peak demand.
When electricity use spikes, bottlenecks form on transmission networks, preventing the cheapest sources of power from flowing to the areas where they’re needed most. As a result, inefficient power plants that happen to be closest to demand centers are forced to ramp up and operate at a loss. In many cases, they’re coal plants.
Currently, PJM compensates these plants with out-of-market “uplift payments.” The pending proposal -- which ultimately needs approval from federal regulators -- would allow coal and nuclear plants to set the price of energy when they’re in use, reducing the need for uplift payments.
Coal miner Consol Energy Inc., which operates in Pennsylvania, is "encouraged" by the debate about grid resilience. PJM’s plan will “more fairly allocate pricing" to coal-fired power plants, spokesman Zach Smith said in an emailed statement.
The new rule may raise market prices by $4 per megawatt-hour, Guggenheim Securities analysts including Shahriar Pourreza said in a note late Monday. Over the course of a year, it could earn generators “hundreds of millions of dollars,” Moody’s Investors Service analyst Toby Shea said in a November note.
The losers, according to critics of the plan, would be ratepayers who may ultimately have to shoulder that extra bill.
“There’s a contingent of folks who believe this is just a more technical way to sneak across the finish line a proposal that will benefit struggling coal and nuclear generators,” said Christina Simeone, a director at the Kleinman Center for Energy Policy.
For coal producers, the plan has some of the benefits of Perry’s proposal without the opposition. Because it would raise revenues for all power producers, it’s less likely to draw the ire of natural gas and renewable generators that assailed Perry’s plan.
PJM isn’t alone in coming up with its own plan. Fellow grid operator Midcontinent Independent System Operator Inc., which covers a region stretching from central Canada down to the Gulf Coast, is developing a proposal to overhaul elements of the way it runs the grid as the mix of power generators evolve, a spokesman, Mark Brown, said by email. It’s unclear if the plan would be a boon to coal.
Even in PJM, salvation may not come quickly enough for Murray and other coal miners. The grid operator has yet to submit its proposal to federal regulators for approval, a process that could take months and face legal challenges. And PJM has only begun its own lengthy stakeholder process to get the proposal cleared by the companies that operate in the region.
“Bob Murray is willing to support anything that’s going to direct incremental revenue of any kind to coal-fired power plants,” said Christine Tezak, managing director of ClearView Energy Partners in Washington. “But if you ask where PJM’s price proposal is -- it’s nowhere.”
Already, federal officials are showing signs of marshaling support behind PJM’s plan. Deputy Energy Secretary Dan Brouillette, in a congressional hearing Tuesday morning, suggested that Perry’s plan all along wasn’t asking for anything special -- but rather responding to the desires of grid operators such as PJM.
“It was the people running the grid, PJM folks, who were asking for changes in the rules,” he said. “It was to provide more appropriate compensation for services that are provided each and every day.”
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