Holding Clean Energy Hostage
Traditional utility companies are blocking renewable energy every step of the way.
Nuclear power is getting a lifeline. On August 1, in a controversial decision, New York State’s Public Service Commission voted to approve subsidies to all nuclear power plants in the state. The estimated eventual cost to electricity customers in the state is over $7 billion. Most of the bailout money will be channeled toward Exelon and Entergy — two large electric utility companies that have threatened to close down some of the reactors they were operating in the state.
Plant closures are increasingly common in the nuclear sector these days. Not counting the New York State reactors that have been given a lifeline, over the last three years, electrical utilities have decided to shut down thirteen nuclear reactors deemed economically uncompetitive, and the number of closures is expected to grow.
Coal plants are also flagging. The use of coal for electricity generation in the United States has fallen substantially in the last decade, from 50 percent in 2005 to 33 percent in 2015. More than 660 coal units have been retired since 2010, and of the more than 150 new coal plants proposed since 2000, the vast majority has been cancelled.
Why are these power plants shutting down? In essence, the costs of maintaining aged nuclear reactors and coal plants are rising while the costs of renewable energy production using solar photovoltaics and land-based wind turbines are declining.
Likewise, falling natural gas prices from hydraulic fracturing (fracking) have resulted in gas-fired generating stations producing cheaper electricity. And because the total sale of electricity in the United States has been growing very slowly (only 1.5 percent over the last decade, as compared to 24 percent in the 1990s), new sources of electricity supply end up competing directly with existing sources of generation.
All of this sounds like good news, at least for those desiring a clean energy future. Shutdowns and other changes in energy production and consumption are chipping away at US emission levels. As President Obama triumphantly announced in August 2015:
This generation of Americans is hammering into place the high-tech foundations of a clean energy age. It’s the same people who first harnessed the power of the atom, the power of the sun; the same spirit of people who connected the continent by road and by rail, who connected the world through our science and our imaginations; the same people who set foot on the Moon, and put a rover on Mars, and probes the farthest reaches of our solar system. That’s what Americans do. We can do anything.
So, is the United States creating a new electricity supply system that will provide affordable energy and mitigate climate change?
Unfortunately, no — at least at the moment. The electric utility companies that control electricity generation in the United States are standing squarely in the way of such an energy future.
Playing the Market
Conventional electricity generation is expensive business. The average market capitalization of any power-generating utility that trades on the New York Stock Exchange is about $15 billion, with the big ones running up to $50 or even $60 billion. Electric utilities employ thousands of employees and contribute significantly to local tax bases.
As a result of these characteristics, utilities possess substantial economic and political power and they are consolidating this power and capital through mergers and acquisitions.
The example of Ohio-based FirstEnergy Corporation is a good illustration of the many ways in which utilities have utilized these powers.
FirstEnergy has faced financial challenges for the last several years, especially since 2011, when it bought out Allegheny Energy, a utility that generated 78 percent of its electricity from coal.
The purchase was poorly timed — coinciding with a decline in the market for coal-fired electricity — and since then, FirstEnergy has struggled financially.
To maintain profitability, FirstEnergy adopted two main strategies. The first was something that green energy advocates should welcome: retiring old plants. Between 2011 and 2014 FirstEnergy shut down more than a third of the coal-fired capacity that it owned after the Allegheny merger.
Its second strategy was to find ways for customers to pay more, thus subsidizing the remaining struggling coal plants. This involved FirstEnergy exploiting the fact that it operates in multiple states. All of these states — with the exception of one, West Virginia — had opened up their electricity sector to market competition in the past two decades through deregulation.
The idea was to treat electricity like any other commodity, like bread or laptop computers, to be bought and sold on a marketplace. In the past, electric utilities were vertically integrated and owned power plants, transmission lines, and local distribution lines.
Deregulation meant that the three sectors — generation, transmission, and distribution — were split up and different companies could be involved in these different sectors. Only the distribution companies (that deliver power directly to consumers) are regulated by state public service commissions.
Large holding companies like FirstEnergy own multiple entities, some of which generate power, some that transmit power, and some that sell power to end-users. FirstEnergy’s deregulated generation companies make money by selling the output of their power plants into a regional electricity market.
This worked well for FirstEnergy as long as electricity prices remained high and its coal and nuclear plants were making money. But once electricity prices on the market came down, FirstEnergy’s coal and nuclear plants became much less profitable — a direct hit to FirstEnergy’s shareholders.
By contrast, in states like West Virginia that did not go through this restructuring process, electricity consumers pay all of the costs of generating power, plus a profit that is established by the state public service commission.
Therefore, by definition, any power plant that has been approved by the state’s public service commission would be profitable, and there would be much less risk for the plant’s owner.
In order to transfer the risk of low market prices from its shareholders to its ratepayers, in 2013 FirstEnergy proposed to “sell” one of its struggling coal plants owned by a deregulated Pennsylvania-based subsidiary to its West Virginia–based subsidiary.
West Virginia regulators’ approval of the deal was a coup for FirstEnergy. It no longer had to worry about the plant’s competitiveness because West Virginia electricity customers would now pay all of the plant’s costs for the remainder of its life.
FirstEnergy also sold the plant at an inflated price to be recovered from West Virginians because, well, why not? That deal went so well that now, in 2016, FirstEnergy is proposing to transfer another of its struggling coal plants to its West Virginia subsidiary.
Next, in 2014, FirstEnergy devised a novel way to abuse Ohio’s deregulated electricity system. In Ohio, FirstEnergy owns separate companies to generate and distribute electricity; the generation company sells the output of its power plants into the wholesale electricity market, and the distribution companies buy power from the market to deliver to customers.
FirstEnergy asked Ohio regulators to approve a power purchase agreement by which its distribution companies would directly pay for the power generated by FirstEnergy’s Davis Besse nuclear plant and some of its struggling coal plants, again bypassing the market, and thus competition from other power plants.
Despite opposition from environmental advocates, industrial electricity customers, and even other power generation companies (like Dynegy), the Public Utilities Commission of Ohio approved the deal.
Some of FirstEnergy’s competitors in the power generation business asked the Federal Energy Regulatory Commission (FERC) to review the deal to see if FirstEnergy was violating FERC rules on affiliate transactions.
FERC agreed, and FirstEnergy decided, rather than wait out FERC’s slow process, to propose a slightly different transaction to Ohio regulators — one that had almost exactly the same impact on ratepayers, but, through a legal loophole, would be less likely to trigger FERC review. That case is now pending before the Public Utilities Commission of Ohio.
Just as with FirstEnergy, the response from the nuclear industry and nuclear utilities has been to either shut down nuclear reactors and/or to call for government intervention in some fashion to support continued operation of nuclear plants.
Indicative of this trend is a February 2016 “toolkit” published by the American Nuclear Society (ANS) — an organization that represents nuclear utilities and other members of the industry — designed to teach utility companies about the various ways states can be persuaded to subsidize un-profitable nuclear plants.
One of the strategies in the ANS’s playbook advises utilities to use the requirement imposed in many states on electricity distribution companies to purchase renewable energy (renewable portfolio standards, for example) as a template companies can use to push states to impose similar requirements for purchase of nuclear capacity/energy.
This is what Exelon, a utility that ranks at #191 on Forbes’s top public companies around the world, has been trying to do in the state of Illinois. Exelon pushed for legislation in Illinois that would have required retail electric utilities to procure 70 percent of their electricity from sources that do not emit carbon dioxide, specifically including nuclear power.
The twist that would have allowed nuclear utilities to corner most of the profit was that renewables were allowed to participate only if they were not already participating in earlier state programs that offered incentives.
The bill effectively would have funneled close to $300 million a year to Exelon’s nuclear plants by imposing a surcharge on electric bills statewide. But the bill did not pass the legislature.
We have been here before. As Illinois attorney general Lisa Madigan explained,
Exelon’s nuclear plants have benefited from two rounds of Illinois subsidies already. First, Illinois electricity ratepayers paid all of the construction costs for the Illinois nuclear plants. Illinois consumers then paid again when Exelon and others convinced Illinois lawmakers to create a competitive market for electricity and consumers were charged for additional costs associated with the transition to a deregulated supply market. Exelon’s current bailout demand would amount to a third round of subsidies for these plants.
Likewise, in relation to a similar proposal for government bailouts in Connecticut, the state’s consumer counsel Elin Katz, who represents utility customers in the state, told the trade journal Nucleonics Week that
in a deregulated market, the industry retains the benefits of the upswings and the risks of market downturns. If Connecticut consumers are going to be asked to backstop some of that risk, there should be a corresponding consideration of shared benefits.
These subsidy demands are very reminiscent of corporate bailouts in other sectors of the economy. As Noam Chomsky explained in an interview about the financial crash of 2008, “what you have is a system of socialization of cost and risk and privatization of profit. And that’s not just in the financial system. It is the whole advanced economy.”
This is precisely what the electric utilities are doing today: seeking to maintain their high levels of private profit by getting money from customers and taxpayers.
Despite the declining costs of solar and wind energy and more energy-efficient appliances, many powerful utilities are still wedded to obsolete generating technologies. They are not going to go down without a fight, and will do their best to limit competition from new, renewable sources of electricity, and to have electricity customers subsidize their fossil fuel and nuclear plants.
For example, a few years ago, utility companies launched a major offensive to limit competition from distributed, small-scale solar generation, simply because these are on “the other side” of the electricity meter in people’s homes.
In January 2013, the Edison Electric Institute, the electric utility trade association, issued a report called “Disruptive Challenges” that offered a blueprint for utilities to suppress solar generation.
Following this, a number of states — Arizona, Hawaii, and Nevada, to name just three, have imposed increased charges on homeowners with rooftop solar panels. Every state in the country is witnessing proposals for policy change in this area, and the battles have been pitched.
Utilities have also fought against the expansion of state renewable energy standards. FirstEnergy, for example, achieved a victory in 2014 when it was successful in convincing the Ohio legislature to freeze Ohio’s renewable energy and energy efficiency standards. Exelon Corporation, the largest owner of nuclear power plants in the country, has lobbied against renewable energy policies in Illinois and Maryland.
Building up a political counterweight to the power of the utilities is an urgent task, and it requires both developing a powerful constituency to support decentralized power generation technologies that are outside the control of the utilities, and simultaneously building the political will to stand up to utilities’ demands for bailouts in exchange for not shutting down their obsolete power plants.
In the first category, there is a small but growing movement for rooftop solar, as well as an even smaller but again growing movement for community solar plants. As the price of solar photovoltaic technology falls and more and more homeowners and businesses choose to go solar, it is indeed disrupting the business model of utility companies.
The amount of electricity generated from rooftop solar in this country is still very small, but coupled with the declining price trends for solar, it is clearly enough to motivate the electric utilities to try to change the rules in order to suppress it. It is still an open question as to whether, or how quickly, solar advocates will prevail.
Of course, solar need not be the only clean energy technology that is outside the control of large utility companies. Wind can be that way too. Indeed, two of the countries that are significantly further ahead of the United States in renewable energy deployment, Germany and Denmark, have adopted more distributed forms of ownership.
Denmark gets a fifth of its energy from wind, of which 85 percent is owned directly by landowners and farmers; by contrast, less than 5 percent of US wind is community owned. Germany, too, has built a powerful constituency of farmers and landowners who benefit from renewable energy; as of 2012, nearly half of Germany’s renewable energy was owned by private citizens, either individually or through cooperatives.
Meanwhile, major utilities that are heavily invested in fossil generation behave as they do in the United States; RWE, Germany’s largest owner of coal plants, successfully lobbied against a tax on emissions from lignite coal plants last year, and the COO of RWE was quoted in January as saying “RWE has a clear plan (for coal) until 2050.”
In the second category, of building the political will for economic transition when utilities threaten to shut down their plants, we can look to the example offered by another recent decision across the country from New York.
In June 2016, the electric utility Pacific Gas & Electric (PG&E) announced that it would close the two units of Diablo Canyon, the last nuclear power plant in California, by 2024 and 2025, and replace the lost electrical capacity with “investment in a greenhouse-gas-free portfolio of energy efficiency, renewables and energy storage.”
The decision was not something PG&E took on willingly; it followed extensive negotiations between the company and an unusual coalition that involved the International Brotherhood of Electrical Workers Local 1245, the Coalition of California Utility Employees, the Natural Resources Defense Council, Environment California, Friends of the Earth, and the Alliance for Nuclear Responsibility.
Not only is the deal going to facilitate an orderly transition to low-carbon sources of energy, but it will also help the workers employed in Diablo Canyon get a fair deal —through retraining or early retirement packages, rather than abruptly losing their jobs as is happening in other parts of the country.
The Diablo Canyon deal is by no means perfect, but it offers an illustration of how to build countervailing political power that could benefit both labor and the environment.