A conservative energy analysis group charges that the Trump administration’s draft plan to aid economically uncompetitive nuclear and coal generating plants, pitched at strengthening grid resilience, will do the opposite. The Houston-based Institute for Energy Research says, “The administration’s proposal would undermine the profit and loss system by socializing the losses of these power plants, which in turn would introduce four potential threats to grid resiliency.”
IER analyst Alexander Stevens lays out the four threats posed by the Trump plan.
* The policy encourages “moral hazard” by encouraging “riskier behavior on the part of the firms receiving subsidies as well as their competitors by creating the expectation that they will not have to bear the full costs of future losses.” Moral hazard, says Stevens, contributed to the 2008 financial meltdown and Great Recession and “is also a major problem with the current systems of subsidies and mandates for competing power sources,” meaning federal and state subsidies for renewable energy.
* The Trump program “could harm grid resiliency by undercutting the discovery process in the market for power generation. Undermining price signals prevents market participants from learning from their mistakes because they do not suffer the full burden of their mistakes.” This also retards new entrants into the market.
* The plan contributes to “the current culture of corruption within the energy industry. It would send a strong signal to market participants that they should devote more resources to influencing government policy because doing so will protect them from the demands of a competitive market.” In the long run, writes Stevens, “this practice undermines trust in government, and makes it more difficult for regulators to act in any direction, including achieving their stated goal of improving grid resiliency.”
* The draft Trump-Department of Energy proposal will “have negative effects on economic growth. Firms that receive special privileges from government are less innovative because they are not required to respond to the demands of a competitive market.” New competitors replacing the largest incumbents are an “indicator of a vibrant economy….”
Stevens writes, “The foundation of a resilient energy grid can be found in two important features of a free market. The price system, in its ability to collect and disseminate information, plays a coordinating role, which allows the grid to adapt to changing conditions and potential disruptions. Additionally, the profit and loss system works as a feedback mechanism, guiding firms to pursue projects that provide reliable energy to consumers.”
What should the Trump administration do to “maintain or improve grid resiliency?” Stevens asks. They “should abandon attempts to save any particular power plant. Instead, the administration should continue to pursue deregulation, allowing energy markets to support a competitive mix of energy sources for the grid. Moreover, Congress and the administration should abandon the existing system of subsidies and mandates of politically preferred sources of energy that have disrupted markets and forced market participants to invest ratepayer’s money in ventures they would not make absent political intervention.”
Founded in 1989, the non-profit IER describes itself: “IER maintains that freely-functioning energy markets provide the most efficient and effective solutions to today’s global energy and environmental challenges and, as such, are critical to the well-being of individuals and society.” The founder and CEO is Robert L. Bradley, Jr., who is also affiliated with the libertarian-oriented Cato Institute and Competitive Enterprise Institute.
Bradley spent 16 years at the now-defunct Enron Corp., including serving as a speech writer for the late Enron founder and CEO Kenneth Lay. He frequently clashed with Lay and Enron over their policies and direction. He is the author of the 2011 book Edison to Enron: Energy Markets and Political Strategies.
— Kennedy Maize