Energy policy should be guided by the free market — not by subsidizing losers
In January, the Federal Energy Regulatory Commission (FERC) unanimously rejected a profoundly anti-competitive proposal by the Energy Department to provide billions in subsidies to old, unprofitable power plants. After the exceptional political blowback from its attempt to pick winners (or more aptly, subsidize losers), Energy Department officials are back to the drawing board. But have they learned?
The early signs indicate a clear “no.” Key political appointees at the Energy Department are ignoring evidence and bypassing their own in-house experts to funnel financial aid to unprofitable power plants. The motives couldn’t be more obvious — the same politically-tied companies that drove the last proposal are back at it again because they can’t compete in the marketplace.
This is not energy dominance. This is energy desperation.
Grid operators strongly opposed the department’s proposal, citing deep anti-competitive concerns and saying it was not necessary to preserve grid reliability. FERC’s decision echoed this sentiment. Almost comically, Energy Department officials responded by suggesting that they needed to “help FERC members understand the importance of coal” to electric reliability and resiliency.
At the nexus of incompetence and cronyism lies the pinnacle of bad governance. For an administration that promised to drain the swap, energy subsidies do precisely the opposite. Subsidizing unprofitable power plants puts cronies, not America, first.
The department’s overture sparked widespread outrage. Democrats and former George W. Bush administration energy officials decried the proposal while consumer and environmental groups joined free-market think tanks, including the R Street Institute and The Heritage Foundation, in opposition.
While Energy Department officials insist they’re “with the federal government” and are “here to help” improve grid reliability, the very interests that would benefit from a reliable grid say government bailouts will not help. Heavy industry, dismayed by the Energy Department proposal, told Congress that “DOE is saying manufacturing jobs are not as important as the jobs at economically obsolete … power plants.” It’s not the role of the federal government to determine whose job is more important.
If power plants are profitable, subsidies only serve to pad a company’s bottom line. If they’re not profitable, taxpayers should not prop them up. Rather than keeping them on life support, government should allow economic failures to fail so that those resources are free to flow to more useful purposes elsewhere in the economy.
Ironically, the Energy Department’s initial anti-competitive proposal prompted mass organization of pro-competition interests that are ready to go on the offensive. Broad coalitions — such as the Affordable Energy Coalition — have formed in defense of markets. And therein lies the opportunity for the Energy Department to shift course and embrace competitive forces.
Economic fundamentals, not cronyism, should drive electricity investment decisions. Competitive electricity markets align economic incentives and put customers, not well-connected companies, first. Putting private capital at risk, rather than socializing risk through taxpayer or ratepayer-funded subsidies and regulated monopolies, ensures that companies properly assess their investments. This is why competitive markets have outperformed monopoly investments, resulting in cost-efficient investments, increased innovation and more choice for American families and businesses.
Competitive merchants have retired the type of expensive plants that monopolies have retained to boost their regulated returns. And while these merchants are investing in new, innovative and inexpensive plants, monopolies are pursuing expensive boondoggles like those plaguing customers in South Carolina, Mississippi and Georgia.
In an April 2017 memo, Secretary Perry requested a study examining the country’s electricity markets and reliability. The Energy Department should seek to enhance competitive markets by following through on technical recommendations from the resulting staff report. Furthermore, the department should offer its modeling and other in-house technical capabilities to grid operators and FERC officials as they continue to examine grid resilience. This would complement a broader conservative energy reset, anchored by a commitment to competition, customer choice and good governance.
But if Round II resembles Round I, the administration will dig itself into a deeper hole. For decades, the federal government has implemented distortionary energy subsidies and regulations. Further undermining competitive markets and pouring billions in subsidies to cronies is a surefire way to harm all energy customers, stifle innovation and promote energy dependence on handouts. Congress should press the administration for a course correction — or else members will face the wrath of dismayed voters with higher energy bills this fall.
Image credit: Zerbor
*Nicolas Loris cowrote this piece. He is an economist and is the Herbert and Joyce Morgan fellow at the Heritage Foundation’s Roe Institute for Economic Policy Studies.