Recently, in the spirit of old-school investigative journalism, Bloomberg obtained information that the US federal government was considering direct intervention in the US energy market – compelling market participants to buy coal and nuclear energy. This is a worrying trend of intervention that builds upon the steel protectionism already implemented.
Forcing utilities to purchase more expensive energy will lead to households and industry subsidising coal and nuclear, and paying more for their energy. Yet this isn’t a form of wealth redistribution that happens in a vacuum – any goods produced will be less competitive and manufacturing will be stunted.
There is an argument I’ve seen on this point, that if renewables are subsidised, why can’t coal and ageing nuclear? I believe there’s a very simple point against this. Renewables are an immature technology, and have been subsidised on the expectation – which is being met – that they will reduce costs and become cost competitive. The upside of this is that any government subsidy for new entrants (such as an innovative wind turbine or solar rollout) should have an additional rousing effect on incumbent market participants to stay competitive and innovate. In many countries CCGTs (Combined Cycle Gas Turbines – highly efficient gas power plants) have come out on top in the energy transition because traditional utilities saw an advantage in their flexibility and the lower wear and tear they have in stopping and starting. Yet this only happened because the alternative was going bust. If a firm knows they will be bailed out anyway to preserve jobs, they won’t bother innovating and they will never become competitive. And this is what’s so problematic about the leaked memo – by propping up an uncompetitive industry the key strength of free and fair markets is undermined.
Coal as Trump’s Power Base
I’ve created a basic map below (you might have to zoom out to see the full picture) which overlaps elected Republican members of the US House of Representatives with geolocated coal power plants*. Coal plants are labelled as red circles, and areas with Republican representatives are marked in purple. There’s a general correlation along coal country and Republican votes outside of urban areas. There is also evidence in Trump’s rhetoric that he has a bias toward coal, as on the campaign trail he stated “They want to be miners, but their jobs have been taken away … And we’re going to bring them back, folks.”
Coal woes are structural
In his State of the Union address earlier this year, Trump proudly declared that he had “ended the war on beautiful, clean coal” – but perhaps this was premature. Analysts are sceptical coal can make a comeback. A lot of ordinary, well-meaning people, are optimistic. Some view the problem as one of regulation, as quoted in Time magazine:
That view crosses party lines in a state filled with billboards telling the EPA to stop killing jobs and bumper stickers suggesting that those who don’t like coal can give up electricity. “The mess started because Obama wanted to kill coal,” says Rupert “Rupie” Phillips, the lone independent in the West Virginia house of delegates. “Thank God for Donald Trump.” Phillips, who has vowed to do everything in his power to prevent any new taxes or regulations on the industry, made clear that his only priority is making the mines hum again.
Whilst higher taxes – particularly those linked to carbon emissions – have harmed the competitiveness of coal in the UK and possibly other countries this is not the case in the US. Regulations, too, are an easy scapegoat- especially for a country with a distrust for federal government – but they are not realistically a factor. In Q1 2012 (quarter selected by author to isolate proportion of seasonal layoffs), 52% of jobs were reported as cut due to a drop in demand compared to 0.002% due to government regulations, according to the US Bureau of Labor Statistics. Economists claimed the impact of regulations on coal were minimal, and jobs are even created to retrofit equipment or meet regulations.
Researching the history of coal and creating a timeline, the areas that most stood out to me were market developments. The development of fracking and associated technologies such as a moveable rigs and increased adoption of horizontal drilling, opened up previously unproven reserves of oil and gas – which slashed the price of natural gas to below $2/mmBTU – more than enough to outcompete local coal.
The fundamentals of thermal power generation are changing too – as wind and solar force lower capacity factors (and lower profits) from plants with higher variable costs such as coal. Flexibility is now an important asset, and one that coal can’t challenge gas power on. In Texas, coal has to face wind-induced negative prices as it ramps up in the morning.
Herein lies the problem for coal. The shale gas revolution has created a situation that will destroy the prices of natural gas – coal’s main competitor – for years if not decades. The energy transition has created market arrangements that stunt coal’s ability to be competitive. These factors are not going to move in coal’s favour by tweaking regulations here and there. There isn’t going to be the cyclical upturn that we’ve become used to with energy. The only way to stop this is to essentially swim against the momentum of the market, which is why Trump is planning to force the market to buy coal power. There simply isn’t a sensible way to rescue coal, because it’s not a sensible idea.