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Feature Article

Politics vs Economics: Wholesale Changes?

By Roger S. Conrad on Oct. 8, 2017

President Trump and the Republican majorities in the House and Senate have failed to push through most of their major legislative initiatives. But the administration has made waves in US energy markets.

On the campaign trail, Trump promised to prop up the moribund coal-mining industry, though his tough talk and actions haven’t slowed the retirement of power plants that burn this thermal fuel.

In fact, this trend appears to have accelerated. The Florida Public Service Commission’s recent approval of NextEra Energy (NYSE: NEE) and the Jacksonville Energy Agency’s plan to shut down the St. John’s River coal-fired power plant underscores this point.

The utility originally expected to rely on the 1,300-megawatt facility for baseload generation until 2052; however, the prospect of saving customers $183 million by closing the power plant 35 years early made sense for all parties.

To date, most of the retired coal-fired plants have operated in one of the 13 states where deregulation forces this capacity to compete with other fuel sources, especially inexpensive natural gas. Shuttered facilities have tended to be older, less-efficient, and increasingly expensive to keep running.

The closure of the St. John’s River plant bucks this trend and suggests that a tipping point may be at hand. In this case, the economics dictated the closure of a relatively young facility that operated under the protection of a regulated monopoly.

Despite easy assertions about the federal government’s war on coal, the factors driving the thermal fuel’s decline in the US are primarily economic: Not only has the shale revolution produced a bounty of cheap natural gas, but the size of the domestic resource base and ongoing efficiency gains also suggest that this pressure won’t relent anytime soon.

Regulated utilities benefit from replacing older, coal-fired power plants with natural gas or renewable energy in three ways:

  • The new plant will operate much more efficiently, resulting in lower costs even if natural-gas prices sometimes exceed coal prices on an energy-equivalent basis;
  • Retiring the older facility and building new capacity adds to the utility’s rate base, the foundation for earnings and dividend growth; and
  • Burning natural gas emits less carbon dioxide and other pollutants than coal, reducing future legal and regulatory risks.

Ironically, President Trump’s decision to withdraw the US from the Paris climate accord, along with the push to repeal the Clean Power Plan, has engendered a counter-response in many states. Several have expanded so-called renewable portfolio standards that set requirements for the proportion of electricity that comes from clean sources.

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