Archive for the ‘Renewable Energy’ Category

Coal-fired Power

Coal-fired Power

While the Hillary v. Donald Rumble on Monday night garnered all the media attention, the D.C. Circuit Court of Appeals heard a far more substantive discussion the following morning. An en banc panel of ten federal appellate judges heard oral argument on the Obama Administration’s Clean Power Plan.

It was a “hot bench,” with lots of questions from the judges. And while Hillary and The Donald put down their swords after 90 minutes, the oral argument on the CPP went on for more than seven hours.

West Virginia’s Solicitor General opened with an artillery barrage in the putative war on coal. The CPP sets target emission rates for fossil fuel generators such as coal, and prohibits them from operating if they exceed those limits unless they purchase carbon credits from generators whose emissions are below their assigned limits. He argued that the CPP thus forces coal plant owners into an impossible choice: they either subsidize their renewable energy competitors or shut down prematurely. In his view, that would affect not just West Virginia but the nation as a whole. W. Va. and other opponents argued that the Clean Air Act does not allow the EPA to require plant owners to invest in different generation resources.

The question of the scope of the EPA’s authority got a lot of attention. The EPA and other proponents of the plan countered that this type of regulation is already commonplace in the power industry. They argued that the emissions trading contemplated by the CPP would be the least expensive method of pollution control, especially when compared to setting emissions caps for each plant. EPA argued that the Clean Air Act mandates that it devise the best system of reductions for any particular pollution type, and that’s what the CPP does. They pointed to the Supreme Court’s 2007 ruling in Massachusetts v. EPA, which mandates that the agency act to regulate carbon. And, they continued, the high court’s 2011 ruling in AEP v. Connecticut affirmed the EPA’s regulation of carbon, declaring that because climate change damages were within the EPA’s jurisdiciton, individual states could not sue power companies for climate change harms.

Their opponents argued that other language in AEP casts doubt on the scope of that holding.

Other CPP opponents claimed that because CPP requires major changes to the power grid, that the EPA is infringing on states’ rights because each state is responsible for the reliability of its own electric power system. Numerous shut-downs of coal-fired plants that would follow implementation of the CPP would adversely affect grid reliability.

Once again, it comes down to the Third Branch Default Setting that we’ve seen before in litigation interpreting laws that are both complex and unclear. The almost endless adventures of the 8th Circuit Court of Appeals with the Telecommunications Act of 1996, now forgotten like some long-ago war over an equally forgotten issue, comes to mind. Yet the problem is essentially the same. Congress enacts a law, but because of its own inability to agree on what that law should really say, it gets passed with provisions that don’t add up, or are even contradictory. But those problems are down the road, and it’s more important for legislators to get some earned media at the signing ceremony and have some accomplishment to write home to constituents about. Thus it falls the judiciary, sooner or later, to sort things out. C’est la vie, c’est la guerre.


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Artist’s conception of a traditional annual performance review at a French investment bank

Even Willie Mays missed a fly ball every once in a while.

Reuters reports that investment banking firm Lazard Ltd, which advised SolarCity on its $2.6 billion sale to Tesla Motors Inc, made an error in its calculations that discounted the value of Solar City by $400 million.

But the headline is worse than the actual story, so one might question whether there’s some “clickbait” sensationalism involved. There was a miscalculation according to a regulatory filing made by Solar City, but the miscalculation related to a range of minimum-maximum share prices, rather than to a definite acquisition price.

Using its discounted cash flow model, Lazard came up with an equity value range of between $14.75 and $34.00 per share for Solar City. After closing, Lazard realized that it had double-counted some of Solar City’s projected debt. After corrections to the DCF calculations, the valuation range was adjusted to $18.75 to $37.75 per share.

The $400 million figure sounds bad, and of course it is. But the purchase price the parties ultimately agreed to, which was paid in Tesla stock, came out to $25.37 per share. So regardless of the error, the price paid was still within the range originally provided by Lazard.

I’m sure there are lawyers out there who would, if asked, take the case and file against Lazard, but I would not count myself among them. Lazard and Tesla will probably dust themselves off and move on. No harm, no foul.

What’s really interesting about this case is not that an error was made, but rather how Lazard might handle its repercussions internally. Who made the error? Who checked the figures? While I wouldn’t take the suit, I would certainly place money on heads rolling across the office floors at Lazard’s headquarters.

[Attention carpet cleaning companies: send your brochures to Lazard now.]

Lazard, originally a French merchant company that grew into a major investment banking house in the New World via New Orleans, might just keep an old Rasoir National (see artist’s conception, above) in storage somewhere in a New Jersey warehouse for just this type of occasion.

When the Great Recession occurred, the Wall Street chorus was that it was nobody’s fault, they never saw it coming, and nobody could have seen it coming.


The rapidity with which Wall Street bankers transitioned from omniscient Masters of the Universe to a collection of Sargent Schultz clones was the closest mankind has yet come to attaining the speed of light. Despite precipitating the worst financial crisis since the Great Depression and imposing on the U.S. taxpayer bailout costs rivaling those of a world war, no one was held accountable. Wall Street was grateful for Bernie Madoff because his Ponzi scheme story was simpler and took the spotlight off them.

But if you are the unfortunate person at Lazard on the Solar City-Tesla deal who’s tagged with responsibility for this DCF error, whether you’re a first-year analyst or a managing director, you can expect a career ending scene such as that depicted above.

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Redheaded stepchild: Exelon's Byron nuclear plant

Redheaded stepchild: Exelon’s Byron nuclear plant

Listening to Exelon CEO Chris Crane extol the virtues of the free market and claim that his nuclear plant bailout bill is “market-based” is like listening to heavy metal/punk rock music performed by Pat Boone. The inauthenticity and cognitive dissonance are so fundamental as to cause revulsion at the cellular level.

Exelon introduced its bail-out legislation in the Illinois House of Representatives (HB3293) a few weeks ago. When we say Exelon introduced it, we mean exactly that. The notion that any of the bill’s sponsors in the House could understand the legislation, much less write it, is something only employees of Exelon and its public relations firm could say with a straight face.

The fiction that the Exelon bailout bill provides a “market-based” remedy is embarrassingly unconvincing, but, as Illinois’ long history shows, embarrassment is an emotion unknown to either Exelon or Springfield.

The key to HB3293 is Exelon’s Newspeak definition of “low carbon energy resources.” The Exelon lawyers who drafted HB3293 have cleverly sought to superimpose the imagery of the free market on a mechanism engineered to ensure that Exelon will have a monopolistic stranglehold on the sale of LCE credits. Exelon has tailored the term “low carbon energy resources” like a bespoke suit: it includes its own nuclear plants but excludes virtually all other generation that the average ratepayer might reasonably consider “low carbon.”

Exelon modeled HB3293 after the Illinois renewable portfolio standard. The bill amends the Illinois Power Agency Act by establishing a new “low carbon energy (LCE) credit” portfolio standard.

Beginning January 1, 2016 all electric utilities (such as ComEd, which, like the General Assembly, is one of Exelon’s wholly-owned subsidiaries) must purchase sufficient LCE credits to satisfy the LCE credit standard. The trick, of course, is that the bill authorizes electric utilities to recover all costs of purchasing the LCE credits from ratepayers. Thus, ComEd would once again serve as the tube through which Exelon hoovers up cash from ratepayers’ wallets for the benefit of its corporate treasury. (Headline: “Illinois legislation frees Exelon shareholders from fear of dividend cut.”)

Exelon’s definition of “low carbon” generation stipulates that no low carbon generation resource may have a power purchase agreement longer than 5 years. The effect of this unassuming little statutory quirk is to exclude virtually all wind, and much solar energy from the “low carbon” category. It would also exclude solar energy participating in the IPA’s supplemental procurement, which requires purchase contracts of at least five years.

The quantity of LCE credits that each utility must obtain is set at 70% of annual retail electricity sales. Taking 2012 as a sample year, total retail sales of electricity were approximately 143,540,000 megawatt-hours. http://www.eia.gov/electricity/state/illinois/ . (This figure would need to be adjusted by subtracting sales by electric cooperatives and municipalities that run their own systems, but it’s a serviceable proxy for our purposes.) This means that if HB3293 had been in effect for 2012, utilities would have had to acquire roughly 100,000,000 megawatt-hours of LCE credits. That’s a lot of LCE credits.

Exelon’s bailout bill then provides that the LCE credits must be procured from generating resources that are consistent with the “Minimum Internal Resource Requirements” (sic) for capacity established by the applicable regional transmission organization. HB3293 does not define this capitalized term, and a search of PJM (including the PJM manual on capacity markets) and MISO websites did not yield any defined term to match it. However, the term is likely another way to exclude wind, solar and perhaps other renewables from the LCE credit market because the concept of a minimum internal generation resource requirement applies in the context of assessing reliability across a given territory based on generation within it. Reliability, in turn, depends on dispatchable resources. Wind and solar are generation resources, not dispatch resources. Thus, if a particular wind or solar generator made it past HB3293’s first trench because it had a PPA with a term less than five years, it would still get caught on the barbed wire of Exelon’s “Minimum Internal Resource Requirements” criterion. Drafting a statute with a term that is both capitalized and in quotation marks without defining it may strike one as odd, but it’s not so by Exelon’s standards. Like Humpty Dumpty, when Exelon uses a term, it means exactly what Exelon wants it to mean, neither more nor less.

The first procurement of LCE credits will be under a five-year contract beginning January 1, 2016 to May 31, 2021. Just like Exelon’s Electric Infrastructure Modernization Act of 2011, the Exelon bailout bill gives the Illinois Commerce Commission a ridiculously short time period to review the LCE credit procurement plan: it must either approve the plan or approve it with modifications by November 1, 2015. The ICC has no power to disapprove the plan. Exelon wants to make sure that no one has a realistic opportunity to derail its bailout by asking annoying questions during pesky public hearings.

Although Exelon’s bailout bill will ensure that it can use ratepayer wallets as its own private ATM, it tries to camouflage this by providing that the LCE credit procurements must be “cost effective,” meaning that the incremental costs to consumers may not exceed certain limits (an annual average net increase in total costs per kilowatt-hour of no more than 2.015% of the amount paid by eligible retail customers for the planning year ending May 31, 2009).

Then, in a true Newspeak flourish, the Exelon bailout bill provides that “to ensure benefit to consumers,” winning LCE suppliers (note the plural noun; let’s pretend along with everyone in Springfield that there might be more than one) must commit to reimburse the cost of LCE credits for each planning year that the “forecasted average revenue” of the LCE resource that produced those LCE credits exceeds a set price per megawatt-hour. Note that this limitation applies only to the specific nuclear plant that generated the LCE credits in question. That means that if Exelon as a whole is doing just fine revenue-wise, but the three redheaded stepchildren (Byron, Clinton and Quad Cities) aren’t, ratepayers would still have to pay into Exelon’s corporate treasury. This is single-issue ratemaking writ large; that is, allowing a utility to single out specific cost or revenue components in order to recover them separately from ratepayers, without regard to the utility’s costs or revenues as a whole.

Yep, the Illinois Commerce Commission will hardly need any time to review Exelon’s procurement plan.

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Exelon CEO Chris Crane

Exelon CEO Chris Crane

Don’t let the yesterday’s Crain’s headline (Rauner wants to seize utility funds for the poor to help balance budget) lead you to believe that the state government is the only one looking to pick ratepayers’ pockets.

There’s a reason that Exelon is running full-page ads in the Chicago Tribune (e.g., 1/28/2015, pg 8) proclaiming all the great things their nuclear plants do for Illinois. If electricity prices continue to fall, expect baseball and apple pie to make their way onto that list. Exelon does make electricity, of course, but what Chris Crane, Exelon’s CEO, hopes to achieve through this public relations blitzkrieg is that you’ll confuse Exelon Generation, owner of the nukes and a private enterprise, with Commonwealth Edison, its affiliate and a regulated public utility.  If he can convince Illinois that Exelon Generation is almost, but not quite, a public utility, then he’ll have a better chance of getting money from ratepayers to plug the alleged hole in the budgets of the Byron, Clinton and Quad Cities nuclear stations.

Mr. Crane’s game becomes easier to understand if you put the shoe on the other foot. If his Byron, Clinton and Quad Cities nuclear plants were going gangbusters on profits, all those profits would be upstreamed to Exelon Corp. and either paid out as dividends, spent on stock buybacks, paid out in rich officers’ salaries and bonuses or put back into the business. Mr. Crane wouldn’t need to run full page ads in the Tribune burnishing Exelon Generation’s reputation as a corporate citizen, nor would he consider Exelon Generation obligated to rebate a penny of those profits to ComEd ratepayers.

In fact, if Byron, Clinton and Quad Cities were making fat profits, that would mean electricity prices would be higher. If ratepayers dared to complain, Mr. Crane could tell them that that’s just the result of a free, competitive market in electricity, and that’s what Illinois signed on for back in 1997 with the Electric Service Customer Choice and Rate Relief Act (220 ILCS 5/16-101 et seq.). That’s capitalism, and if the public doesn’t like it, then the public be damned.

Exelon executive in easy chair, ca. 2015

Exelon executive in easy chair, ca. 2015

But that’s not how things worked out. Electricity prices are down. When Exelon Generation loses money, in Mr. Crane’s world it’s the responsibility of the ratepayers to make up the difference. And that would include those low-income ratepayers who might otherwise have benefited from the LIHEAP funds Governor Rauner would like to apply to the state’s budget deficit.

Mr. Crane’s first tack was to blame renewable energy, and wind energy in particular, for compelling his nuke plants to take low or even negative prices. That argument didn’t hold water for very long. His next tack was to blame “flawed markets,” which was also unconvincing given that Exelon is the biggest dog in the PJM regional transmission organization, and was the principal architect of the wholesale market about which it was complaining. Mr. Crane’s current ploy is to emphasize nuclear power’s freedom from carbon emissions, and to complain that the electricity market doesn’t appreciate that.

Yes, Exelon is complaining that they’re just not appreciated. Perhaps help other than the monetary kind would be more appropriate:

Unappreciated Exelon Generation executive at right.

Unappreciated Exelon Generation executive at right.

These days Mr. Crane’s lobbyists are oozing all over Springfield, prodigating Exelon’s cash into the pockets of quisling legislators who will enact an Exelon-drafted bill that will ensure a pipeline of dollars from ratepayer wallets to Exelon shareholders. That’s crony capitalism. Or maybe it’s “Craney capitalism.”

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Driving through Miami, FL at high tide (with blue skies and no hurricane)

Driving through Miami, FL at high tide (with blue skies and no hurricane)

Some prominent politicians believe climate change is a hoax, but don’t tell that to people in Miami Beach, where high tide regularly floods the streets.

The Chicago Tribune reports on Miami Beach’s seemingly paradoxical effort to fight rising sea levels by building more oceanfront highrises:

Miami Beach fights rising sea by building more waterfront condos – Chicago Tribune.

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Exelon CEO Chris Crane

Exelon CEO Chris Crane

Make no mistake: Despite CEO Chris Crane’s denial that Exelon is angling for a state bailout for his money-losing nuclear generating stations, shifting the costs and risks of Exelon’s struggling nuclear power business to ratepayers (and/or taxpayers) is precisely what Crane intends.

For proof one need not look further than Illinois General Assembly resolution HR1146, which bewails the failure of competitive wholesale markets to recognize the true value of Exelon’s carbon-free nuclear generation, and ordering the Illinois Commerce Commission, the Illinois Power Agency, DCEO and other state agencies to prepare reports for the upcoming legislative session on how to protect Exelon from the perils of the electricity market. [Memo to Mr. Crane: Look up the term “externalities.” It’s a popular one among economists.] Were he not seeking a state bailout, there would be no reason for Crane to take his complaints about wholesale electricity markets, over which the State of Illinois has no jurisdiction (16 U.S.C. 824), to Mike Madigan. The only conceivable reason Exelon would take its woes to Springfield and have the Illinois General Assembly pass HR1146 is to seek protection from the wholesale electricity market at the expense of Illinois ratepayers and/or taxpayers.

If Crane had legitimate complaints about “flawed wholesale markets,” he’d be devoting 100% of his efforts to getting FERC and PJM to cure the market flaws he keeps crying about. But Crane can fool Springfield into believing his “market flaws” kinderfibel, while at PJM and FERC he’d be laughed out of the conference room.

Of course, Exelon, under then-CEO John Rowe, blazed the trail by which formerly lumbering utilities like Commonwealth Edison spun their generation assets off into competitive market affiliates like Exelon Generation.  Rowe’s strategy between the late 1990’s and early 2000’s was to create a competitive retail electricity market, strip the power plants out of vertically-integrated ComEd (leaving it just a wires and delivery company), and put those generating assets to work in a for-profit entity that would then sell power in an open wholesale market. The conventional wisdom back then was that the price of natural gas would go up, raising electricity market prices because natural gas generally sets the electricity price at the margin. In Rowe’s brave new power world, Exelon stood to make more money from a nuclear fleet in a competitive wholesale electricity market than it would as an old-fashioned, regulated-rate-of-return public utility whose prospects for growth lay somewhere between slim and nil. And Exelon bent the world to its will.

The strategy was working fine prior to 2008-09. Exelon was selling its power in the same markets with the same structure as in place now, and Exelon was making money. When Exelon was making money, though, we never heard it complaining that the markets were flawed. Then-CEO John Rowe bestrode the electricity markets like a capitalist colossus, and Wall Street approved.

Then came the Great Recession and the advent of abundant domestic natural gas from fracking in the Marcellus shale. Rowe had placed big bets on nuclear stations in competitive power markets, but Crane assumed Rowe’s place at the electricity gaming table just as the croupier was raking away all of Exelon’s chips. Exelon had to cut its dividend by about 60% last year as Exelon’s shareholders watched the value of their holdings fall by two thirds.

All was not well in ComEdistan.

Crane and similarly situated power company CEOs wasted no time in implementing that time-honored strategy that has ever been a favorite of both Corporate America and Wall Street: Deflect blame onto others. But the success of this strategy chiefly depends on two factors, one of which is basic credibility: the blame shifting has to make sense. The second is that the attractiveness of the blame-shiftee is inversely proportional to the shiftee’s political clout, including the throw-weight of its lobbyists.

Judging matters by these criteria, Crane’s first choice of blame-shiftee, the production tax credit (PTC) for windpower, a 2.3 cents/kilowatt-hour credit, was inauspicious. Crane and his nuclear power peers lectured many a power conference audience on the evils of the PTC as a market-distorting wind energy subsidy, how it was wreaking havoc on nuclear baseload generation, and that it would cause the lights to go out.

This strategy was a loser for Crane because, except for Big Oil, no segment of the energy industry has received (and continues to receive) more lavish subsidies than nuclear power. First are the $58,000,000,000 in federal government loan guarantees that underwrote the construction of nuclear plants. If a nuke operator like Exelon can’t sell power profitably and defaults on its loans, Harry and Louise Taxpayer will get the bill. Then there’s that grand-daddy of subsidies, the federal Price-Anderson Act, which shifts security and accident risks away from the Exelons of the nation and onto the backs of – you guessed it! – Harry and Louise Taxpayer. There are other indirect subsidies, such as tax breaks on uranium mining, but we need not wander too far into the subsidy tall grass to make the point. The Union of Concerned Scientists determined that the value of all subsidies to nuclear power amounts to more than 7 cents/kilowatt-hour. That’s more than three times the amount of the PTC about which Crane and his nuclear CEO colleagues so loudly complain. In fact, it’s more than the average wholesale price for power between 1960 and 2008. As far as the basic credibility criterion is concerned, the PTC subsidy angle was not a good one because the subsidies the government extends to Crane’s nukes are more valuable than the power his nukes produce.

As Ricky Ricardo might have said, “‘splain to me again” who’s distorting the market?

And while the renewables industry doesn’t have anywhere near the campaign contribution treasure chest that Exelon has, it still has its own lobbyists, and they’ve leveled their own fire back at Crane.

The simple truth is that Exelon is trying to portray itself a public utility, and HR1146 is a crony capitalism measure fairly dripping with job-keeping tropes. (Because the measure was led by Madigan, though, the term “job creator” could not be used without imparting an undesirable Republican tinge to the measure.)

Exelon is a for-profit corporation whose earnings, after the payment of princely salaries to its executives (e.g., $17MM to Crane for 2013, even though the share price tanked), either go out as dividends to shareholders or get plowed back into the business to (hopefully) enhance the stock price and earn even more money for shareholders in the future. Exelon certainly didn’t share its bounty with either ratepayers or taxpayers when times were good in the wholesale markets. Now times are bad, and Crane has been paving the way for corporate welfare for Exelon so that it won’t have to close two or three of its unprofitable nuclear generating stations. Crane’s strategy is thus no different than that of the Wall Street Banksters, so gloriously on display during the financial crisis: Privatize gains, socialize losses. When Exelon makes money, Exelon gets to keep it. If Exelon loses money, all ratepayers and taxpayers must chip in to save Chris Crane’s job.

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NYT: The Obama administration on Monday announced one of the strongest actions ever taken by the United States government to fight climate change, a proposed Environmental Protection Agency regulation to cut carbon pollution from the nation’s power plants 30 percent from 2005 levels by 2030.

Unveiling New Carbon Plan, E.P.A. Focuses on Flexibility – NYTimes.com.

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