Trump’s recent decision to force grid operators to buy power from unprofitable coal and nuclear plants at above-market rates has been widely and appropriately criticized as an unjustified, harmful intrusion into America’s energy markets.
It may not be hyperbolic to say that Trump’s move constitutes, as The Washington Post editorial board put it, “the most astonishing and counterproductive instance of central planning the nation has seen in decades.”
But Trump’s decision is problematic not only because of the direct financial burden it will impose on average American households (though that burden could be as high as $12 billion per year), but because of its broader, market-distorting effects that could bear incalculable costs for the future of the U.S. energy industry.
Politicians rushing to intervene in markets to correct some perceived imperfection or injustice is nothing new. But any imperfections, if they exist, would typically be short-lived, if only the market could re-adjust on its own. As the market signals the decline of coal plants, for example, mining communities are experiencing temporary spikes in unemployment. But as miners retrain for jobs that are in demand and business investment is redirected to more productive technologies, we’ll all be better off. Unfortunately, Trump’s supportive posture toward coal has already interfered with this self-correcting mechanism as coal workers put off retraining in the hopes of receiving government handouts.
And the subsidies and regulations policymakers introduce into the market bring problems of their own. By targeting aid to a particular industry or business, subsidies put other sectors of the economy at an unfair disadvantage, undermine competition, and stifle innovation. For instance, the vast majority of government energy handouts flow to large corporations, depriving small experimental startups of a level playing field. An entrepreneur with an innovative product may never succeed in the market simply because he doesn’t have access to government funding.
On the other hand, companies subsidized by the government and given an artificial competitive edge have little motivation to innovate and deliver superior services to their customers. As resources are diverted from companies preferred by the market to those preferred by politicians, the whole economy suffers.
In practical terms, Trump’s decision could cause severe disruption to wholesale electricity markets, particularly the mid-Atlantic energy market, where most of the relevant coal and nuclear plants are located. With subsidies pouring in to bolster previously-unprofitable power plants, more efficient generators (especially natural gas-fired plants) will struggle to compete.
Trump’s actions also convey the message that cronyism is alive and well. When politicians give subsidies to favored industries and politically-connected supporters, the subtext is that firms should focus on currying favor from policymakers instead of investing in innovation that would position them to compete in the market. A former head of the Federal Energy Regulatory Commission has aptly called Trump’s directive “cash for cronies.” How much new technology could be developed by investing the $300 million energy lobbyists spend influencing policy in research instead?
If Trump moves ahead, under the pretext that his actions are needed to protect national security, it sets a dangerous precedent of government micromanagement for future presidents to build on. Instead of bailing out failing technologies and doling out benefits to their supporters, lawmakers should create energy policies that let the market operate and foster innovative solutions to our energy challenges.
We’d all be better off.
Published in the Washington Examiner.