By: Isaac Orr
WE Energies has announced it will close its Pleasant Prairie coal-fired power plant in Pleasant Prairie, Wisconsin and replace it with a combination of natural gas and solar power. Hundreds of coal-fired power plants have closed over the past several years, but the Pleasant Prairie closing is different; this coal plant is young (by coal plant standards), with as much as 15-20 years of usable life left to generate affordable, reliable electricity.
Why would WE Energies choose to close the facility, then? Unfortunately, it has a structural incentive to shut down this perfectly good asset and build brand-new generation capacity: Thanks to government regulations, it would increase company profits. While WE Energies’ executives cash in on compensation packages worth more than $10 million, they are simultaneously making decisions that will increase electricity costs for Wisconsin families and businesses.
Utility companies such as WE Energies grow their profits by closing down older, lower-cost power plants, in large part because their profits are determined by something called “rate-of-return” regulations, which guarantee these companies receive a profit when they spend money on power plants or electricity infrastructure.
Rate-of-return regulations might seem confusing, but the underlying concept is simple and destructive. Here’s an illustration of rate of return: Imagine a scenario in which you are reimbursed for everything new you purchase for your home. Appliances that were once serviceable would suddenly become replaceable. The television you bought four years ago is serviceable, but you could buy a bigger model. The kitchen might not be falling apart, but it could be remodeled. If someone is going to reimburse you for new purchases, why wouldn’t you make those costly changes?
Now, imagine if you were paid a profit to replace things in your own house using other people’s money. The couch you bought a few years ago would suddenly be on the chopping block, as would the refrigerator, which still works but seems to be making a weird noise.
This is essentially how public utility companies such as WE Energies are being paid. Rather than use power plants until they are paid off and no longer profitable, WE Energies is retiring Pleasant Prairie while it still owes money on the plant. It is only able to earn a profit because consumers end up stuck with the tab in the form of higher electricity bills. This is particularly harmful for low-income families and seniors on a fixed income, because they are the ones who can least afford to pay higher energy costs.
Under normal circumstances, businesses should have every right to make their own decisions about what to sell, how much to charge, and how much to pay their employees, but utility companies are not operating under “normal circumstances.” They are regulated monopolies sanctioned by the state. In this case, consumers have no alternatives to the energy they depend on, and therefore utility companies should aim to keep their prices as low as possible for their consumers.
Unfortunately, WE Energies’ plan to build approximately 350 megawatts of solar power will increase the cost of electricity, because generating electricity from solar power is 3.5 times more expensive than generating it from existing coal-fired power plants such as Pleasant Prairie.
Many people do not realize solar power causes electricity prices to increase. People tend to think because sunlight is free there are no fuel costs associated with solar power schemes. This is totally false, however. Solar power is intermittent and cannot generate electricity when the Sun is not shining. Coal or natural gas plants must be ready to come online at a moment’s notice to provide the electricity families, businesses, and hospitals rely on. As a result, consumers must effectively pay twice for their electricity to ensure reliable power is always available—once for the solar panels and then again for the backup sources of electricity generation.
The Wisconsin Public Service Commission should carefully scrutinize future attempts by WE Energies to build new power plants that are not needed to satisfy consumer demands. If Pleasant Prairie must close because WE claims there is a surplus of electricity in the region, they should probably refrain from building new, costlier forms of electricity production.
Isaac Orr ([email protected]) is a research fellow for energy and environmental policy at The Heartland Institute.