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Moody's Says Coal Producers Likely to Benefit from Potential Bailout, But Markets Could Suffer

Moody's Investors Service said owners of coal-fired power plants, as well as domestic coal producers, would likely benefit from a Trump administration proposal to subsidize struggling coal and nuclear power plants, but retail customers could see higher electric bills and wholesale power markets could also be placed at risk.

Last week, Bloomberg reported that the Department of Energy (DOE) was considering using its authority under two federal laws to compel the nation's grid operators to purchase electricity or power generation capacity from uneconomic coal and nuclear plants, which have struggled to compete against natural gas. The plans were outlined in a 41-page draft memo, and unleashed a firestorm of protests from among others, trade groups representing oil and gas companies and environmentalists.

In a sector comment issued Thursday, Moody's said the DOE's likely response to the proposal, should it move forward, would be to require grid operators to make the purchases for 24 months, thereby forestalling the retirement of coal and nuclear facilities. Moody's speculated that DOE would conduct a study on grid resilience during the 24 month-period, but conceded that "the timing and structure of such a proposal" was currently unknown.

Moody's singled out Exelon Generation Co. LLC and FirstEnergy Solutions Corp. as likely beneficiaries from such DOE action. While the former has a long-term rating of "Baa2" with a stable outlook, the latter had its ratings withdrawn last April, shortly after the FirstEnergy Corp. subsidiary filed for Chapter 11 bankruptcy protection.

"Retail customers will likely pay more for electricity to cover the costs of the subsidy, while efficient gas-generating units, such as those owned by Calpine Corp. would likely be dispatched less often by the grid operators," Moody's said, adding that Calpine has a "Ba3" rating with a negative outlook. "Additional risks involve the broader wholesale power market, which may experience a decline in power prices."

Moody's added that grid operators, including PJM Interconnection, one of the nation's largest, "have commented that they experience no immediate threat to system reliability from plant retirements."

According to Moody's, approximately 35 GW of nuclear and coal-fired generation are scheduled to shut down over the next five years, accounting for approximately 3% of total capacity in the United States as of 2017 (1,084 GW). Of the scheduled retirements, about 34% are located in the Mid-Atlantic region or are within PJM's territory.

DOE would reportedly use its authority under Section 202(c) of the Federal Power Act, as well as the Defense Production Act, to order grid operators to make the purchases.

On Wednesday, E&E News reported that Murray Energy Corp. CEO Bob Murray drafted six executive orders for President Trump to sign last year, but that the president appears not to have signed them. The orders, which were obtained under the Freedom of Information Act, called for the federal government to roll back regulations considered burdensome to domestic coal producers.

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