TODAY’S STUDY: Proven – New Energy Is NO Threat To The Power System

Electricity Markets, Reliability and the Evolving U.S. Power System

Paul Hibbard Susan Tierney Katherine Franklin, June 2017 (Analysis Group)

Executive Summary

It is a common occurrence for the issue of reliability to be raised when market, technology or policy changes are affecting the financial outlook of different segments of the electric industry. This phenomenon has occurred several times over the past two decades, as the prospect of new industry and market structures, technological advancement, air pollution controls and customer-driven changes stood to alter the operations and economics of various types of power plants on the electric system. Sometimes these warnings spring from genuine concerns, such as the need to address the localized reliability impacts of potential plant closures; other times they reflect a first line of defense by opponents of the changes underway in the industry.

Recently, some have raised concerns that current electric market conditions may be undermining the financial viability of certain conventional power plant technologies (like existing coal and nuclear units) and thus jeopardizing electric system reliability. In addition, some have suggested that federal and state policies supporting renewable energy are the primary cause of the decline in financial viability. The evidence does not support either hypothesis.

There is little doubt that the transition under way in the industry will lead to a power system resource mix and consumption patterns quite different from the ones to which the industry has grown accustomed in recent decades. The ongoing diversification of generation supply (See Figure 1) has lowered wholesale electricity costs in most parts of the U.S. and has contributed to recent declines in consumers’ overall cost of living.

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Yet the nature and pace of change have raised two fundamental questions in public debates among electric industry participants, regulators, stakeholders and practitioners:

First, what exactly are the primary drivers of the transition underway in the electric industry?

Second, are the changes impacting the mix of generating resources in a way that could undermine power system reliability?

In this Report we evaluate both questions. Based on our review, we arrive at the following observations and conclusions:

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1. Market Forces are Driving the Change in the Generation Mix, to the Benefit of Consumers

 Fundamental market forces -- the addition of highly efficient new gas-fired resources, low natural gas prices, and flat demand for electricity -- are primarily responsible for altering the profitability of many older merchant generating assets in the parts of the country with wholesale competitive markets administered by Regional Transmission Organizations (RTOs). As a result, some of these resources (mostly coal- and natural gas-fired generating units, but also many oil-fired power plants and a handful of nuclear power plants) have retired from the system or announced that they will do so at a future date.

 Other factors -- such as rapid growth in newer energy technologies (whose costs have declined significantly in recent years), and state policies and consumers’ actions that support such technologies -- also contribute to reducing the profitability of less economic assets. These are, however, a distant second to market fundamentals in causing financial pressure on merchant plants without long-term power contracts. In the PJM regional market, which accounts for a large share of the nation’s coal plant retirements, decreases in natural gas prices have had a much larger impact on the profitability of conventional generators than the growth of renewable energy, as illustrated in Figure 2.

 The retirement of aging resources is a natural element of efficient and competitive market forces, and where markets are performing well, these retirements mainly represent the efficient exit of uncompetitive assets, resulting in long-run consumer benefits.

2. The Transition Underway in the Electric Resource Mix is Not Harming Reliability

 Although some commentators have raised concerns that the declining financial viability of certain conventional power plant technologies (like coal and nuclear power plants) that operate as merchant units in several wholesale electricity markets may be jeopardizing electric system reliability, there is no evidence supporting that conclusion. In fact, a recent reliability review by the National Electric Reliability Council (NERC) -- the nation’s designated reliability organization - - shows that the changes in regional wholesale markets are not leading to lower bulk-power system reliability metrics.

 Many advanced energy technologies can and do provide reliability benefits by increasing the diversity of the system. The addition of newer, more technologically advanced and more efficient natural gas and renewable technologies is rendering the power systems in this country more, rather than less, diverse. These newer generating resources are also contributing to the varied reliability services -- such frequency and voltage management, ramping and loadfollowing capabilities, provision of contingency and replacement reserves, black start capability, and sufficient electricity output to meet demand at all times -- that electric grids require to provide electric service to consumers on an around-the-clock basis. As a result, increasing quantities of natural gas and renewable generation are increasing the diversity of the power system and supporting continued reliable operations.

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Introduction and Overview

A common occurrence in the electric industry is for observers to raise reliability concerns when policy changes -- combined with technology or market trends -- are affecting or may affect the financial outlook for different segments of the electric industry. This phenomenon has occurred several times over the past two decades. Such concerns about electric system reliability were voiced in the mid- 1990s, for example, when changes in efficient co-generation technologies, combined with high rates in certain states, led large industrial customers to call for retail choice and many states to begin to restructure the industry. Such concerns were raised when the Environmental Protection Agency (EPA) and the states began to implement Title IV of the Clean Air Act, which controlled sulfur dioxide emissions from power plants. More recent examples include the debates over reliability impacts in the period leading up to EPA’s adoption of the Cross-State Air Pollution Rule, the Mercury and Air Toxics Standard (MATS) and the Clean Power Plan, all of which would have affected air emissions from various fossil-fuel power plants.

The maintenance of power system reliability is a fundamental necessity for the protection of public safety, health and welfare, as well as to support the nation's economy and standard of living. Expressions of concern over power system reliability are thus common whenever there is major change underway or anticipated in the industry. Sometimes the warnings spring from genuine concerns, such as the need to address localized reliability impacts of potential plant closures; other times they reflect a first line of defense by opponents of the changes underway in the industry, or those potentially adversely affected.

There are many sound reasons why policy and/or market changes rarely, if ever, actually end up adversely affecting electric system reliability. A vast network of entities and organizations, and a robust set of reliability laws, rules, practices, and procedures, ensures this outcome. Nevertheless, these discussions play an important role in focusing the attention of the industry on taking the steps necessary to continue to ensure reliable electric service to Americans.

Over the past decade, the electric industry has witnessed significant transitions. The changes result from a combination of forces: dramatic increases in the production of domestic natural gas and the resulting decreases in the price of natural gas; displacement of coal-fired generation with output at gas-fired power plants that had previously been underutilized; flat demand for electricity; continued improvements in the efficiency, capabilities, and costs of new gas-fired generating technologies and of both grid-connected and distributed solar and wind generation; widespread and growing adoption of small-scale, decentralized generating technologies on customers’ premises; requirements that coal plants without adequate controls on mercury and other toxic pollutants adopt modern equipment; and other forces. These changes have lowered wholesale electricity costs in most parts of the U.S., and have contributed to recent declines in consumers’ overall cost of living.

These changes challenge the economics of older fossil-fuel and nuclear power plants in many parts of the country and are driving a steady transition in the nation's resource mix towards more gas-fired and renewable resources. This raises two fundamental questions that have found their way into the discourse among electric industry participants, regulators, stakeholders, and practitioners:

First, what exactly are the primary drivers of the transition underway in the industry?

Second, are the changes impacting the mix of generating resources in a way that could undermine power system reliability?

This Report attempts to answer both questions. Regarding the first question, we review the fundamental economic and policy factors that affect the profitability of various types of generating sources competing in today's electricity markets. Further, we show how various factors -- changing fuel costs, demand for electricity and various policies -- have influenced the evolving resource mix in various regions. This analysis is presented in Sections III and IV.

Next, we review the evolving resource mix through the lens of power system reliability. This section evaluates the specific contributions of various technologies -- dispatchable and non-dispatchable power plants offering slow-ramping and quick-ramping capabilities, and so forth -- to providing the essential reliability services needed to keep the lights on. We evaluate whether the overall mix of resources resulting from economic and regulatory drivers may somehow degrade power system reliability. This review is presented in Sections V and VI.

Finally, in Section VII we present our observations based on the analysis…

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Observations and Conclusions

While the nation's mix of electric generating resources has always changed over time, it is increasingly evident that the U.S. electric power system is now going through a major transition. The current changes have been driven by several things: fundamental shifts in the prices of fuels for power generation (in particular, natural gas); improvements in traditional and renewable generating technology cost and performance; the rapid emergence of distributed resources including energy efficiency; and state and federal policies promoting the development and commercialization of advanced energy technologies.

These changes take place in the context of some important continuities: the electric industry’s successful maintenance of power system reliability. Even so, a common occurrence in the industry is for observers to raise reliability concerns whenever technology, market or policy trends or events are affecting or may affect the balance of resources on the system. Such reliability concerns have been raised regularly over decades in the face of industry changes. It is a particularly powerful tool in public discussions, because reliability simply cannot be jeopardized. Sometimes the warnings spring from genuine concerns, such as the need to address localized reliability impacts of potential plant closures; other times they reflect a first line of defense by opponents of the changes underway in the industry, or those potentially adversely affected. Yet in every case, the prospect of change has led to reliability assessments, careful evaluations of new and upcoming challenges, and steps taken to avoid reliability problems from actually coming to fruition.

There are many sound reasons why policy and/or market changes rarely if ever actually end up adversely affecting electric system reliability. A vast network of entities and organizations, combined with a complex set of reliability laws, rules, practices, and procedures, ensures this outcome. Nevertheless, these discussions play an important role in focusing the attention of the industry on taking the steps necessary to continue to ensure reliable electric service to Americans.

click to enlarge

There is little doubt that the transition under way in the industry will lead us to a power system resource mix and consumption patterns quite different from what the industry has grown accustomed to in recent decades. The recent changes result from a combination of forces, have lowered wholesale electricity costs in most parts of the U.S., and have contributed to recent declines in consumers’ overall cost of living. Yet the nature and pace of change have raised two fundamental questions in public debates among electric industry participants, regulators, stakeholders and practitioners:

First, what exactly are the primary drivers of the transition underway in the electric industry?

Second, are the changes impacting the mix of generating resources in a way that could undermine power system reliability? In this Report we have evaluated both questions. Based on our review, we arrive at the following observations and conclusions:

 Fundamental market forces -- flat demand for electricity, low natural gas prices and the addition of highly efficient new gas-fired resources -- are primarily responsible for altering the profitability of many older, merchant generating assets in the parts of the country with wholesale competitive markets administered by RTOs. As a result, many such resources (mostly coal- and natural gas-fired generating units, but also many oil-fired power plants and a handful of nuclear power plants as well) have retired from the system or announced that they will do so at a future date.

 Other factors -- such as rapid growth in advanced energy technologies and state policies supporting such technologies -- also contribute to reducing the profitability of less economic assets, but such factors are secondary to market fundamentals in causing financial pressure on merchant plants without long-term power contracts.

 The retirement of aging resources is a natural element of efficient and competitive market forces, and where markets are performing well, these retirements mainly represent the efficient exit of uncompetitive assets, and will lead to lower electricity prices for consumers over time.

 Recently, some observers have raised concerns that the transition prompted by market and policy factors may be undermining the financial viability of certain existing generating units that use conventional power plant technologies (like coal and nuclear power plants) that provide ‘baseload’ power supply, and in so doing, may be jeopardizing electric system reliability. There is no evidence supporting that conclusion. In fact many advanced energy technologies can and do provide reliability benefits by increasing the diversity of the system and by providing important reliability services to the grid. The addition of newer, technologically advanced, and more efficient natural gas and renewable technologies is rendering the power systems in this country more, rather than less, diverse. The evolving power system is tending to increase fuel diversity, technology diversity, size diversity, and geographic diversity of power supply. NERC's own analysis suggests that the trend in reliability performance is increasing rather than decreasing in all regions. Further, newer generating resources are contributing diverse reliability services, too: frequency and voltage management, ramping and load following capabilities, provision of contingency and replacement reserves, and black start capability. Given the many attributes associated with a reliable electric system, the term "baseload resources" is an outdated term in today’s electric system which sees gas-fired resources and renewable capacity together capable of providing both around-the-clock power and the flexibility to cycle and ramp as needed to meet and sustain bulk power system reliability objectives.

 The electric system will inevitably continue to change in the future as it has in the past, as new technologies and investments come about through innovation, market forces, consumer preferences, and policy signals and directives from states and the federal government. As this occurs, it will be important to continuously evaluate the reliability implications of a power system that is transforming in truly fundamental ways. Fortunately, existing FERC, NERC, ISO/RTO, state, and utility planning and regulatory functions ensure that evaluation will occur and that reliability will be maintained.

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