Analysis shows market forces, not policy, driving shifts in power sector
Monica Trauzzi: Hello and welcome to OnPoint. I’m Monica Trauzzi. With me today is Paul Hibbard, a principal at the Analysis Group. Paul, thank you for joining me.
Paul Hibbard: My pleasure.
Monica Trauzzi: Nice to see you.
Paul Hibbard: You, too.
Monica Trauzzi: So the question of reliability in the electric power sector is being rethought under the current political climate. We have — Energy Secretary Perry is expected to release an analysis of reliability under current market conditions and policies on the federal and state level. That’s expected this month. How valid are reliability concerns and questions?
Paul Hibbard: Well, reliability — any time that there are changes in the electric system the states, the federal government tend to revolve around trying to determine whether or not reliability is going to be affected. And so reliability as an issue is of course incredibly valid. It’s extremely important to assess reliability under any changing circumstances to make sure that the power system is still reliable, both for the health and well-being of citizens, but also for the economy. So in general reliability is an incredibly important issue. In the current context, questions about the reliability of the current system with the changes that are underway now is a different matter, I believe.
Monica Trauzzi: And so to that end you recently co-authored a report that took a look at reliability and baseload power. What did you find is the reason for the retirements of coal and nuclear plants?
Paul Hibbard: Sure. We looked at a number of different factors that could potentially affect the economics of the existing older, inefficient baseload plants that are currently operating today. And by the way, by baseload plants I essentially mean just generating assets that operate generally around the clock. The term itself is something of an anachronism in electric reliability-speak. But what we looked at were the various market factors that could be driving some units out of business and bringing other units in, and in the end we found that the primary reason that some assets are retiring are related primarily to the shale gas revolution and the drop in natural gas prices, at the same time that a lot of new, relatively efficient natural-gas-fired generating units are coming online. They are driving down prices in all of the market regions throughout the U.S., and those drops in prices are making it very difficult for the older, inefficient assets to remain profitable.
Monica Trauzzi: So it should be noted that the analysis you did was funded by the American Wind Energy Association and also Advanced Energy Economy Institute. There are federal and state policies in place that support renewables. They don’t support nuclear, for example, which is also zero-emissions energy. So how is that then an even playing field? And couldn’t one then argue that these policies are putting certain technologies at a disadvantage?
Paul Hibbard: Well, I think it’s not exactly correct to say that subsidies have not gone to all forms of energy. The U.S. has a long track record of spending enormous amounts of money to support the commercialization, development, and operation of all forms of energy, from subsidies to the fossil industry to the nuclear industry, but also to renewables and to investments in demand response and energy efficiency. And now we see a lot of pre-commercial funding going towards storage, to try to develop that as an energy technology. So it’s not quite accurate to say that there aren’t things, there aren’t expenditures on behalf of the federal government and state governments that support all forms of energy, but with respect to renewables the concern has been that some of the federal subsidies and the state policies are creating an unlevel playing field, particularly in wholesale markets. When we looked at this we found that the potential impact on the profitability of existing power plants associated with state and federal policies is diminishingly small compared to the effect that we’ve seen with the drop in natural gas prices and with the emergence of competition, the construction of a lot of really efficient gas-fired power plants.
Monica Trauzzi: So then there’s this other question of whether baseload power is even necessary, if it will continue to be critical to the power sector. Is it necessary for a well-functioning grid?
Paul Hibbard: Well, as I mentioned, the term baseload is something of an anachronism. Baseload really refers to a level of demand that’s there — 8,760 hours in the year — in other words, a level — a minimum level of consumption by the public for electricity. And there are a number of power plants that can help meet that demand. Of course in the past it’s been these larger coal and nuclear units and gas-fired units and hydro, but baseload — in the halls of NERC and the power system operators that actually maintain reliability, what they seek are essential reliability services. They seek the capabilities to ramp quickly, to provide backup power, to provide reserves, to provide black start on the system. Those are actual technical needs to maintain the reliability of the power system.
Now power plants that are currently being called baseload power plants, coal plants and nuclear plants, provide some of those services, but they don’t uniquely provide those services. The newer gas-fired combined cycle and combustion turbines, renewables to a large degree, the hydro and biomass that remain on the system — all of these power plants provide various reliability services that are used to maintain the power of the grid. So the term baseload, although I realize it’s being used current in the context of existing coal and nuclear units, it’s not a unique reliability attribute. There are a lot of power plants that can contribute to maintaining the reliability of the grid.
Monica Trauzzi: So if DOE’s study comes back to show that policies are unfairly picking winners and losers, ultimately what do you think the impact could be on the fuel mix we see and investments that utilities might make in the long term?
Paul Hibbard: Well, I think the investments that utilities will make in the long term will be driven by the fundamental market economics. That will not change. It will remain cheapest and lowest-risk to construct new gas-fired power plants. Renewables are so competitive in many regions and in many contexts that there will continue to be an economic benefit to construct new wind and solar facilities, with or without subsidies. The cost and the risk associated with developing large coal and nuclear facilities will remain suspect economically I think. So the current administration and various state administrations always have and will continue to change their policies towards various energy resources, but ultimately what we found in our study was that’s not what’s driving the change in the resource mix right now. It’s the fundamental economics in the market.
Monica Trauzzi: So how could we see policy shift under the current administration?
Paul Hibbard: I think we’ve seen a lot of discussion over the past month or so, both in press reports and then administration officials and the president’s speeches related to energy, of this theme of energy dominance. What I see — what that appears to me is to be the rhetoric supporting reducing the impediments to developing fossil — primarily coal, gas and oil resources and opening up the market for being able to export some of those resources, as well as increasing the contribution of those resources to meeting our domestic energy needs. So I’m not in a good place to be able to tell you really what’s going to happen over the next few years with respect to energy policy, but that does seem to be a high priority for the current administration.
Monica Trauzzi: All right — a lot to watch, a very dynamic time.
Paul Hibbard: That’s right.
Monica Trauzzi: Thank you for coming on the show.
Paul Hibbard: You’re welcome.
Monica Trauzzi: And thanks for watching. We’ll see you back here tomorrow. That was great — nice job. Excellent.
Paul Hibbard: Thanks. Thank you. Great questions.
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