CO-AUTHORED BY MATT FUTCH AND JOSH FREED. FIRST PUBLISHED IN FORTNIGHTLY AUGUST 2016 ISSUE –
THE FIRST IN A SERIES OF FOUR ARTICLES
The U.S. power sector is in an unquestionably exciting and challenging time. A confluence of public and private forces is reshaping energy markets and pressuring utility balance sheets. These same forces are creating an entirely new and faster cycle of change for the energy system.
Both the public and private parts of the economy are urging our industry to build a cleaner, more reliable, and customer friendly system in the most affordable manner possible. Despite these forces, our current trajectory indicates a slow, contentious, and expensive path. This painstaking and economically inefficient behavior is well documented.
The electricity sector is currently stuck in a false zero sum mentality between providers, technology companies, and policymakers of all political persuasions. This conflict-driven dynamic slows down investment, innovation, and the scale of transformation needed to meet our collective goals.
Communities that desire clean, reliable, and affordable energy deserve a simple means to acquire it. Whether that be through traditional channels, or new transactional relationships between providers and consumers.
In this first article of a series, we explore an alternative narrative based on three core operating principles:
Complexity is the enemy. Simplicity is the answer.
Supply and demand can and should be equals.
All of the above, as long as it’s clean and reliable.
Underlying these rules is a sense of urgency to get on with the challenge of climate change in a manner that delivers maximum economic benefits. We must deliver these benefits without sacrificing the fundamental security and reliability of the energy supply.
To describe this narrative succinctly we are coining this phrase: “the middle way.”
The middle way leads to an intersection where the laws of power physics, energy regulation, and consumer demand for affordable energy all meet.
In this first article, we will briefly describe each core principle. In future articles, we will explore in detail how to practically implement each operating principle in the domains of technology, policy, and market design. Each of these articles will pull in a highly credible and well known expert in the power sector. Let’s get started.
Complexity is Enemy, Simplicity is Answer
One of the greatest barriers for industry transformation is the complexity of market rules from the reality of a physical and virtual energy system. The good news is we have made major advances in advanced analytical tools to help drive more informed decisions on how to plan, build, and operate our energy infrastructure more efficiently with lower environmental impacts.
Fortunately, we have a parallel increase in public understanding of the relationship between energy and the environment. The bad news is that the complexity of our current legal, financial, and grid architecture remains high for both existing and new market entrants. This complexity dramatically increases time and expense for investors, utilities, and consumers to make decisions enabling the build out of a clean, reliable, and resilient energy system.
The U.S. electric industry comprises over three thousand public, private, and cooperative utilities, more than one thousand independent power generators, three regional synchronized power grids, eight electric reliability councils, and about one hundred-fifty control area operators.
It is hard enough for seasoned energy professionals to make appropriate business and strategic decisions for the people and companies they represent. Imagine what it is like for the non-industry consumer when they hear contentious and fact-filled arguments from so many different industry, government, and business people in the energy economy.
Within our small echo-chamber we know there are many bold and seemingly simple ideas, such as carbon taxes, clean energy portfolio standards, or high-voltage direct current superhighways to meet our grand challenge.
Despite these bold visions, stakeholders inevitably take a deep dive into the arcane implications of seemingly elegant ideas that could capture the public imagination. To avoid this narrative trap, it is incumbent upon all of us to come to a simple consensus message around what we are seeking to accomplish. The next step is to state in plain language how we are going to execute the stated goals we have set for ourselves.
The U.S. must have a strong and simple message about the low carbon transition we are collectively seeking to achieve. That message is an energy system that reliably powers the economy in an environmentally responsible manner.
Without a simple message and a clear roadmap, the industry will struggle to make the significant political and financial capital investments needed to build a cleaner, more reliable, and climate resilient power system.
Supply & Demand Can/Should be Equals
Since as early as most of us can remember, our industry has focused on security of supply to meet a consistent growth pattern in total demand. We have made build-to-peak an essential catalyst to deliver the fundamental needs of our society through reliable, affordable, and safe energy.
This operating model allowed the U.S. to finance, build, and operate the greatest engineering achievement of the 20th century. We are now at the twilight of this growth and demand-driven model.
What is emerging is a dynamic interplay between supply and demand, where value and services can determine the shape of the electricity commodity. The growth and energy throughput model is being transformed by a powerful combination of end use efficiency, on-site generation, and a confluence of energy policy and grid edge technologies.
Much of the current struggles of the industry stem from how to safely make this difficult transition from a relatively static procurement model to a dynamic, information, and data driven exchange. This new energy marketplace looks and feels more like the competitive information and logistics driven airline industry.
The uncertainty and risk associated with this transition indicates a need to secure energy in a way that focuses on both supply and demand as part of an integrated marketplace.
The middle way indicates a real need to focus on systems thinking. It also provides an alternative to limited advocacy for specific technology, market, or regulatory pathways to de-carbonization.
For example, a significant amount of political capital has been expended in the ongoing debate regarding the Environmental Protection Agency’s Clean Power Plan. Beyond legality, this debate has devolved into an old argument about which generation technologies like renewables, gas, or nuclear should or should not be eligible for compliance.
The other side of the energy stakeholder spectrum argues for a much greater reliance on distributed energy, energy efficiency, and an assortment of flexible demand side technologies. The predictable end result is reflected in a slow litigated path towards an uncertain outcome for major investors in the energy sector.
Signs of a middle way approach to redesigning the power system for this transition abound. . There are the discussions on ensuring financial viability of nuclear power, new regulatory approaches to distribution planning in California and New York, and the emergence of regulated and unregulated utility affiliates into the commercial energy services business.
These seemingly disparate trends represent a desire by stakeholders to invest in the long game of developing a portfolio of clean energy options by accessing power reliability through supply. This would include renewables and nuclear. Or by accessing through demand, which would include combined heat and power, solar photovoltaics, and microgrids.
The fundamental economics of the industry indicate a need for both supply and demand options to become available in a close to real time manner for power operators, consumers, and energy delivery companies.
It’s important not to get overwhelmed by near term market signals, commodity pricing, fuel switching, technology evolution, etc. We should all agree as an industry to make this transition in a way that does the least harm to our environment, our energy system and the people and businesses that rely upon it for their livelihood.
This debate is partly a manifestation of complex, state-by-state, or regional approach to greenhouse gas emissions in the absence of a strong carbon price signal (favored by economists in the form of a tax). The point here is not that one side of the advocacy spectrum is correct. But rather that they are both desperately needed.
There is no one technology or policy side of the energy market that can provide all the answers to meeting our energy and environmental goals. The grid is an integrated and dynamic system requiring a steady state of power flow.
As a result, only a holistic, integrated approach that incorporates all available supply and demand options will work to contain the time and cost to society. What we advocate and will make clear in subsequent articles is the need to develop a portfolio or integrated resource plan approach to the transmission, distribution and generation components of the grid. This places supply (generation) and demand (distributed energy resources, demand response, microgrids, etc.) on equal legal and financial footing.
All of the Above, If Clean, If Reliable
The incredible decline in cost for renewable energy generation, combined with a massive increase in gas supply from hydraulic fracturing have helped contain the cost to consumers in meeting emission and renewable energy goals. While 68% of new installed capacity was renewable, roughly 1/3 of all electricity is now generated from natural gas. Utilities, developers and traders are seeking to lock in the current low prices for fuel while meeting stricter environmental standards.
As we have seen before in previous investment cycles, what goes up must come down, and vice versa. It’s important to remember that what we have seen over the last eighteen to twenty months in any particular part of the industry may not indicate long-term trends. Natural gas prices may start a steady incline. Or renewables may enter a period of policy uncertainty. While an unknown technology breakthrough could improve or deteriorate the basic economics of energy storage.
What we are seeking is clean, reliable and affordable energy. This can only come from a combination of existing and new assets in the system. That gets us to the question of our existing nuclear fleet, which currently provides roughly sixty percent of the zero-emitting energy in the U.S. power system.
With low gas prices and continued policy support for renewables, we have a new and increasingly pressing problem of how to maintain the financial and operational viability of our existing nuclear fleet. The recent cases of New York and Illinois attempting to construct policy mechanisms to sustain operation of their nuclear generators is indicative of the limitation of technology-specific policies and a zero sum energy narrative. The debate over the fate of these plants has a counterproductive tone that is similar to the past five years of regulatory clashes over net energy metering.
There is a long history of U.S. energy regulation based on prudency, risk, and consumer protection. These are key principles we need not abandon. However, we must constantly ask ourselves how much time we have to contemplate the perfect path to meet our greenhouse gas emission goals. In this context, the fate of the existing nuclear fleet is not a trivial question.
It is a mistake to make multi-billion dollar decisions based on short term, exigent factors, such as the near-term volatility in natural gas prices or any other short term changes in the market. Utility scale wind and solar continue their blistering installation pace. But we still have a major deficit in zero to low emission generation to make up should a significant amount of nuclear capacity be decommissioned in a short period of time.
The middle way suggests we need to consider the value of all clean energy generation at the utility and distributed energy scale. In addition, we must also ensure all of these resources help to maintain the reliability of the system as we make a major transition away from the fossil fuel-based generation stack.
All of the above as long as it’s clean and reliable. It is a simple way of saying that we can only afford to meet the massive clean energy transition needed through taking advantage of all available clean energy resources. Both our existing paid for assets, and the deployment of new technologies.
Now for the Hard Part
For many, these principles may sound good. But they be should be viewed with a high degree of skepticism and a strong thirst for implementing details. Over the next few months, we will get into the technical, policy, and financial steps that flesh out the middle way framework.
Yes, this middle path will require compromise and choices. And yes, it will require the continuous application of large capital investments made by all of us as consumers. However, we need a new collective story that indicates a benefit for multiple stakeholders.
It is only through this new narrative that we can achieve the highly ambitious and technically challenging reconfiguration of the power system without breaking the bank. We look forward to an ongoing conversation on each of these fundamental principles to be outlined in this series.
It’s incumbent on all of us to meet somewhere in the middle. And to help build an energy system that reliably powers the U.S. economy in an environmentally responsible manner.
THE NEXT ARTICLE IN THE SERIES WILL BE IN THE FORTNIGHTLY NOVEMBER ISSUE