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Is the Reliability, Resiliency, and Affordability of our Electricity System in Jeopardy?

  • Sep 26, 2017

Electricity is crucial to modern society and economic activity.  According to the DOE’s Quadrennial Energy Review, the electricity grid and electricity industry drives $18.6 trillion US gross domestic product and significantly influences global economic activity totaling $80 trillion.  With extreme weather events shocking the electricity system, aging infrastructure, incorporation of intermittent renewable energy generation, and premature retirements of baseload generation such as nuclear and coal, is the reliability, resiliency, and affordability of our electricity system in jeopardy?

On April 14, 2017, Energy Secretary Rick Perry issued a memorandum requesting a study to examine electricity markets and reliability.  Published August 2017, the DOE’s Staff Report to the Secretary on Electricity Markets and Reliability evaluates the present trajectory of trends that are of particular concern to ensure a reliable, resilient, and affordable electricity system.  Clocking in at over 185 pages of analysis, the following are key findings paraphrased from the study:

  • Market designs may be inadequate given potential future challenges. Variable renewable energy (VRE)—with near-zero marginal costs and if at high penetrations—will lower wholesale energy prices independent of effects of the current low natural gas prices. This would put additional economic pressure on revenues for traditional baseload (as well as non-baseload) resources, requiring careful consideration of continued market evolutions.
  • Evolving market conditions and the need to accommodate VRE have led to the increased flexible operation of generation and other grid resources. Some generation technologies originally designed to operate as baseload were not intended to operate flexibly, and in nuclear power’s case, do not have a regulatory regime that allows them to do so.
  • Society places value on attributes of electricity provision beyond those compensated by the current design of the wholesale market. Americans and their elected representatives value the various benefits specific power plants offer, such as jobs, community economic development, low emissions, local tax payments, resilience, energy security, or the national security benefits associated with a nuclear industrial base. Most of these benefits are not recognized or compensated by wholesale electricity markets, and this has given rise to a variety of state and private efforts that include keeping open or shutting down established baseload generators and incentivizing VRE generation.
  • Markets recognize and compensate reliability, and must evolve to continue to compensate reliability, but more work is needed to address resilience. Reliable and affordable electricity is essential to the modern economy, including the manufacturing, services, and financial sectors.
  • The biggest contributor to coal and nuclear plant retirements has been the advantaged economics of natural gas-fired generation. Low-cost, abundant natural gas and the development of highly-efficient NGCC plants resulted in a new baseload competitor to the existing coal, nuclear, and hydroelectric plants. In 2016, natural gas was the largest source of electricity generation in the United States—overtaking coal for the first time since data collection began. The increased use of natural gas in the electric sector has resulted in sustained low wholesale market prices that reduce the profitability of other generation resources important to the grid. The fact that new, high-efficiency natural gas plants can be built relatively quickly, compared to coal and nuclear power, also helped to grow gas-fired generation. Production costs of coal and nuclear plants remained somewhat flat, while the new and existing, more flexible, and relatively lower-operating cost natural gas plants drove down wholesale market prices to the point that some formerly profitable nuclear and coal facilities began operating at a loss. The development of abundant, domestic natural gas made possible by the shale revolution also has produced significant value for consumers and the economy overall.

inexpensive natural gas

The Impact of Inexpensive Natural Gas

  • Another factor contributing to the retirement of power plants is low growth in electricity demand. Growth of total electricity use has slowed from averaging 2.5 percent annually in the late 1990s, to averaging 1.0 percent annually from 2000 to 2008, to remaining roughly flat since then. Changes in electricity demand—particularly the apparent decoupling of economic output and electricity demand—have been driven in part by energy efficiency policies.

net electricity production

  • Dispatch of VRE has negatively impacted the economics of baseload plants. Since 2007, the contribution to total generation from wind and solar has grown quickly, accelerated by government policies and mandates. State renewable portfolio standards (RPS) have been the largest contributor—associated with 60 percent of VRE growth since 2000—followed by Federal tax credits and government research (which contributed to the dramatic drop in wind and solar technology costs). Because these resources have lower variable operating costs than traditional baseload generators, they are dispatched first and displace baseload resources when they are available.

variable renewable energy

While centrally-organized markets have achieved reliable wholesale electricity delivery with economic efficiencies in their short-term operations, changing circumstances have challenged both centrally-organized and, to a lesser extent, vertically-integrated markets.  Wholesale markets have evolved since their introduction, and currently function as designed (to ensure reliability and minimize the short-term costs of wholesale electricity) despite pressures from flat demand growth, Federal and state policy interventions, and the massive economic shift in the relative economics of natural gas compared to other fuels. The result of low average wholesale energy prices, while beneficial for buyers of wholesale electricity, represents a critical juncture for many existing baseload generation resources and their role in preserving reliability and resilience.

The Future of Nuclear Power