Beyond Trump—why power companies should be investing now in carbon-free electricity

August 10, 2017 by Jennifer Morris, The Conversation
Installing solar panels on the roof of a Walmart store in Mountain View, California in 2010. Through 2016 the company had installed 140 megawatts of rooftop solar generation on its stores. Credit: Walmart, CC BY

When utility executives make decisions about building new power plants, a lot rides on their choices. Depending on their size and type, new generating facilities cost hundreds of millions or even billions of dollars. They typically will run for 40 or more years – 10 U.S. presidential terms. Much can change during that time.

Today one of the biggest dilemmas that regulators and electricity industry planners face is predicting how strict future limits on greenhouse gas emissions will be. Future policies will affect the profitability of today's investments. For example, if the United States adopts a carbon tax 10 years from now, it could make that burn fossil fuels less profitable, or even insolvent.

These investment choices also affect consumers. In South Carolina, utilities were allowed to charge their customers higher rates to cover construction costs for two new nuclear reactors, which have now been abandoned because of construction delays and weak electricity demand. Looking forward, if utilities are reliant on coal plants instead of solar and wind, it will be much harder and more expensive for them to meet future emissions targets. They will pass the costs of complying with these targets on to customers in the form of higher electricity prices.

With so much uncertainty about future , how much should we be investing in noncarbon electricity generation in the next decade? In a recent study, we proposed optimal near-term electricity investment strategies to hedge against risks and manage inherent uncertainties about the future.

We found that for a broad range of assumptions, 20 to 30 percent of new generation in the coming decade should be from noncarbon sources such as wind and solar energy. For most U.S. electricity providers, this strategy would mean increasing their investments in noncarbon power sources, regardless of the current administration's position on climate change.

Hedging against risks

Many noncarbon electricity sources – including wind, solar, nuclear and coal or natural gas with carbon capture and storage – are more expensive than conventional coal and natural gas plants. Even wind power, which is often mentioned as competitive, is actually more costly when accounting for costs such as backup generation and energy storage to ensure that power is available when wind output is low.

Over the past decade, federal tax incentives and state policies designed to promote clean electricity sources spurred many utilities to invest in noncarbon sources. Now the Trump administration is shifting federal policy back toward promoting fossil fuels. But it can still make economic sense for power companies to invest in more expensive noncarbon technologies if we consider the potential impact of future policies.

How much should companies invest to hedge against the possibility of future greenhouse gas limits? On one hand, if they invest too much in noncarbon generation and the federal government adopts only weak climate policies throughout the investment period, utilities will overspend on expensive energy sources.

Beyond Trump—why power companies should be investing now in carbon-free electricity
In March 2017, wind and solar power accounted for 10 percent of U.S. electricity generation for the first time. Credit: EIA

On the other hand, if they invest too little in noncarbon generation and future administrations adopt stringent emissions targets, utilities will have to replace high-carbon energy sources with cleaner substitutes, which could be extremely costly.

Economic modeling with uncertainty

We conducted a quantitative analysis to determine how to balance these two concerns and find an optimal investment strategy given uncertainty about future emissions limits. This is a core choice that power companies have to make when they decide what kinds of plants to build.

First we developed a computational model that represents the sectors of the U.S. economy, including electric power. Then we embedded it within a computer program that evaluates decisions in the electric power sector under policy uncertainty.

The model explores different electric power investment decisions under a wide range of future emissions limits with different probabilities of being implemented. For each decision/policy combination, it computes and compares economy-wide costs over two investment periods extending from 2015 to 2030.

We looked at costs across the economy because emissions policies impose costs on consumers and producers as well as power companies. For example, they may lead to higher electricity, fuel or product prices. By seeking to minimize economy-wide costs, our model identifies the investment decision that produces the greatest overall benefits to society.

More investments in clean generation make economic sense

We found that for a broad range of assumptions, the optimal investment strategy for the coming decade is for 20 to 30 percent of new generation to be from noncarbon sources. Our model identified this as the best level because it best positions the United States to meet a wide range of possible future policies at a low cost to the economy.

From 2005-2015, we calculated that about 19 percent of the new generation that came online was from noncarbon sources. Our findings indicate that power companies should put a larger share of their money into noncarbon investments in the coming decade.

Beyond Trump—why power companies should be investing now in carbon-free electricity
The levelized cost of energy considers a plant’s expected lifetime and operation cycle and spreads those costs over an assumed financial lifetime. These estimates show that electricity from coal will be much more expensive if utilities have to use carbon capture and sequestration (CCS) to meet future emissions limits. Credit: EIA

While increasing noncarbon investments from a 19 percent share to a 20 to 30 percent share of new generation may seem like a modest change, it actually requires a considerable increase in noncarbon dollars. This is especially true since power companies will need to replace dozens of aging coal-fired power plants that are expected to be retired.

In general, society will bear greater costs if power companies underinvest in noncarbon technologies than if they overinvest. If utilities build too much noncarbon generation but end up not needing it to meet emissions limits, they can and will still use it fully. Sunshine and wind are free, so generators can produce electricity from these sources with low operating costs.

In contrast, if the United States adopts strict emissions limits within a decade or two, they could prevent carbon-intensive generation built today from being used. Those plants would become "stranded assets" – investments that are obsolete far earlier than expected, and are a drain on the economy.

Investing early in noncarbon technologies has another benefit: It helps develop the capacity and infrastructure needed to quickly expand noncarbon generation. This would allow energy companies to comply with future emissions policies at lower costs.

Seeing beyond one president

The Trump administration is working to roll back Obama-era climate policies such as the Clean Power Plan, and to implement policies that favor fossil generation. But these initiatives should alter the optimal strategy that we have proposed for companies only if corporate leaders expect Trump's policies to persist over the 40 years or more that these new generating plants can be expected to run.

Energy executives would need to be extremely confident that the United States will adopt only weak climate policies, or none at all, into decades in order to see cutting investments in noncarbon as an optimal near-term strategy. Instead, they may well expect that the United States will eventually rejoin worldwide efforts to slow the pace of climate change and adopt strict emissions limits.

In that case, they should allocate their investments so that at least 20 to 30 percent of over the next decade comes from noncarbon sources. Sustaining and increasing noncarbon investments in the coming decade is not just good for the environment – it's also a smart business strategy that is good for the economy.

Explore further: A new study details why it's prudent to invest in carbon-free electricity now

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antialias_physorg
4 / 5 (4) Aug 10, 2017
If utilities build too much noncarbon generation but end up not needing it to meet emissions limits, they can and will still use it fully. Sunshine and wind are free, so generators can produce electricity from these sources with low operating costs.

This is really being overlooked a lot: That excess energy cannot beused today does not mean it cannot be used in the future. With water shortages being an almost certainty in the near future any excess energy could go to desalination plants. Shifting towards electric cars will also increase demand, and cars can act as somewhat of a buffer system. It's really not that hard to find uses for variable output that exceeds the basic lighting/heating/industry demand where intermittent avialability is not a problem.
RealScience
5 / 5 (2) Aug 10, 2017
Why would hydroelectricity be in the "non-dispatchable" group?
It is generally even more dispatchable than natural gas, let alone coal.
MR166
3.7 / 5 (3) Aug 10, 2017
"Today one of the biggest dilemmas that regulators and electricity industry planners face is predicting how strict future limits on greenhouse gas emissions will be. Future policies will affect the profitability of today's investments. For example, if the United States adopts a carbon tax 10 years from now, it could make power plants that burn fossil fuels less profitable, or even insolvent."

Government regulation is a huge problem in all areas of business. The US is quickly reaching the point of bankruptcy and there will be a lot of suffering when that happens. Our only hope is less regulation not more. But that will never happen as long as our educational system teaches that bigger government is the solution to all problems and inequalities and not the cause of them.
Eikka
5 / 5 (2) Aug 11, 2017
That excess energy cannot beused today does not mean it cannot be used in the future.


Excess energy not used today is not available tomorrow.

With a source such as wind and solar, which are "free", the cost per kWh depends on how much energy you capture over the whole lifespan of the generator. The less you capture, the more it costs per kWh. Treating the surplus as free energy is a misunderstanding. It's like going to an all-you-can-eat buffet and thinking the food is free; it's not - whether it's worth the fee depends on how much you can eat.

That's why even the surplus shouldn't be just given away for free. It too has a cost, and if it is sold below cost to run some enterprise that produces less value, the society sees a net loss in real value.

It's like dropping food on the floor at the buffet because it's "free" - the next time you come in the entry price is higher to account for the loss. With excess, the right solution is to make less, not waste it.
Eikka
5 / 5 (4) Aug 11, 2017
Why would hydroelectricity be in the "non-dispatchable" group?
It is generally even more dispatchable than natural gas, let alone coal.


It is and it isn't.

Hydroelectric plants are built into rivers, and rivers must flow. Despite the large artifical lakes, they don't actually store very great amounts of energy, so they must generate power more or less constantly. Otherwise they must bypass the turbines and lose money, which means higher electricity prices.

The dispatchability of hydroelectric power also depends on the season, because most of the available water is upstream, locked up in snow or soaked in the soil, sitting in ponds and small streams and just slowly trickling into the river. You can't command the water to suddenly scoot 300 miles down the stream when you need it - you use it or lose it when it happens to come.

The larger issue is the variable availability of water. The year-to-year variation in water flow is easily 50%
WillieWard
3 / 5 (2) Aug 11, 2017
The only "carbon-free electricity" is nuclear power.
"the wind plants and the solar plants, are gas plants"
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MR166
3.7 / 5 (3) Aug 11, 2017
Willie our increasing dependence on nat gas will cause massive shortages in the not too distant future. Fracking and shale gas are not the panacea that they are advertised to be since the well depletion rates are very high. Drilling is expensive and these wells go dry fast forcing more drilling. Nuclear and coal should be encouraged not discouraged. Isn't there some company that produces modular 1MW nuclear plants the size of a tractor trailer that can be buried underground or was this a fraud? Distributed 24/7 power would ease a lot of grid problems.
RealScience
5 / 5 (1) Aug 11, 2017
Why would hydroelectricity be in the "non-dispatchable" group?
It is generally even more dispatchable than natural gas, let alone coal.


It is and it isn't.

Hydroelectric plants are built into rivers, and rivers must flow. Despite the large artifical lakes, they don't actually store very great amounts of energy ...

The dispatchability of hydroelectric power also depends on the season...

... The year-to-year variation in water flow is easily 50%


Good points.

I'm used to big dams with big lakes that have enough storage to buffer seasonal flows and even a few dry years, and those are highly dispatchable.

But I agree that not all reservoirs are like that. I grew up near a river with a "daily peaker" dam that had only a few weeks' storage, and some run-of-the-river dams have no dispatchability.

However I wouldn't classify hydroelectricity as a whole as 'non-dispatchable', since much of it is highly dispatchable.
Eikka
5 / 5 (1) Aug 24, 2017
I grew up near a river with a "daily peaker" dam that had only a few weeks' storage


Very few hydroelectric plants have even days of storage. At maximum flow they may empty their reservoirs in hours.

I'm used to big dams with big lakes that have enough storage to buffer seasonal flows and even a few dry years, and those are highly dispatchable


That depends. Take the Hoover Dam for example - it has 19.5 cubic kilometers of water behind it, and it would take a full 200 days to run it dry. The problem is that the plant is running at 23% capacity on average, and still losing water to the point that it won't be able to operate soon - all because of the droughts from 2010 onwards. They're installing smaller high efficiency turbines to keep the plant running despite the dropping water levels.

Eikka
5 / 5 (1) Aug 24, 2017
Though one problem with hydroelectric plants is that if actually used at full power, they will flood the river downstream and cause rapid erosion of the banks, which leads to cities and towns washing away - after all these plants are often constructed as means of controlling meltwater spring floods and as a result they have a limited "power envelope" to protect communities downstream. Many of them are actually megacatastrophes waiting to happen, as they run without adequate maintenance.

Relying on these dams for dispatchable energy means more variable water levels downstream, and that damages the ecosystem as well as human infrastructure.

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