An Alternative America First Energy Plan
An Alternative America First Energy PlanKenneth Kramer, guest editor
The Trump Administration recently posted its “America First Energy Plan” on the White House website. While more a statement of philosophy than an actual plan, it raises a number of important issues, as well as policy goals on which all Americans should be able to agree. The objectives of any US energy policy should include energy independence, affordable prices, environmental stewardship, job creation, and globally competitive US industries. Increases in coastal flooding alone should be sufficient proof that our current fossil fuel path is not sustainable. However, some supporters of the energy status quo promulgate a false choice between economic and environmental sustainability.
But sustainability does not penalize our economy – it presents huge opportunities for growth.
The primary fossil fuel intensive sectors of the economy are electric generation, transportation, and building and industrial heating. While there have been important efficiency gains in the transportation and heating sectors, decarbonizing those sectors will ultimately require the replacement and/or retrofit of building and transportation equipment fleets. This will necessarily be a long-term undertaking, and to reach medium-term decarbonization targets by, for example, 2030, many of the best opportunities will be in the power generation sector.
Project developers understand that renewables need to be price competitive with conventional alternatives, and industry business models have developed accordingly. In many markets renewable energy, primarily wind and solar, has reached or exceeded grid parity, costing no more than conventional grid power primarily from gas and coal fired plants. Rooftop solar is successfully competing with utility suppliers, and competitive, technology-agnostic tenders for wholesale power purchase agreements have been awarded to wind and solar generators. The majority of new generation capacity installed in 2016, both domestically and globally, was renewable. In many markets, wind and solar projects are economically competitive without subsidies. Power grids are operating with stability while absorbing peak levels intermittent power undreamed of ten years ago. Even with the impressive progress to date in clean power, outstanding issues include:
- In the US, with relatively low power costs, recent competitive wind and solar power purchase agreements have benefited from investment and production tax credits, state renewable energy credits, and other temporary incentives, which will not, and should not, remain in place indefinitely.
- Solar and terrestrial wind power are intermittent power sources, and not on their own capable of providing dispatchable baseload power.
- Rate base oriented utility business models still discourage the use of distributed energy resources (DERs).
- With current storage technology and cost, given seasonal variations in renewable resources, it is not feasible to power the grid with 100% intermittent renewables.
Given these considerations, what are the key variables that will impact the continued growth of renewable generation in the near term?
The marginal cost of electricity is determined by the least expensive generation technology, which most recently has been the natural gas fired combined cycle gas turbine (CCGT). With the success of fracking, gas has been trading at historic lows, which appears not to leave much room for significant decreases in power price in the 2 foreseeable future. The costs of wind and solar power, with no fuel cost, are driven primarily by capital cost, and are projected to continue to decline and become more competitive, without subsidies, on a levelized cost of energy (LCOE) basis. While projected cost improvements in existing technologies are encouraging, research and development should continue to be supported. Ideally, external costs should be recognized through carbon pricing.
- Grid Resiliency:
At peak times renewable generation in both Texas and California has exceeded 40% of the power on the grid. In Germany peak renewable generation has exceeded 70%. The theoretical maximum intermittent generation that a power grid can sustain is unclear. However, two factors clearly add grid resiliency: adding storage to the network, and expanding the market for energy balancing, as the intermittencies from different generators tend to balance out as they are averaged over larger areas. California is a leader in both of these areas, through its 1.3 gigawatt storage initiative, and the expansion of the Western Energy Imbalance Market.
- Utility 2.0:
A significant proportion of solar generation is in residential and commercial rooftop installations, and the growth of distributed generation potentially threatens the long-term viability of traditional regulated electric utilities. Utilities will remain necessary to maintain the power grid, and as such they should operate under a business model consistent with both public policy and the interests of their customers. Many utilities are actively hostile to distributed solar generation as a threat to their revenue base, which is not an irrational response. It is the job of state policymakers and public utility commissions to develop business models that reflect the changes in the electricity industry since Thomas Edison’s time, and that don’t penalize utilities for facilitating the growth of DERs. New York’s ambitious Renewing the Energy Vision (REV) initiative is a leading example of this strategy, although three years into the process, it demonstrates that change of this magnitude does not come quickly.
- Limits of Generation Decarbonization:
Solar radiation is by far our largest renewable resource, but is seasonably variable, and summer insolation in the US exceeds winter insolation by a factor of three or more, depending on location. There is no currently existing technology capable of economically storing months of energy supply, especially with a single charge/discharge cycle per year. As such, even under optimum conditions a minimum amount of dispatchable baseload generation will be required, and, given the US’ limited hydropower resources, the zero carbon alternatives would appear to be nuclear power or fossil plants with carbon capture and sequestration. Neither of these options has been demonstrated to be consistently cost competitive, which raises the policy issue of whether, given current technology, a hypothetical decarbonization “budget” would be better spent on costly and controversial generation technologies, or on reforming other sectors of the economy.
While cost trends for renewables are already favorable, issues such as grid resiliency and utility business models will require active involvement from market participants and stakeholders. The current limitations of technology and economics, with regard to the complete decarbonization of power generation, demonstrate both the need for continued research and development, as well as a holistic approach to decarbonizing the economy.
Understanding that the first 10% reduction in one industry might cost a fraction of the last 10% reduction in another, it is clear that we are best served by optimizing the costs of this transformation across the whole economy.
About Kenneth Kramer and Rushton Atlantic
Ken Kramer is a founding partner of Rushton Atlantic, LLC (www.rushtonatlantic.com), a New York- and Chicago- based valuation consulting practice focusing on renewable and conventional energy, infrastructure, manufacturing and transportation, and a member of Global Asset Valuation Advisory Network, an international consortium of valuation consultancies. Rushton Atlantic’s services support financing, investment, financial reporting, tax and insurance. Ken serves on the Renewable Energy & Energy Efficiency Advisory Committee to the Secretary of Commerce, and served on the Steering Committee for the Department of Energy’s Future of the Grid Initiative.Mr. Kramer is a frequent contributor to The Green Economy.