Ceres recently issued an update of its 2012
report, Practicing Risk-Aware
Electricity Regulation. The updated
report concludes that large fossil fuel and nuclear power plants are the
riskiest investments for utilities, and that renewable energy, distributed
generation, and energy efficiency are lower-risk investments with potentially
lower price tags than baseload alternatives. According to Ceres, these relative
investment risks are driven in part by recent developments in the U.S.
electricity sector. Notably, the EPA is poised to regulate carbon emissions
from new and existing power plants in the near future. In addition, renewable
energy costs have decreased significantly in recent years, and some renewable
technologies are either approaching or have already become cost-competitive
with fossil fuel resources. Impending carbon regulations and increased
deployment of distributed generation and energy efficiency are placing added
pressure on entrenched utility business models, and, as GEI’s Nate Larsen recently
discussed, regulators are beginning to explore strategies to modernize the
grid.
Renewable energy resources such as onshore wind and solar PV
are insulated from risks associated with fuel price volatility and emissions
regulations, and the levelized costs of these resources are on par or below the
levelized costs of fossil fuel resources. Nevertheless, many utility integrated
resource plans continue to identify renewables as higher cost, higher risk
resource options. For example, PacifiCorp’s
2013 IRP concluded that new wind resource additions were not cost
effective. PacifiCorp also determined that a resource portfolio with extensive
coal plant retirements or conversions represented both a high-cost and
high-risk investment. PacifiCorp thus proposed to keep its coal fleet operating
and only invest in new wind capacity if necessary to comply with state RPS
requirements. Duke
Energy Progress’s (DEP) 2013 IRP asserted that “[m]odernizing the power
plant fleet is an important investment in the Carolinas’ environment and its
future,” and noted that utility will need to invest in new incremental
resources to compensate for future coal plant retirements. However, while DEP
planned to procure enough renewable resources to comply with its RPS
obligations, it determined that it should meet its future energy needs with new
natural gas plants and nuclear resources.
The question of the day is whether EPA’s proposed
Clean Power Plan emission goals will motivate utilities to adequately
account for the risks and long-term costs associated with all fossil fuel
resources. If so, the final 111(d) rule has the potential to incentivize
investments in renewable energy. If not, the rule will likely encourage
substantial investments in new natural gas plants and accompanying
infrastructure, such as interstate pipelines. Realistically, the rule will
likely result in construction of new natural gas generating units either
on-site or in close proximity to existing coal plants or interstate
transmission lines, and incremental deployment of renewable energy resources in
the vicinity of existing transmission corridors. States, however, have the
power to incentivize investments in less risky, more sustainable infrastructure
through their 111(d) implementation plans.
Clean
Air Act section 111(d) directs states to establish “standards of
performance” for emissions of covered pollutants from existing sources within a
listed source category. Each state must draft a plan to implement and enforce
these standards and submit its plan to EPA for approval. EPA’s 111(d)
implementing regulations refer to these state-issued standards as “emission
standards.” The federal regulations mandate that states establish these
emission standards as either an allowable emissions rate or an emissions
allowance system. The proposed 111(d) rule for carbon emissions gives states
flexibility to comply with the rule’s requirements on an individual basis or
enter into multi-state compliance agreements. If states prefer to implement
their 111(d) emission standards through a state-based or multi-state allowance
system, the proposed rule would enable them to establish a program that favors
electricity generation from specific resource types. For example, state
allowance systems could work in tandem with RPS requirements to incentivize renewable
energy production.
A carbon emissions allowance program that places a premium
on renewable energy generation is one potential strategy to deter investments
in high-risk fossil fuel resources, but it is by no means the only available
strategy. State public utility commissions should consider revising their
resource planning and procurement rules to send a clear message to utilities
that investments in baseload fossil fuel plants are not prudent and that
zero-emitting resources are in the public interest. Ratepayer advocates should
closely monitor levelized cost projections and oppose investments in resources
that are vulnerable to long-term cost increases. And finally, policymakers
should ensure that applicable legal and policy frameworks incentivize energy
infrastructure development that mitigates ratepayer and taxpayer vulnerability
to risk over extended timeframes. Infrastructure constructed today will likely
operate for multiple decades, and it is imperative that we discourage
investments that will lock-in exposure to rising costs and environmental
degradation for years to come.
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