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IHS Explores Energy Diversity

IHSCoverEnergy Diversity has always been a tough topic. Renewable energy advocates would prefer to see diversity end with their preferred gusty, sunny choices while the energy industry is wary of putting too many eggs in an intermittent omelet. Conversely, the polar vortex showed that natural gas and coal can be sidelined by physical limitations (coal freezing in piles) and operational considerations (natural gas diverted to home heating).

But noting these things anecdotally is much easier than trying to quantify them. This is what IHS, a data and software company in Colorado, has tried to do in a report called The Value of U.S. Power Supply Diversity. It’s a worthwhile report because IHS is not in the tank (or reactor core) for any particular industry – it might like to service any and all of them, which one should consider in reviewing this report – and comes across as exceptionally even handed.

That doesn’t mean the company has nothing to say about itself:

IHS Energy employed its proprietary Power System Razor (Razor) Model to create a base case by closely approximating the actual interactions between power demand and supply in US power systems.

I’m sure their salespeople would be happy to share Razor with you so you can model your industry.

So what has Razor come up with on energy diversity?

The current diverse US power supply reduces US consumer power bills by over $93 billion per year compared to a reduced diversity case. In addition, the current diversified power generation mix mitigates exposure to the price fluctuations of any single fuel and, by doing so, cuts the potential variability of monthly power bills roughly in half.

It agrees with our view of the polar vortex:

The recent volatility [because of the polar vortex] in the delivered price of natural gas to the US Northeast power systems demonstrates the value of fuel diversity.

Nuclear energy made a significant difference here, but IHS at least validates the premise. To be honest, I was a little doubtful about using the polar vortex to demonstrate that nuclear facilities did what they’re supposed to do anyway – keep running, which they did. For making the case for energy diversity, however, the vortex is a gift in a bottomless box.

The report pins down elements that define the elements of diversity. These include what it calls “The Portfolio Effect,” which like a stock portfolio, hedges against price volatility by including a variety of types; and “The Substitution Effect,” by which one energy type can spell another (as nuclear did for natural gas and coal during the vortex).

The report takes a kind of Panglossian view here and there:

US power consumers benefit from the diverse power supply mix shown in Figure 14 [which shows the current mix]. Simply inheriting this diverse generation mix based on fuel and technology decisions made decades ago makes it easy for current power stakeholders to take the benefits for granted.

Which is, we live in the best of all possible energy worlds. If you accept that, it’s because it’s the mix (more-or-less) that created the modern world - which wasn’t fretting about carbon emissions until relatively recently.

The report tackles this, though it’s fair to say that while downplaying climate change keeps the focus on diversity, it also makes the report seem a little dim on current events:

The relative unpopularity of coal, oil, nuclear, and hydroelectric power plants (compared to renewables), combined with the missing money problem, tightening environmental regulations, and a lack of public awareness of the value of fuel diversity create the potential for the United States to move down a path toward a significant reduction in power supply diversity.

Which is bad, of course – and it is. I’d probably ease nuclear and hydroelectric out of that list because 1.) nuclear is well-recognized for its emission-free qualities and 2.) hydro feels misplaced no matter how you cut it. Who dislikes hydropower? If these are allowed back in, that’s good for diversity and for carbon emission reduction. It’s broadly recognized that these are key energy types going forward, which the report itself considers essential to policy.

Whenever the report looks at nuclear energy, it’s well-informed and, as far as it goes, correct.

German power prices increased rapidly over the past decade because Germany closed nuclear power plants before it was economic to do so and added too many wind and solar power resources too quickly into the generation mix.

The arbitrary distinctions involved in “clean energy” are evident when comparing the emissions profiles of integrated wind and solar power production to that of nuclear power production. A simplistic and misleading distinction between power supply resources is a contributing factor to the loss of fuel diversity.

We’ve picked a few nits, but this is without doubt one of the best reports we’ve seen that zeroes in on energy diversity. Well worth serious consideration to understand this important energy topic.

NEI has a good story about this report here.


perdajz said…
The whole issue of "diversity" in electricity production is a false analogy to an investment portfolio, where diversification actually makes sense. In an investment portfolio diversification makes sense because the alternatives have different rewards in relation to different risks. With electricity, this is not true: each alternative produces the same thing - a kw-hr. Since the rewards are the same in any instance, we only need to pick the alternative with the least risk, rather than weigh a diverse set of options. The alternative with the least risk per unit kw-hr is nuclear power. That's all there is to it.
perdajz said…
A diverse investment portfolio makes sense because the alternatives have comparable strengths and weaknesses. Stocks have high return (9% per year, historically) but high volatility (10% annualized) relative to bonds, which have a historical return of 3.5% and volatility of 1 or 2%. Depending on your need for return and appetite for risk, you pick a mix of stocks and bonds.

Now imagine an alien from another planet offers you 9% return with 1% volatility. You would no longer have any need for stocks or bonds or any kind of diverse portfolio as we think of it. You would simply invest everything you had in the other planet.

And so it is with our choice for electricity. Coal and natgas offer high return at high risk. Solar and wind offer little return with some risk, albeit not as high as that of fossil fuels. Nuclear offers high return at low risk. This means that there is no reason to consider the first two options.
perdajz said…
Just to clarify, my definition of risk includes market and environmental risks, such as externalities, public health, and worker safety. I am fully aware that nuclear power incurs legal, regulatory and political risk.

My definition of return would be kw-hr adjusted by capacity factor, or just capacity X capacity factor.
Anonymous said…
I would expect that the IHS report is reasonably comprehensive and represents a useful study on the issues associated with the potential overdependence on a single energy source. However, isn't it just a tad disingenuous to promote it on this site without at least mentioning that the study was co-sponsored by NEI?

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