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Conflicting Government Rules Are Damaging the Power Grid

One of the strengths of the electric system is its diversity, with energy flowing from generators that use a variety of fuels. But conflicting government policies and poorly constructed markets are reducing that diversity, and the result will be electricity that is more expensive, more prone to price spikes, and less reliable, according to a new study.

The problem may not be immediately evident to consumers, for whom the light switch on the wall is like a water faucet connected to a vast system of reservoirs and feeder streams. As long as the water comes out, the user doesn’t really care where each drop came from. The consumer is well served by the diversity of supply, even if the diversity isn’t obvious.

The same is true for electric current.

But the power grid is changing, according to a report issued Tuesday by the economic analysis firm IHS Markit, Ensuring Resilient and Efficient Electricity Generation: The Value of the Current Diverse U.S. Power Supply Portfolio, which lays out how federal and state policies to encourage wind and solar have had the unintended consequence of hurting a larger source of clean energy, nuclear power. The study, sponsored by the Edison Electric Institute, the Nuclear Energy Institute and the U.S Chamber of Commerce, suggests that the policies do this by interfering with market prices, a problem for nuclear plants, which are especially reliant on an accurate pricing system. With prices artificially depressed, some nuclear plants are closing, and putting the diverse character of the system at risk. And a less diverse system will eventually be more expensive, the study found.

Some of the change to the grid is driven by new environmental rules, making the owners of coal-fired power stations choose between expensive upgrades and retirement. Some of it is caused by changes in the relative prices of fuels, giving an advantage to natural gas.

Increasingly, though, the changes are coming because the grid is governed by two sets of rules, which were drafted completely independently and undermine each other. The picture painted by the study is a bit like a band with two drummers. This is hard on fellow band members and for the audience, too.

One set of rules lays out the structure of the competitive electricity market. The main payments to generators are for energy, that is, kilowatt-hours. The price is determined by lining up the suppliers in order of how much money they want for their product. At any given moment, the system arranges for the lowest-cost suppliers to be running, then the ones who are slightly more expensive, and more expensive than that, etc., until there are just enough suppliers to meet demand. Everybody pays the amount demanded by that last supplier, which is called the “clearing price.” Over the long run, the clearing price is a signal that companies in the generating business use to decide what plants to build, and which to retire.

At least, that’s how it was supposed to work.

A second set of rules – the other drummer – provides quotas for wind and solar power, and provides subsidies for building solar panels or operating wind machines. The study explains that when wind and solar run, they can offer energy essentially for free, since their costs are more or less the same whether they are running or not. They are expensive, but much of that cost is paid for by federal subsidies or subsidies from consumers.

For plants that are intended to run around the clock, like nuclear reactors, driving down that energy price may make them unable to recover their costs, even though they may be the lowest cost producers. If they close, the system loses some benefits that consumers previously got for free. One is protection against sudden changes in the price or availability of a single fuel, like natural gas. The impact on consumers is small if any given fuel is a small slice of total supply.

Another free benefit is cleanliness. (Well, not “free,” but not paid for by consumers.) If the system has to absorb more on-again, off-again wind and sun, it will also need more natural gas, to backstop the intermittent sources. If the combination of wind and sun and natural gas reduces the use of nuclear power and hydroelectricity – as the report suggests – then total emissions rise. California, on the leading edge of heavy reliance on intermittent sources, is seeing prices rise and carbon dioxide output remain fairly steady, the study says. A “perverse” increase in carbon dioxide output is to be expected, the study found.

The new study makes many of the points that appeared in an August report by the Department of Energy, "Staff Report to the Secretary on Electricity Markets and Reliability," which cites the value of baseload power plants, like nuclear, to assure reliability and diversity.

Discussion of the grid includes intermittent mention of the “sanctity of markets,” but as the report makes clear, many of the factors determining the wholesale price of electricity have nothing to do with markets; they have to do with state- and federal-level subsidies for favored technologies. But reducing the diversity of the grid means real costs to consumers. Having a diversified generation portfolio lowers the cost of electricity to consumers by 27 percent, according to the study. That is separate from the other benefits, like clean air and reliability.

The solution to a policy-induced mismatch, it finds, is not to let the two drummers continue sending conflicting signals; it is to fix the policy to configure the system to keep down costs and risks.

The above is from Matt Wald, senior communications advisor at NEI. Follow Matt on Twitter at @MattLWald.


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