Climate Policy: Physical Reliability vs Economic Philosophy

, senior energy analyst, Climate & Energy Program | October 4, 2016, 3:10 pm EST
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As states get serious about reducing climate-harming carbon pollution, their decisions will guide how the electrical grid changes, for better or worse. These decisions are central to the people who actually plan and manage the grid—the grid operators—who have shown varying degrees of willingness to embrace a clean energy economy.

New York and New England grid operators are showing how they can adapt and include state policies aimed at reducing climate-damaging carbon emissions. Advocacy by the Union of Concerned Scientists with PJM, the less enthusiastic grid operator for the Mid-Atlantic, Ohio Valley and Northern Illinois, has begun to show results. If PJM stakeholders can open a dialogue, we might get to a better future.

Renewable energy facilities in PJM region contribute to reliable electricity supply. Image courtesy PJM Interconnection, LLC.

Renewable energy facilities in PJM region contribute to reliable electricity supply. Image: PJM Interconnection, LLC.

Grid operators, their stakeholders, and the government regulatory authorities must navigate a mix of new and not-so-new conditions in the electricity industry:

  • Low gas prices reduce profits and survival of coal and nuclear plants, and increase reliance on gas supplies for power plants;
  • Greater use of demand-side resources that have seasonal profiles;
  • Public policies from state and local governments, and lately businesses, are buying renewable energy through long-term contracts, with the motivation of reducing climate-damaging carbon emissions

Beginning in the late 1990s, states (now 29) created renewable electricity standards that require increasing additions of renewable power generation. This is true in the regions served by the more recently-established markets of PJM, New York Independent System Operator, and the New England Power Pool. The capacity markets set up in these regional grids aim to ensure the long-term reliability of the power supply by making payments to keep plants open and available for peak-demand times, like the hottest summer afternoons and coldest winter mornings.

Economists are not ready to accept state policies that affect market outcomes, fearing the market will not ensure investment. But resolving this debate between economic philosophy and existing state laws is critical as climate impacts increase and policies pushing carbon reductions further guide the transition away from fossil fuels.

UCS emphasizes the physical reality of additional renewable energy, whether paid for through state commitments or contracts with major consumer and technology corporations. Renewable generation contributes to the energy supply. With wind more productive in winter and solar performing during peak-demand times in summer, a realistic accounting of supply and demand must reflect the rise of renewable energy.

Count carefully when planning for winter demand

PJM is struggling to improve access to its capacity market for seasonal resources. Demand response (DR), where consumers get paid to lower their on-peak use, has grown to be a significant contributor to the PJM capacity market by largely relying on adjustments to summer energy use. Air-conditioning is an especially attractive flexible demand, though more opportunities arise every day with new technology. PJM’s proposal for pairing or aggregating winter resources and summer resources has to be strengthened with a definition of the rights and capabilities of winter capacity resources.

As it stands now, PJM uses the capability of a resource measured in summer, and has not established what capacity resources are deliverable and useful in winter.

The gaps in PJM’s partial attention to seasonal resources, and winter capabilities in particular, risk both higher consumer costs and lower system reliability. For all the PJM rhetoric about the need for predictable outcomes and efficient markets, and a stated willingness to ignore public policy, these gaps deserve more forthright attention.

PJM made reforms in the capacity reliability market after the January 2014 cold weather revealed that many capacity resources did not adequately prepare for winter energy production. The most expensive surprise was the lack of gas supply arrangements that PJM presumed were in place despite years of PJM requiring verification of fuel costs. Generators expected to make electric power deliveries at any time had not obtained similar commitments from the gas pipeline system. On those coldest days in January, wind and DR deliveries to PJM that exceeded expectations or obligations were welcome and noted by PJM. Now UCS has advised that the same type mistake looms, as PJM has not determined how the electric transmission system is adequate for all obligated generators to deliver their capacity needed for reliability. Only windfarms are studied for winter transmission impacts.

In addition, when PJM excludes information of renewable energy additions, there are added costs to consumers when PJM plans capacity procurements. In the most recent PJM commitment to pay for capacity, the official market monitor analyzed the bids and found that if the rules excluded the DR, efficiency, and renewable generation from selling capacity (as scheduled reforms will do next year), the annual cost to consumers would rise $5 billion to meet the demand from the present supply absent these clean energy resources.

Progress? Maybe, maybe not

Separately, prodded by state bailouts of nuclear and coal plants, PJM has floated a proposal meant to keep any sort of state-subsidized power plant from increasing supply and lowering payments in the capacity market. PJM would exclude from capacity procurements both the supply and demand met by a state policy. As an approach to state renewable energy standards, this PJM proposal may protect consumers from some of the billions of dollars in higher costs resulting from capacity procurements that omit the supply from renewable energy but still include the demand served by that supply.

As a response to uneven, uncoordinated state public policies, the PJM approach is a regrettable but understandable interim solution. However, in the near-future, this segregation of policies and markets will prove to be an unworkable approach. Two physical realities cannot be ignored by economic philosophy: 1) The harms from climate change demand policy responses that will affect energy markets; and 2) renewable energy use is increasing everywhere, and costs are still falling, and that will affect energy markets, too.

As I prepare to post this blog, consumer interests in PJM have proposed to have PJM stakeholders revisit the basic objectives and designs of the capacity market, with state public policy as one of the areas where reform is needed.

We believe the need is real.

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