Fossil Fuels vs. Renewables: A Price on Reliability?

June 12, 2023 | 2:58 pm
Pedro Castellano
Mike Jacobs
Senior Energy Analyst

What happens when promise of electricity reliability fails in bad weather? How can gas power plant owners claim to be reliable but fail to make adequate efforts to purchase fuel?

We know that consumers pay for electricity reliability and bear the cost when supplies are tight. We now know that gas power plant owners will vociferously deny responsibility for their failings. And we also know that extreme weather will create more challenges for reliability.

Utility companies, as well as state and federal government regulatory agencies, made a series of questionable decisions that together created the situation we find ourselves in today.

Three decades of deregulation allowed private companies, as opposed to public regulators, to make critical decisions about reliability. In many places state and federal utility regulators delegated decisions about energy supplies to the market. Since companies and policymakers do not want to pay a lot to ensure reliability, they both subscribe to the theory that the law of supply and demand will provide an adequate supply at a low cost.

In reality, cost cutting leads utilities to overrely on short-term gas suppliers, making an inadequate supply look like it will meet demand. That can prove disastrous. Consider what happened in New York City and northern New Jersey when Hurricane Sandy struck in 2012. After the storm hit, owners of backup generators at hospitals, data centers and municipal facilities found out that they all contracted with the same low-priced oil-delivery service that did not have the capacity to deliver enough oil to handle the spike in demand.

The same scenario has played out with the power plants that use fossil fuels, predominantly methane (“natural”) gas, delivered by pipelines. The electric power system is trapped by gas-dependent power plants that cannot obtain gas when it needs it to keep the lights on. It’s a persistent problem that the Federal Energy Regulatory Commission will take up at an open meeting and a forum on June 15 when it addresses a tangle of issues related to reliability in extreme weather and the markets meant to provide a reliable electric supply .

Stuck between the past and the future

In the past, state and federal policies granted electric utilities a monopoly over the supply of energy while regulators monitored company overspending. Regulators and consumers had no competing power supplies to compare on cost or performance, and utility companies claimed that every power plant was “needed for reliability.”

For a while, utilities made a combination of self-interest and reliability arguments to oppose technical innovation and deregulation. Market and competition advocates, however, ultimately won the policy fight, and paid some—but not enough—attention to reliability.

Through that transition from publicly regulated monopoly to competition, electric utilities focused on summer demand, which drove the need for plants that can produce electricity (capacity) as well as the fuel those plants required to produce that electricity. The electricity industry repeatedly turned to gas, available through pipelines that were primarily used to deliver heating fuel in winter, as the fuel source for summer peak electricity demand. Gas seemed to be available, state policymakers went along with market forces, and they raised too little concern over reliability risks. This system worked so well in the past that gas plants totally dominated new power plant investment from 1990 through 2014.

In much of the country, electric power plant choices are now made via competitive markets. As long as the electric industry’s reliability emphasis on summer went unchallenged, gas-burning power plants could cut costs on other types of reliability that were not priced into the markets. The gas markets still do not value flexibility or provide winter reliability that electricity demand requires. Several recent winter storms revealed that gas-fired power plants are often unable to obtain fuel. Such fuel inadequacies result in electricity outages. At the same time, extreme weather events are becoming more common as more fossil fuel is burned and carbon is released into the air. It’s a vicious feedback loop.

Renewable energy competition

Now that renewable energy sources are economically competitive, companies are building more wind and solar facilities. New renewable energy plants outpaced new fossil fuel facilities across the country in eight of the last nine years, according to the US Energy Information Administration. Meanwhile, lower costs and technological improvements in energy storage are making it an attractive investment as well. These changes have dramatically reduced the amount of fossils fuels burned for energy.

With less gas and coal burned—and a larger role for renewables—the electricity industry is unsure about what the right measure of grid reliability might be. (In the past, a power plant’s value for reliability was the product of its capacity in summer and its unplanned outage rate.) Today, grid operators recognize plants have correlated outages. Forcing this debate is the gas supply’s wintertime failings. Grid operators are now reconsidering how gas-fired power plants are valued for reliability.

Competing without a fuel supply

Once the electric utility world adopted markets, policymakers’ next step was to try to ensure the electric power supply’s reliability through a competitive auction. The realization that all gas plants have not included reliability as a part of their business strategy led to increasing efforts by regional grid operators to set rules incentivizing performance and penalizing nonperformance. The gas-burning power plants that were caught short of fuel last winter are now facing penalties and trying to shift blame. At the same time, wind farms produced well above expectations.

Can we fix this?

The problems of relying on gas are now evident. Market forces are moving private investment to renewables. Energy storage, combined with wind and solar, is lining up to get on the grid and further displace fossil fuel. Regulators and utilities can update market rules and reliability measures so combined renewables-plus-storage plants are treated the same as other combined cycle (gas turbine-plus-steam turbine) power plants. Modernizing grid planners’ measurements of reliability will help, too. There is no time to waste in preparing for a reliable system that recognizes the expanding role of renewables.