A recent report by consulting firm IHS Markit misses recent technological advances that have drastically reduced the cost of renewable energy while also enabling wind and solar to provide essential grid reliability services, in many cases better than conventional power plants.
The report, which was commissioned by the Nuclear Energy Institute, Edison Electric Institute, and the Chamber of Commerce, also incorrectly focuses on renewable energy as the reason coal and nuclear power plants are retiring, when experts have concluded that low natural gas prices and flat electricity demand are the primary factors.
It is important to scrutinize this report because it is cited as justification for DOE’s misguided proposal to subsidize coal and nuclear generation, even though the IHS report strongly denounces that very type of subsidy for distorting and undermining electricity markets.
Outdated renewable cost data
The IHS report uses outdated assumptions for the cost of renewable energy and natural gas to make it appear that those technologies are more expensive than coal and nuclear. In reality, the primary reason coal and nuclear plants are retiring is that they are no longer competitive with natural gas generation due to sustained low gas prices.
IHS incorrectly claims that wind energy costs $85 per MWh (MegaWatt-hour, enough to power a typical home for a month). This ignores technologies advances that have driven a more than the two-thirds reduction in the cost of wind energy and a more than 80 percent reduction in the cost of solar since 2009.
The Energy Information Administration shows that unsubsidized wind now costs $55/MWh, while Wall Street investment firm Lazard shows unsubsidized wind is the lowest cost of all new energy sources, ranging from $32-62/MWh depending on the region. These costs are in the same range as the operating costs IHS cites for existing conventional generators. As a result, the large cost that IHS claims will result from the transition to gas and renewable generation would actually be either a minimal cost or a net benefit if IHS used more accurate renewable cost information.
IHS reaches its flawed wind cost calculation by assuming that wind plants have a capacity factor (a measure of actual energy production relative to a theoretical maximum) of 30 percent, while in reality new wind projects are consistently delivering capacity factors in excess of 40 percent, with some reaching 50 percent. IHS also assumes that a wind plant costs $2,125/kW to install, even though EIA shows a cost of $1,576/kW and Lazard shows a cost range of $1,250-1,700/kW.
IHS also incorrectly argues that the value of wind and solar energy should be significantly discounted relative to conventional energy sources. However, EIA has found that wind’s value is only reduced by about 10 percent ($4-5/MWh) relative to gas generation after accounting for the different time of energy production and contribution to peak capacity needs. EIA’s analysis also shows that in many regions today, solar generation provides greater value than gas generation.
IHS also appears to inflate wind’s cost by assuming that wind must be paired with natural gas generation, which is not accurate. In reality, all power plants are backed up by all other power plants on the power system. In fact, the gradual and predictable variability of wind output is far less costly for grid operators to accommodate than the abrupt failures of large conventional power plants.
Technological advances allow renewables to provide grid reliability services
IHS incorrectly alleges that wind and solar fail to provide “flexibility/dispatch” and “grid support functions.” In reality, wind and solar resources now provide those grid reliability services, in many cases better than conventional power plants. NERC has documented that wind energy “offers ride-through capabilities and other essential reliability services,” and NERC’s CEO testified at a House hearing last month that, “Variable resources significantly diversify the generation portfolio and can contribute to reliability and resilience in important ways.”
Specifically, wind and solar plants now offer:
Grid disturbance ride-through: It is critical that all power plants on the system be able to ride through grid disturbances that result in voltage or frequency fluctuations, many of which are caused by the abrupt loss of a large conventional power plant. This is necessary to prevent a disturbance from causing a cascading outage on the power system.
Wind plants have excellent ability to ride through grid disturbances, as their power electronics protect the turbine generators from grid disturbances. In fact, for over a decade wind plants in the U.S. have been required to meet a rigorous ride-through standard, one that many conventional generators cannot meet.
Voltage and reactive power control: For power to be transmitted efficiently and to protect grid and consumer equipment, voltage must be maintained within acceptable levels at all points on the grid. Power plants help regulate system voltage by providing reactive power in response to voltage fluctuations.
The power electronics discussed above also enable wind and solar plants to provide reactive power support to regulate voltage on the power system. This response is fast and accurate, and can be available even when the renewable plants are not generating electricity.
Flexibility, frequency regulation, and primary frequency response: Wind and solar plants can also be operated in a highly flexible, dispatchable manner to quickly and accurately follow fluctuations in electricity supply and demand to keep frequency stable, as is now done regularly by grid operators in Texas and Colorado. NERC recently noted that the Texas power system’s frequency response is noticeably improved when wind output is high.
System resilience: Increasing wind and solar power also add to grid resilience. Cold snap events in Texas in 2011 and during the polar vortex event across much of the country in 2014 confirmed that no energy source is immune to outages. During each event a large share of the coal fleet simultaneously failed due to extreme cold, while wind energy output was well above expectations for its contribution during a peak demand period, helping keep the lights on for millions of customers. PJM also recently found that energy mix scenarios with a very large share of wind generation were some of the most resilient to unexpected weather events.
IHS also incorrectly claims that electric reliability is declining and at risk. However, the CEO of NERC, the entity responsible for electric reliability, testified to the Federal Energy Regulatory Commission in June that “the state of reliability in North America remains strong, and the trend line shows continuing improvement year over year.” A document sent to DOE by NERC in May similarly explains that there is no crisis for grid reliability or resilience. As Republican former FERC Commissioner Nora Brownell recently noted, “I have never seen a credible argument — not one — that there is a problem with resiliency and reliability.” DOE’s own August Staff Report on grid reliability states that “All regions have reserve margins above resource adequacy targets.”
The facts about market distortion
IHS’s report also incorrectly focuses on renewable policies as the primary factor causing low electricity prices and coal and nuclear plant retirements, yet experts including DOE agree that cheap natural gas and flat electricity demand are by far the largest factors.
DOE’s August Staff Report notes that “The biggest contributor to coal and nuclear plant retirements has been the advantaged economics of natural gas-fired generation.” The DOE report also explicitly exonerates renewable generation as a primary cause of retirements, noting that “the data do not show a widespread relationship between [variable renewable energy] penetration and baseload retirements…While concerns exist about the impact of widespread deployment of renewable energy on the retirement of coal and nuclear power plants, the data do not suggest a correlation.”
The maps here show that most retiring coal and nuclear plants are in regions that have little to no renewable generation, yet those regions do have low natural gas prices and high coal prices.
The IHS report does correctly explain that one should expect “the orderly economic replacement of unprofitable, obsolete generating technologies with new, profitable state-of-the-art natural gas–fired generating technologies.” However, DOE’s recent proposal to subsidize for coal and nuclear plants would prevent the beneficial market-based outcome that IHS suggests should be expected, and instead lead to the very market distortions and consumer harms that the IHS report warns against.
Both the DOE Staff Report and the IHS report warn against the potential for public policy to distort electricity markets, yet the DOE proposal cites those reports in arguing for one the most distortionary market interventions imaginable, a direct subsidy for energy production from coal and nuclear generators.
Paying a premium for the energy produced by coal and nuclear plants, as DOE proposes, is a highly distortionary market intervention. In many markets today, gas plants are able to produce power at slightly below the cost of coal power plants. DOE’s proposed coal subsidy would cause coal plants to operate instead of gas, even though gas is a cheaper means of producing electricity. Using a more expensive, less efficient electricity source inevitably harms consumers.
Even worse, this policy would distort market prices in almost all hours of the year, as subsidized coal plants would now be setting electricity market prices a large share of the time. The price of electricity would be depressed by an amount equal to the value of the subsidy, with the end result that many non-coal power plants would be forced into retirement even though they were a more economic source of energy.
This would greatly diminish the value of these markets and raise questions about their ability to function, putting in jeopardy the billions of dollars in annual consumer and reliability benefits these markets provide. For example, PJM and MISO each provide around $3 billion in annual net benefits by improving reliability and efficiency.
It should be pointed out that this distortionary impact stands in strong contrast to renewable energy incentives, which do not change the dispatch order of other power plants and are almost never factored into electricity market prices. Wind incentives do not change the dispatch order of other power plants because wind is the cheapest energy source regardless of incentives, on account of its zero fuel cost. Because wind plants are the cheapest fuel source they almost never set electricity market prices, so the value of wind incentives is also not directly factored into the market prices received by other generators; on the other hand, fossil fuel subsidies directly affect electricity market prices because fossil power plants almost always set the market clearing price.
Regardless, wind energy accounts for less than 3 percent of cumulative federal energy subsidies, and the renewable tax credits are being phased out after achieving the goal of driving down the cost of renewable energy by scaling up deployment. Moreover, those incentives help account for the well-documented public health and other externality benefits of renewables. Some states use renewable portfolio standards to account for those benefits of renewable resources. In contrast, DOE’s proposed mandate does not effectively bolster electric reliability and therefore does not capture any externality benefit.
Other flaws in the IHS report
The report opens with a misleading discussion of the causes and results of changes in California’s electricity generation mix. In reality, low hydroelectric output due to extended drought, new water withdrawal rules that limit once-through cooling, and the decommissioning of the state’s nuclear generation are the primary reasons why carbon dioxide emissions have not fallen more drastically and why electric rates have modestly increased. Other states that have made even larger investments in renewable energy have seen some of the largest drops in electric rates and emissions.
The report also appears to have made an error in estimating the statistical relationship between a state’s electricity price and its electricity consumption, which causes the report to exaggerate the harm to consumers from electricity price increases. The statistical function described in Appendix I assumes that a state’s electricity consumption should increase with an increase in average temperature. However, this ignores that low temperatures also increase electricity consumption to power furnace fans and in some cases the direct use of electricity for space heating and water heating.
As a result, IHS’s analysis incorrectly assumes that temperate states like California and Hawaii should have high electricity consumption because their average temperature is higher than a state like North Dakota or Wyoming, and therefore wrongly concludes that the primary reason California and Hawaii have lower electricity consumption is because their electricity price is higher. In reality, a primary reason that California and Hawaii have low electricity consumption is that a large share of the population lives in temperate coastal areas where there is less need for both air conditioning and heating. IHS could have better modeled electricity consumption by using a quadratic function that predicts high electricity consumption for both high and low temperature extremes, rather than a linear function that only predicts high electricity use in states with high temperatures.
To conclude, the cost and reliability arguments of the IHS report are fatally flawed due to anachronistic assumptions about the cost and reliability services contributions of renewable resources. The report also incorrectly focuses on renewable energy as the reason coal and nuclear power plants are retiring, when experts have concluded that low natural gas prices and flat electricity demand are the primary factors. The IHS report should not be viewed as support for DOE’s proposal to subsidize coal and nuclear generation, and in fact the IHS report explains how that type of subsidy distorts and undermines electricity markets.