The EPA’s Affordable Clean Energy (ACE) Rule: Putting Money on ACE Is a Bad Bet — Part I

This post is the second of a pair on the Trump administration's so-called "Affordable Clean Energy" (ACE) rule. You can read the first post here on CPRBlog. 

Industry Trends

In short, energy projections demonstrate a clear trend for clean energy and away from fossil fuels. These trends, directly and negatively, affect traditional electric utilities. About the time that rooftop solar financing was being consolidated by third parties such as SolarCity and Sunrun, utilities began to worry about a "death spiral." In such a scenario, customers would install solar rooftop panels, generate some or all of their electricity, and then either reduce their utility bills or, in some instances, sell their excess electricity back to the utility. To the extent that customers left the grid, the utility would have to recoup their fixed costs from a smaller customer base, thus increasing electricity prices and forcing more customers off the grid – hence the downward spiral.[1] At the time of these initial concerns, only about 2 percent of electricity was being generated by solar and distributed energy resources and, therefore, these new sources of energy barely put a dent in traditional generation.[2] 

Today, however, utilities face a range of new developments in the electricity sector that threaten the traditional ways that utilities do business and are forcing smart utilities to rethink their business models.[3] Declining technology costs for solar and wind have already been mentioned. To this list of declining costs, add energy storage. Not only is energy storage becoming cheaper and more promising, the Federal Energy Regulatory Commission has removed barriers for the entry of energy storage technologies into the U.S. power market.[4] 

Additionally, smart firms must assess the dangers of climate change and plan accordingly. To that end, some states, California being the most notable example, plan to ramp up renewable electricity production and expand the use of energy efficiency technologies, most notably through various regulatory devices such as net metering and renewable portfolio standards. In a complementary way, more than 100 major private corporations, including Ikea, Apple, Bank of America, Citi, Coca-Cola, and General Motors, have formed a collaborative global initiative, entitled RE100,[5] committed to using 100 percent renewable electricity. 

Renewables aren't the only fuel sources under discussion in the energy transition. Since the late 1970s, when nuclear investment became too costly and unattractive for utilities, there has been a stream of articles about the nuclear renaissance. To date, however, that renaissance has not borne fruit, largely because of the high cost of constructing nuclear generation capacity. In fact, the companies that own the only nuclear plants currently under construction recently announced that they'll need to spend significantly more money to complete work on those units. Those cost increases may well incur bond downgrades and with them increased financial risks.[6] 

Nevertheless, as climate change continues to occupy the concerns of policymakers and as non-fossil fuel electricity becomes more affordable, there is revived thought about nuclear renewal. At this point, however, it is unlikely that we'll see significant investment in large-scale nuclear power plants even though they do promise relatively carbon-free electricity. The nuclear hope, instead, rests on advanced nuclear plant designs, modular nuclear units, and small-scale nuclear generation.[7] In addition to technological advances in nuclear power, states such as Illinois and New York, and soon-to-be others, that are interested in reducing emissions support their nuclear fleets with subsidies, often referred to as zero energy credits (ZECs), that have withstood legal challenges.[8] 

Faced with a growing interest in non-fossil fuel electricity, traditional utilities can take one of two courses. First, they can continue to invest in fossil fuel electricity and watch their market shares decline. Or, second, they can reinvent themselves as new energy companies, rather than electric utilities, and participate in the ongoing clean energy transition. Regardless, placing bets on a coal future is not a winning gamble precisely because economic realities and regulatory incentives are driving the transition to cleaner fuels.[9] Even given the uncertainty of federal regulations, utilities are investing and will continue to invest in the clean energy transition and will do so with hedging strategies that support non-carbon investments in the near-term.[10] 

Traditional utilities can play a role in the clean energy transition. These utilities have the technical and managerial know-how to construct large-scale utility projects and balance the grid. The smart utility of the future will build utility-scale solar and wind; will participate in markets comprised of microgrids, distributed energy resources, and renewables; and will provide behind-the-meter technologies as efficiency measures for their customers. All of these activities can become revenue sources different than those traditionally relied upon by electric utilities. 

The significance of the clean energy transition, particularly in the electricity sector, is recognized by utility executives and regulators. A recent industry survey by the consulting firm Black & Veach concluded with these challenging comments: 

"Plunging costs of solar power and growing concerns of climate change are inspiring ranks of the largest private and Fortune 500 companies to pursue aggressive renewable energy goals for sustainability, cost-effectiveness and resiliency. This has left utilities with the sobering question of whether significantly invest in green infrastructure or to keep these large customers and watch large, rate-paying customers defect, taking considerable revenues with them."[11] 

The report begins by identifying key drivers of the modern electricity industry including: (1) a global movement dedicated to clean energy technology and innovation; (2) the development of the smart grid, including the integration of renewable and distributed energy resources;[12] (3) the emergence of non-traditional clients on the grid, including distributed energy resources and microgrids; (4) continuing development of more cost-efficient energy storage with and without natural gas; and (5) the expansion of electric vehicles and their need to integrate with the grid. All of these present challenges and, as the saying goes, they present opportunities, as well. 

The survey was quite revealing. Most significantly, 71 percent of utilities surveyed indicated that the "death spiral" was real, particularly if a utility continues to rely on an old customer base without adapting to new customer needs. More notably, the old paradigm in which customers use and pay for electricity is changing as customers become competitors, with rooftop solar installations being perhaps the most obvious example of a traditional utility customer selling its generation back either to the utility or into the grid.[13] 

To emphasize the point of the new electric industry era, the report notes two telling anecdotes. On April 28, renewable energy on California's power grid reached 73 percent of demand. This high percentage lasted only an hour, but given California's developing regulatory structure, the future for clean energy is clear. The second anecdote involved Xcel Energy's experience in Colorado, in which the utility received bids from energy developers to supply solar and wind-generated electricity (with battery storage included) at a cost lower than that of conventional generation. Grid parity is a reality, not a dream.[14] Additionally, the report noted that roughly 50 percent of the utilities acknowledge that they are actively working with customers and with regulators on alternative energy solutions to ensure a sound investment strategy.[15] 

Conclusion 

The investment choice facing Gerald Gentleman Station in contemplation of ACE serves as an instructive case study because it points to a useful decision tree for utilities. Utilities that are similarly situated to Gerald Gentleman face two initial questions. First, how many utilities are in the category? If there are only a few such utilities, then the issue of the environmental, as well as the overall investment effects, of ACE will be de minimis. However, if there is a significant number of similarly situated plants that will continue to operate coal-fired generation without taking necessary environmentally protective steps, then the environmental problem can become significant as the early reports discussed this morning have recognized. 

The second question raised by plants such as Gerald Gentleman is how to invest the money saved by not installing expensive pollution control equipment. Again, two issues present themselves. First, if there is no money for future investment and the utility continues to operate coal-fired central power stations, then their days may be numbered as clean energy takes over a larger segment of the sector. Second, if a utility does have money to invest, the smart move is to invest in the clean energy space and to reinvent the way the utility does business as it becomes the utility of the future. 

Finally, for those companies that either choose to or are financially stuck with coal-fired central station generation, they must now face an existential choice. First, they must recognize that continued investments in coal to fire their central power stations will face reduced demand. In other words, this situation begins a real death spiral. Or, second, the smart utility can get on board the transition to clean energy and invest in ways that are consistent with the projections and market indicators discussed.