Diversity key to US grid resilience

25 September 2017

Policy-driven market distortions are leading to a loss of diversity in the US electric supply portfolio, which will cause higher costs for consumers as well as a loss of resilience to supply disruptions, according to a new study by IHS Markit. A less diverse portfolio will also likely mean little or no reduction - and possibly increases - in electricity sector carbon dioxide emissions, the report finds.

Ensuring Resilient and Efficient Electricity Generation: The value of the current diverse US power supply portfolio assesses the impact on consumers and the US economy of current trends moving the US power sector toward a significantly less efficient mix of fuels and technologies for power production. The study compares the actual industry performance of recent years (2014-2016) with that of a less efficient diversity portfolio case over the same time period.

Current policy-driven market distortions are precipitating a move towards a less diverse system with no meaningful contribution from nuclear

The current diversified US electric supply portfolio lowers the total cost of electricity production by around $114 billion per year, and lowers the average retail price of electricity by 27%, the report found. It also reduces the variability of consumer bills, and provides resilience against low-probability but high-impact constraints on power delivery, including extreme weather events like the polar vortex cold weather phenomenon of early 2014 and more recent hurricanes as well as infrastructure failures.

The current diverse set of generating technologies provides US consumers with a reliable, resilient and cost-effective electric supply portfolio, but current policy-driven market distortions are precipitating a move towards a less diverse system with no "meaningful" contribution from coal or nuclear resources, and a smaller contribution from hydroelectric resources.

Some parts of the country could within a decade find themselves with such a portfolio, relying on a tripling of wind, solar and other intermittent renewables from a current 7%, and on natural gas to provide the majority of their generation, the report says. The increase in retail prices resulting from such a portfolio could have macroeconomic impacts including a 0.8% decline of real US gross domestic product, equivalent to $158 billion, as well as job losses and a reduction in household disposable income.

Premature retirement

A lack of harmonisation between policy initiatives and wholesale electricity market operations distorts the wholesale electricity market, the report notes, with further problems caused by an "accumulation of federal state subsidies and mandates for specific technologies." Such mandates on carbon emissions reductions are "often at odds" with their objective, it says. "In particular, nuclear power resources are similarly situated to other non-CO2-emitting resources such as wind, solar, and geothermal in the supply portfolio." However, it says, policies that suppress market-clearing prices cause disproportionate cash flow suppression for the high-utilization generating technologies required to cost-effectively supply stable, constant base-load demand. This results in wholesale price suppression, which "disproportionately harms" nuclear power resources and "causes premature retirement and replacement by a mix of renewable and natural gas resources with a higher CO2 emission profile", it says.

Eliminating policy initiatives that cause significant market distortions would be the most straightforward way to preserve the benefits of a diverse generating portfolio, the report says. "However, implementing such an approach to harmonise policy initiatives and market operations may be politically unfeasible," it acknowledges. An alternative approach could involve regulatory approval and implementation of offsetting market interventions, such as changes to market rules to accurately reflect the cost of electric reliability and resilience in market prices, and payments for cost-effective generation attributes, such as contributions to power system resiliency and environmental attributes. To do this requires appropriate changes in operating and planning rules and standards at the federal and state level, it says.

"It is easy to take the cost-effective diversity of the current US electric supply portfolio for granted," IHS Markit chief power strategist and lead author of the study Lawrence Makovich said. "Ironically, addressing climate change concerns with federal and state policies to subsidise and mandate wind and solar electric generation produced the unintended consequence of distorting wholesale electricity market clearing prices and driving the uneconomic closure of nuclear power plants - a zero-emitting source. The result has been some power system carbon dioxide emissions remaining constant or increasing," he said.

IHS Markit's research was supported by the Edison Electric Institute, the Nuclear Energy Institute (NEI), and the Global Energy Institute at the US Chamber of Commerce.

The IHS Markit study makes many of the same points that appeared in the US Department of Energy's Staff Report to the Secretary on Electricity Markets and Reliability, published in August, the NEI said. That report suggested low-cost abundant natural gas and the growth of renewable energy are accelerating the premature retirement of baseload power plants, particularly coal and nuclear, and putting the reliability of the electricity grid at risk.

NEI Senior Director of Policy Development Matt Crozat commended the IHS Markit study, noting that public policies can create "unintended market distortions" by suppressing the power prices for all of generators. "If plants close, this ultimately results in higher emissions, higher prices and less reliability. New York and Illinois have already acted to prevent such closures and we urge other states and jurisdictions to act before it is too late," he said.

Researched and written
by World Nuclear News