Nine Trends to Watch in the Renewable Transformation

Cliff Hamal and Julie Carey* (chamal@lecg.com)
There is a strong push for increased renewable generation across U.S. electricity markets, driven by renewable portfolio standards, carbon emission concerns and environmental strategies of individual firms. Stepping back from the details of this evolving landscape, we consider some broader issues associated with this transformation.

1.   The existing wholesale market structure can accommodate increased renewable generation. Difficulties integrating renewable generation into the electric utility system are widely recognized, with the primary emphasis on the variability and uncertainty of wind generation.  The focus on wind is appropriate, as it will account for the lion’s share of new renewable energy and its variable output is a particular source of concern.  System operators are grappling with the implications of large quantities of this intermittent, unpredictable and non-dispatchable energy resource all moving together in response to the same weather systems.  Despite concern for dramatic changes, the market structures themselves will accommodate more renewable power.  Price signals will continue to drive market responses that will keep the system in balance.  Ancillary services such as regulation services will provide the near real-time system balancing by rapidly increasing or decreasing generation levels of online power plants in response to system needs.  There is a strong desire to minimize regulation purchases to save money and the amount purchased has generally trended downward.  The increased variability of wind will likely reverse this decline, but such quantity adjustments are routine and do not require any change in market rules.  System operators are finding that investments in wind prediction technology will improve their control and balance of the system, and further learning should be expected.  Accommodation for wind, however, will be made within current market mechanisms.

2.   Increased renewables and other market developments will change the mix of generation technology over time. Obviously, adding renewables changes the generation mix directly.  It also has a second order effect of changing generation requirements for the rest of the system.  Too often discussion of system needs ignores the role of prices in guiding investments decisions.  The corollary to existing market structures accommodating renewables is that those structures—and price in particular—should be sending the signals for new investment.  The variability of intermittent resources should increase the returns to flexible, dispatchable units that can respond to price changes with rapid operational adjustment.  With wind generating power predominantly at night, the ability to curtail output will be critical, and especially so if tax incentives continue to make it profitable to generate when prices are below zero.  Old, inflexible units will be economically forced to early retirement as these price trends continue.  There are two other developments with the potential to significantly change the pattern of pricing.  The first is smart grid infrastructure deployment that can greatly increase demand response.  Smart grid technologies bring the promise of water heaters and other equipment that can respond to market prices by increasing or decreasing power consumption, which reduces price volatility, including that caused by intermittent supply.  Second, substantial penetration of plug-in vehicles will raise off-peak demand and may also help dampen volatility by being easily interruptible as load and possibly, someday, using their batteries to support the grid in extreme situations.  As a result of all of these developments, the resource mix will evolve.  Ultimately, the decisions over resource investments will be made based on expected market prices.

3.   Short term and long term storage needs associated with increased renewable generation.  With growing variability in wind generation output and high wind generation output at times when electric power demand is low, there is a greater economic benefit from more electricity storage.  Short-term storage that can flatten problematic price spikes due to the variability of intermittent resources.  Pumped storage is ideal for solving this problem, and demand-side peak shaving resources will also grow in importance.  Of course, if smart grid developments produce substantial demand response, minor time-shifting of demand may provide substantially the same service as short-term storage.  The other problem with intermittent resources is the problem of limited output for days at a time mostly due to extended weather patterns (such as heat waves that reduce wind and storm systems that limit solar generation), raising the need for alternative supply sources for extended periods.   The solution does not lie in finding a way to store electricity, but in maintaining an ability to generate electricity from other sources.  In a nutshell: fossil fuel. This is an anathema to renewable purists, but it is unrealistic and counterproductive to plan on any other basis—energy storage for periods of renewable shortfalls is not likely to become economic. The fossil generation facilities largely already exist, more can be built readily, fuel is plentiful and there is no risk of the intermittent shortage outlasting the level of reserves that have been set aside.  Growth in renewable generation will displace energy from these facilities to provide environmental benefits, but we should (and will) plan on keeping sufficient quantities of fossil generation available to provide reliability.

4.   The growth of renewables on the distribution systems will be a challenge.  Development of an intelligent grid at the local distribution level will be crucial to unleashing the potential growth of renewable generation at customers’ sites.  Significant distributed generation with customers supplying energy back to the grid will only work when the system can handle the flow.  Reverse flow energy from the customer to the grid is a challenge to the utility because the systems were designed for centralized production and one-way transmission.  The dramatic change in system operations creates considerable uncertainties over how this will work, both hour-by-hour and over the long term.  Investments in smart grid technologies on the distribution systems have the potential for developing a more flexible, interactive, bidirectional distribution system, but this work is progressing slowly, in part because of the concern over costs, technology standards, and approvals by regulatory commissions.  Full upgrades will be neither cheap nor quick.

5.   Political support for renewables will continue to be fickle.  There seems to be an underlying belief in the renewable industry that all would be fine if it could break free of on-again, off-again government support.  Subsidies, portfolio requirements, tax incentives and the like tend to have specific target dates or sunset provisions that feed a boom and bust cycle.  It is true that greater certainty would result in steadier industry growth and potentially lower costs.  It just is not going to happen.  For technologies that are not otherwise economically viable, such support is essential.  And this support often comes in a lumpy manner depending on political interests and other factors.  If the support is too high, excessive supplies will flood the market.  Insufficient support produces no results.  And so the lumpy nature of subsidies will continue as the political process provides commitments for concrete steps that are continually adjusted over time to keep actions in line with the political will.  The solution to the problem is a price on carbon, preferably in the form a tax to eliminate the potential price volatility that can come from cap-and-trade.  We are many years away from carbon prices high enough to motivate substantial renewable generation.

6.   Environmental priorities will evolve over time.  While there is considerable interest in renewable generation, this means different things to different people, states and regions.  Ultimately, it concerns the environment, but precise environmental objectives are rarely specified.  For example, if our ultimate environmental goal is to address climate change, different renewable technologies may have significantly different levels of benefits.  Some biofuel options, which are clearly renewable, may not provide the desired benefits due to other effects on the environment.  Some states consider the generation of electricity from waste products renewable.  Hydroelectric, which is clearly renewable, raises other environmental effects so there are some that would want to limit its qualification, particularly for large, environmentally-disruptive facilities.  Also, definitions may expand to include carbon capture or nuclear generation because they do not emit carbon.  Today, definitions of renewables vary from state to state and one should expect changes over time.  A national renewable portfolio standard would provide standardization, if it were ever adopted, but even that standard might evolve or be subject to further modification by the states.

7.   Expect a political backlash as costs build.  The increased cost of renewable generation will become more apparent as its share of energy supply grows.  While scale economies will lower costs to a degree, the total cost of renewable resources will be greater than non-renewable alternatives for some time.  Socialized costs for demand side management programs and major transmission investments to carry renewable energy long distances will contribute to further rate increases for electric power consumers.  And most of these added costs will stay in rates for many years.  Customers will ultimately pay the added costs, and this cost difference may become apparent when there are neighboring regions with lower costs and lower renewable requirements or when self-production (including distributed generation) provides the opportunity for bypass.  At some point a backlash in inevitable.  The price effects are felt most keenly at the utility commissions where the electricity rates have to be approved and some commissions are already struggling with questions of costs and benefits.

8.   Generation versus transmission, forever in tension.  System improvements often require a balance between generation and transmission investments.  Since the advent of competition, achieving this balance has grown more difficult, as a result of the tension between the incentives and outlooks of at-risk generation investors and regulated transmission utilities.  The drive for the development of renewable resources far from load centers will further complicate this process.  Project developers want to build in the highest-wind regions and hope someone else will pay the cost of building transmission over long distances to get the power to customers.  To the extent that project developers avoid the cost, disputes will arise over which utility’s customers should pay and how the benefits of the transmission system upgrades are allocated.  Then there is the issue of who gets to use the transmission line.  The public policy goal may be to increase renewable generation, but open access rules give equal access to all suppliers.  There will be instances where there is too much renewable generation in a supply region, congesting even the newly added transmission lines, and leading to depressed prices for the renewable energy.  Such problems are inevitable.  The massive transmission investment plans in MISO alone (accounting for more than the net-of-depreciation value of the entire MISO transmission system) provides an indication of the scale of these issues.

9.   Local conditions matter.  The regional differences in the market, and their implications for integrating renewable resources, will only grow.  The quantity and types of variable energy differ across regions, as do the tools available to address these issues.  So to do the characteristics of the installed generation base.  As always with electricity, the local market conditions matter.

* The authors are Director and Principal, respectively, with LECG, LLC.

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