Take Control of Your Future, Part VI: Regionalization of Energy Resources

In my initial blog in this series, I discussed seven megatrends that are changing how we produce and use power. Here, I discuss how the regionalization of energy resources is fundamentally changing the energy industry.

What Is Happening?

To get access to energy supply and resources, more regions, states, energy markets, and utilities are looking beyond the traditional borders of their energy business and territory. The main drivers playing out right now are:

• An accelerated shift of generation resources to cheaper gas and low-cost renewables.
• An increase in carbon reduction policies and targets.

Accelerated Shift of Generation Resources

In part IV of this series, I discussed the accelerated shift in power generation to natural gas and renewables. First, as a result of cheap natural gas—which will be the case for the foreseeable future—investments in combined-cycle natural gas generation plants have increased. Major investments in gas pipelines by utilities have also increased (including from Florida Power & Light [FPL], National Grid, Spectra, and others), mostly supported by states and regions like Massachusetts, New York, and Texas. Some utilities (including FPL) have been investing in the exploration and production of natural gas.

These infrastructure investments still face challenges in getting the required approvals and expected returns. FPL initially received approval from the Florida Public Service Commission (PSC) to recover the costs related to its investment in upstream development in Oklahoma’s Woodford Shale through rates as part of its fuel expenses. However, 2 weeks ago, Florida’s highest court overturned this decision and concluded that the PSC did not have the authority under state law to approve cost recovery for the joint venture as part of FPL’s rates. We will see how this plays out as utilities continue to look to secure access to natural gas and increase shareholder value.

Second, investments in renewables continue to increase. The Guidehouse Energy Market Outlook projects that in 2016, 19.3 GW of wind and solar generation capacity will be added in the United States, which is about 75% of total new generation additions in 2016. Besides the complexity of the duck curve, regions, states, energy markets, and utilities are also looking at how to get this renewable power (in places where sun and wind are favorable) to places where this power gets consumed. The transmission impacts are significant. Combined with Federal Energy Regulatory Commission (FERC) Order 1000, these impacts will drive new investments in transmission. This has been evidenced already in the Northeast, Texas, Massachusetts, and the western United States, among other places.

Increased Carbon Reduction Policies and Targets

Part III of this series explored the rising number of carbon emissions reduction policies and regulations. Even though the U.S. Environmental Protection Agency’s (EPA’s) Clean Power Plan (CPP) is on hold, many individual states, cities, and utilities are moving toward the CPP goals to reduce carbon emissions, plan for an advanced energy economy, and meet cleaner generation goals. Policymakers are setting clear targets to increase renewable generation in the Northeast. Recently, in order to meet the state’s 50x30 goal, the New York Department of Public Service (NYDPS) described a path forward in its Clean Energy Standard (CES) white paper. The paper outlines the principal policy objectives of the CES, which include increasing renewable electricity supply to achieve the ambitious goal of renewable energy meeting 50% of New York’s electricity needs by 2030 and promoting the progress of Reforming the Energy Vision (REV) market objectives. Regions, energy markets, states, and utilities are looking for access to cleaner energy resources—mainly gas and renewables—either by building these generation assets and securing access to cheap natural gas or by bringing cleaner power into their territory through interconnection.

How Does All This Play Out?

There are many examples now of regional approaches for solving the challenges discussed above. One example is the creation of the western Energy Imbalance Market (EIM) by the California Independent System Operator (CAISO), which is pursuing shared benefits for the participants. CAISO reported recently that the cost benefits of the EIM were $18.9 million during the first 3 months of 2016. The western EIM also saved 48,342 metric tons of carbon emissions during the first 3 months of the year by using 112,948 MWh of surplus renewable energy across the participants to meet demand. “The EIM is now firmly established and is providing considerable economic and environmental benefits,” said CAISO’s President and CEO Steve Berberich. “These successes are the result of the vision and hard work of many across the West.” Oregon-based PacifiCorp, which serves customers in six western states, was the first EIM participant, followed by NV Energy. Other utilities that have announced plans to join the EIM include Puget Sound Energy and Arizona Public Service in October 2016, Portland General Electric in October 2017, and Idaho Power in April 2018.

A second example is the Regional Greenhouse Gas Initiative (RGGI), which was used by the EPA as an example of a flexible and multi-state carbon reduction program. Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island, and Vermont are members of the RGGI, which is a cap-and-trade program to curb CO emissions. To comply with the EPA’s final targets for carbon reductions from existing fossil fuel power plants, states may attempt to join the RGGI or establish similar programs that can then trade into and out of the RGGI.

Beyond the United States: Europe a Good Example?

Europe created the Energy Union, which is designed to help deliver Europe’s 2030 climate and energy targets and make sure that the European Union (EU) becomes the world leader in renewable energy. Achieving these goals will require a transformation of Europe's electricity system, including the redesign of the European electricity market, in order to meet consumers' expectations, deliver benefits from new technology, facilitate investments in renewables and low carbon generation, and recognize the interdependence of EU member states when it comes to energy security. A critical part of this initiative is connecting isolated electricity systems to secure supply and helping to achieve a truly integrated EU-wide energy market—a key enabler for the region. The EU has set an initial minimum interconnectivity level of 10% to be achieved by all member states by 2020. Depending on the geographical position of a country and its energy mix (e.g., the weight of renewables in a given country), achieving the required 10% minimum may not be enough. The EU is therefore looking into raising the target to 15% by 2030.

These are the underlying objectives as defined by the Energy Union:

• Electricity systems will become more reliable, with lower risk of blackouts.
• Money will be saved by reducing the need to build new power stations.
• Consumers’ increased choice will put downward pressure on household bills.
• Electricity grids will be able to better manage increasing levels of renewables, particularly variable renewables like wind and solar.

You could argue that these objectives would be very important for the United States, as well. Should we take a much more national, inter-regional approach like Europe?

So What Does This Mean?

First, regions, states, energy markets, and utilities have to adapt their long-term resource plans and incorporate regional scenarios for power supply, while at the same time build in a rapidly changing mix in fuel resources toward renewables and natural gas. Second, they must think out of the box with regard to securing fuel security or access to renewables well beyond their traditional territory borders. Third, to effectively develop system plans, the planning processes need to take into account the entire regional transmission system. Regional entities should find a way to bring together players such as federal agencies, municipalities, and cooperatives so that their needs are also addressed and more holistic solutions are presented. Finally, to facilitate and enhance emerging market offerings such as the EIM, the planning toolkit needs to be expanded to better address the challenges of very large-scale renewables integration across multiple regions.

This post is the sixth in a series in which I discuss each of the power industry megatrends and the impacts (“so what?”) in more detail. My next blog will be about merging industries and new entrants. Stay tuned.

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