Diversity is the Key to Efficient, Affordable Energy

The reaction to this week’s joint announcement by the U.S. and China on plans to drastically cut emissions has been mixed. According to the fact sheet released by the White House, under the agreement the U.S. agrees to cut net greenhouse gas emissions to 26-28 percent below 2005 levels by 2025. President Xi Jinping of China announced his intention to halt the increase in China's CO2 emissions by 2030, with an attempt to peak earlier, and to increase the non-fossil fuel share of China's energy usage to around 20 percent by 2030. 

One major step for the U.S. is the EPA’s recently released Clean Power Plan, with the goal of reducing power sector emissions for existing power plants to 30% below 2005 levels by 2030.  However, critics of the proposal have already voiced numerous concerns about the legality and feasibility of the plan, as well as concerns about the plan's impact on the reliability of the power grid. Reliability will be a key issue since the plan intends to dramatically decrease the share of coal fired generation relative to the nationwide electric power generation mix in favor of renewables. 

The shale renaissance that created an abundant supply of natural gas in U.S. has been one of the key factors in the switch away from the use of coal in electricity generation. In fact, over the last decade, the increase in electricity generated by natural gas reduced the share of coal in electricity generation by 10 percentage points.  A recent estimate by the Government Accountability Office states that, since 2012, 13 percent of the country’s coal capacity has either been retired or is planned to be retired by 2025. 

At the same time, the country’s nuclear generation capacity is also under threat. In addition to low natural gas prices, subsidies for renewable energy undermine the value of nuclear plants, causing premature retirement of these plants.   

Diversity of supply (or integration of different fuels and technologies) plays a key role in lowering the cost of electricity generation, as well as maintaining reliability, and also reduces the variability in monthly power bills. This past winter’s polar vortex was a perfect case study for how delivery and price issues in one fuel source can impact electricity consumers. The situation could have been worse if the system did not have other fuel sources, mainly coal to provide a relief valve for power generation in the Midwest and East.

In fact, a recent study conducted by IHS Energy shows how valuable a diverse power supply is for U.S. electricity generation and, consequently, the U.S. economy. Comparing the current mix of supply with a hypothetical case in which there is no meaningful contribution from coal and nuclear, the study found that the cost of generating electricity would be $93 billion higher per year without coal and nuclear. The study also calculates the macroeconomic impacts of a less diverse energy supply. The increase in the cost of electricity would reduce real U.S. GDP by nearly $200 billion, lead to roughly 1 million fewer jobs, and reduce the typical household’s annual disposable income by around $2,100 within the three years after the power price changes. 

Then there is the issue of efficiently integrating renewable power sources into the nation’s power grid.  The aging of the nation's infrastructure has been a concern for the last decade without any major action to address the issue. In fact, according to the 2013 Report Card for America’s Infrastructure, conducted every 4 years by the American Society of Civil Engineers, the country’s grade for energy and the national power grid is D+, which means poor and at risk. Similarly, a new assessment by grid overseers North American Electric Reliability Corp, argues that the surge toward natural gas and renewable energy, driven by cheap gas and new government rules and policies, is creating reliability concerns -- especially in the Midwest, New York and Texas -- and weakening buffers for blackouts. Furthermore, this analysis did not include the impact of the EPA's Clean Power Plan that can only exacerbate reliability concerns.   

As any smart investor would know, it is not wise to put all your eggs in one basket. Unfortunately, the current regulatory climate both at the state and federal levels is encouraging the trend of decreasing the diversity of our power supply in electricity generation. A closer look at policies that encourage the phase out of certain fuels, like the Clean Power Plan and state level renewable portfolio standards, is warranted. While fighting climate change is a noble goal, there need to be   smart, cost effective ways of dealing with the problem. As a new paper by Hugh Byrd and Steve Matthewman concluded: “no matter how smart a city may be, it becomes dumb when the power goes out.”

Dr. Pınar Çebi Wilber is a senior economist for the American Council for Capital Formation, a nonprofit, nonpartisan organization promoting pro-capital formation policies and cost-effective regulatory policies.

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