It all comes down to the price of natural gas.
Complying with pending mercury and ozone rules, and possibly carbon regulations, will mean replacing substantial amounts of coal capacity, mainly with natural gas, Dale Nesbitt, founder of Deloitte MarketPoint, told a Deloitte Center for Energy Solutions seminar in Washington July 18.
Depending on how stringent the rules are and how fast compliance is required, that could mean doubling the roughly 7 trillion cubic feet of gas now burned in the US annually for electricity, Nesbitt said. The US currently produces about 22 Tcf a year.
Imposing all pending environmental regulations on the power industry in the next few years, which could occur, would cost US ratepayers $1.5 trillion to $2 trillion, Nesbitt said. The difference in price – and in the hit to the economy – is whether natural gas prices stay low or rise.
Nesbitt analyzed 16 scenarios, including some with limits on carbon emissions, though the Environmental Protection Agency hasn’t yet proposed greenhouse gas limits except for new construction.
Expensive Renewables, Natural Gas Price Volatility and Government Incentives
He found the cost of the transition would depend largely on the price of gas, and on what renewables were required. Nesbitt said he was surprised in doing the analysis by just how expensive renewables like wind and solar are, due mainly to their low capacity factors. “They’re not an efficient use of capital,” he said.
The analyses posited carbon limits through trading markets like the ones now functioning for sulfur and nitrogen oxides. When all three were regulated at expected limits, “carbon kills SOx and NOx markets,” Nesbitt said.
Markets for Renewable Energy Credits (RECs) are also affected, he said, since the market price of a REC is the difference between the cost of the generation replaced and the “full loaded” cost of the new renewable.
That means that, as government subsidies bring down the cost of renewables, they also depress the price of RECs, which states frequently are relying on to reach their renewables goals. By the same analysis, he said, the prices of RECs rise with lower natural gas costs
Failure to adapt power pricing could prove “terribly expensive” for consumers – O’Neill, FERC
Richard O’Neill, Chief Economic Advisor, Federal Energy Regulatory Commission, said the transition to a greener and smarter grid requires a market design to accommodate increasing amounts of small-scale renewables and new loads like electric cars.
He said real-time pricing – using smart meter technology to let customers see the actual price of generation and choose whether to use it – is far superior to government trying to regulate loads. Customers could cut back in peak times when the price can soar and use appliances in off-peak times when power is cheap and plentiful.
Failure to adapt power pricing could prove “terribly expensive” for consumers, he said.
David Owens, Executive Vice President, Edison Electric Institute, agreed but cautioned real-time pricing and an earlier version, “time of day” pricing, has been tried around the country in pilot programs and not one has been allowed to go into general effect by any state regulator.
Intervenors regularly protest the change from flat kilowatt-hour rates to dynamic pricing is a back-door rate increase that will harm low-income customers disproportionately.
Nesbitt said his analyses are intended to show policy makers and regulators what the effects of their decisions could be and how disparate factors interact in power markets.
Real-time pricing, he said, could be a “huge win” for all sides, and added he was struck by the growing consensus of its value among experts despite the suspicion about it among consumers.