What’s the Existential Threat to Utilities? Here’s a Hint – It’s Not the EPA’s Clean Power Plan

Published: Mon 09 Jun 2014
A blog entry by Christine Hertzog

Contributed by:

Christine Hertzog
Managing Director
Smart Grid Library

Christine Hertzog's Blog

On June 2, 2014, the US Environmental Protection Agency unveiled the Clean Power Plan that proposes to reduce carbon emissions from power plants 30% by 2030. What are the impacts to utilities? Coal fired power plants, once responsible for 39% of electricity generation in the USA, will drop to 30% by 2030, according to the EPA’s projections. However, coal plants have become a riskier investment for utilities for a number of other reasons:

1.  Coal power plants are aging out of use. The average age is 42 years, and some have been operating for more than 60 years. The Clean Power Plan may hasten, but does not cause the demise of old and inefficient power plants that rely on coal as their fuel source. Utilities take a long view and should have been seeking different sources of power a number of years ago. The US Department of Energy’s Energy Information Administration (EIA) projects that new fossil-fuel generation plants in the USA will use natural gas rather than coal as the fuel of choice. Natural gas plants have more flexibility than coal plant – terms of their abilities to start and stop as well as their locations. Other retiring assets are replaced with an increasing percentage of utility-scale solar and wind generation as utilities make progress on state renewable standard portfolio objectives. In California, the 3 main IOUs are well on the way to achieving that state’s 33% objective.

2.  Coal power plants are also shuttering because they can’t compete against low natural gas rates and declining electricity use. The Energy Information Administration (EIA) recently noted that the most inefficient coal plants are retiring now and into 2016.

3.  Clean coal through carbon capture and sequestration technologies isn’t reality yet.  The trends don’t look promising, as many projects have not progressed beyond demonstration stage, and worldwide, projects are cancelled or put on hold.  There’s significant risk in investing in coal plants that cannot avoid dumping CO2 emissions into an atmosphere that is already warming at an alarmingly fast rate.

4.  No one has come up with a good solution for safe and cost-effective coal ash disposal.  The lack of good solutions is costly – as Duke Energy most recently experienced.   The February 2014 coal ash spill into the Dan River in North Carolina will cost between $2B to $10B in projected cleanup costs, and the utility has warned that its ratepayers could face a 20% increase in electricity rates as a result.  If the state regulators allow this increase to occur (whatever happened to shareholder risks?), it is an increase based on coal ash pollution mitigation– not on carbon reductions.

The Clean Power Plan proposal is not a real threat to electric utilities.  There are far more existential threats to utilities than closure or cleanup of coal power plants.  These threats focus on the very nature of the utility business model regarding centralized generation and a fragile supply chain of transmission and distribution grids.

Consumers (businesses and residential customers) aren’t waiting around for utilities (or their regulators) to take action.   They are taking advantage of Smart Grid drivers (technology, policy, and money) to cleanly generate their own power, typically using solar photovoltaics (PV).  The trajectories of decreasing costs and increasing sources of capital in PV technologies will be mirrored in energy storage technologies and packaged self-generation solutions.  As that happens, more and more customers will defect from the grid and only remain connected for service assurance.

Customer defections and the concomitant reductions in electricity sales constitute the existential threat to utilities.   Threat mitigation requires utilities and their regulators to work together to allow utilities to diversify from simple electricity delivery services.  It isn’t a prudent use of utility resources or funds to fight the Clean Power Plan when the real threats lie elsewhere.

Christine Hertzog
Smart Grid Library