Coal to the Rescue

Via The Washington Examiner:

A fundamental shift in how America generates electricity is raising serious doubts about its ability to keep the lights on.

Switching from coal to more natural gas and renewables is straining the country’s power grid.

The biggest change in the past two years is what the utility industry calls the big “fuel switch” to natural gas — that is, gas took over as the leading producer of the nation’s electricity supply.

The market is awash with natural gas from fracking, which has made it cheaper and more attractive than other energy sources. A unit of gas has cost $2-$3 for the past few years compared to $14-$17 a decade ago.

On top of that, tighter environmental regulations imposed by former President Barack Obama have forced many older coal plants to shut down, which in turn has created an opening for more power plants run on natural gas and other renewable energy sources.

But depending so heavily on a gaseous fuel instead of piles of rocky coal brings risks, especially because environmentalists fight to prevent pipelines being built, so gas-fired plants have a tough time getting the support infrastructure they need.

All this points toward coal making a comeback as a necessary part of the energy mix to avoid blackouts. Washington forecasts higher natural gas prices and a resulting resurgence of demand for coal-fired electricity in the coming year. Washington oversees wholesale power markets, where price is king. Repealing the Obama administration’s climate rules, as President Trump has touted, also would help coal compete on equal footing with natural gas.

Reliability is electric

Former federal energy commissioners say all of this poses serious challenges if reliable electricity service is to be maintained and brownouts and blackouts are to be avoided.

The federal government is going to have to relearn the nuts and bolts of keeping the lights on, according to Republican luminaries.

“The whole issue of reliability is one that will take a renewed focus here in Washington,” says Tony Clark, a former Republican commissioner at the Federal Energy Regulatory Commission who left the agency last year when his term expired.

Clark recently joined the law firm Wilkinson Barker Knauer LLP to serve as senior adviser on electricity and energy policy. He will share his time between the firm’s offices in Washington and its Colorado and other state offices.

Clark expects FERC, the electricity watchdog, to be the focus of more attention this year as reliability becomes a bigger issue for the administration and Congress.

“Both at the agency and on Capitol Hill, you’re going to have probably renewed focus on some of these nuts-and-bolts kind of reliability issues, especially as it relates to baseload power and the impact of environmental regulations on reliability of the grid,” Clark says.

“There are some real issues with the retirement of baseload, the integration of more natural gas-fired units, and the increasing penetration of variable energy resources, and how all those things tie together,” says Clark.

A debate is emerging over the value of baseload plants, which are those that can provide power nonstop, such as any that burn fossil fuels. Wind and solar plants cannot do this, and Clark refers to them as “variable resources.”

Markets in California and the Southwest are “right on the leading edge” of this debate, he says. They are trying to figure out how to deal with the unreliability of electricity supplies that is the hallmark of “green” sources. Fossil fuel plants have to be kept going to keep grid supply stable, Clark says.

The energy markets that FERC oversees are struggling with the challenge of “pricing into the market some kind of assurance that you are going to have the resources to back up and compensate for that intermittency,” Clark adds.

“It’s a really, really big thing, barring some kind of technological revolution on the energy storage side of things, you have to accommodate for the intermittency in some way.”

There are two ways to deal with it, Clark says. Either you must build more transmission to account for times when the grid is over-supplied or under-supplied with electricity, or have fast-ramping power plants that can come online quickly, which means more natural gas.

Added to that is the effect renewable energy is having on nuclear and natural gas power plants.

Federal subsidies are pushing wind power prices so low in some states that baseload plants cannot compete and are being forced out of the market.

Cheap natural gas prices are also making it tougher for nuclear power.

The move toward more natural gas and renewables is expected to continue to grow, even with a new president in the White House who is focused on bringing back the coal industry.

A system built for coal

Coal will come back on its own without President Trump‘s help this year and next as a result of natural gas prices rising in 2017 and 2018, according to the Energy Information Administration, the Energy Department’s independent statistics arm.

The challenges posed by the changing fuel mix will grow worse if ignored, experts say, not least because the system was built for coal.

“The system was designed mostly around central station and coal-fired generation,” says John Moura, head of reliability assessment at the North American Electric Reliability Corporation, or NERC, the congressionally sanctioned reliability watchdog and cop on the beat when it comes to anything that could turn out the lights.

“There is a lot of reliability you get when you have three months of backed-up supply in your backyard coal inventory,” Moura says.

Natural gas is different because it relies on pipelines to deliver fuel on a just-in-time basis, agreed to in contracts not written with reliability in mind.

Moura says “a lot of reliability” is gained by having big heaps of coal stacked near a power plant so it can make up for unexpected outages or increasing demand during a sudden cold snap or heat wave.

“You don’t get that same level of reliability with the natural gas-fired generator. You can make that generator appear to be just as reliable as a coal unit and have storage,” but there is always going to be a risk, Moura says.

Some natural gas plants have built large storage derricks of the sort one sees at an oil refinery, but that adds costs that get passed on to ratepayers. That is his challenge in advising lawmakers and state regulators who need to understand the facts, he says.

“One of my major goals is to make regulators know what risk they are taking,” Moura says. “You can’t have a complete 100 percent reliable system. We are always going to be taking some risk.”

Moura’s group was chartered by Congress after the 2003 East Coast blackout to work with the federal government to develop mandatory enforceable standards for utilities overseen by the Federal Energy Regulatory Commission.

The North American Electric Reliability Corporation’s latest long-term reliability assessment, out last month, looks at reliability over the next decade. Many regions of the country are becoming too dependent on one fuel source, it says.

Even those without reliability problems will face increasing demand for natural gas to backstop renewables and at the same time provide baseload electricity and supply heat.

“NERC has identified that reliance on a single fuel increases vulnerabilities, particularly during extreme weather conditions,” the report says. It also explains how more rooftop solar panels and other small power generators are creating problems because “many utilities currently lack sufficient visibility and operational control of these resources, increasing the risk to [the bulk power system’s] reliability.”

No one knows how much generation capacity is out there on people’s roofs, or when and where such sources will produce electricity. Sometimes, there might be more electricity supply than demand.

“It used to be that the big ramp for demand was in late afternoon and evening and hot summer days when you had huge air-conditioning load,” Clark says. “What happens now, if you got a really solar-dependent region of the country, you could actually have over-supply in those very hours in the afternoon because you have so much solar power that is coming online” all at once.

“But as soon as the sun goes down in late afternoon-evening you still have very high air-conditioning load needs, but the solar power isn’t there anymore,” Clark says. That’s why natural gas is becoming an increasingly important issue, because it’s the only resource that can ramp up quickly enough to meet the drop in electricity from solar.

The California case

California is the best example of how the problem is playing out in markets increasingly dependent on the sun for electricity, but also increasingly reliant on natural gas.

The closure of the Aliso Canyon gas storage facility near Los Angeles made national news in 2015 when a major leak forced families to flee their homes. The cause of the leak is still being investigated, but the effect of the lost supply on the electric grid has been profound.

The closure and the state’s renewable energy and climate policies have set up the likelihood of a major blackout in one of the country’s biggest metropolitan areas.

Increasing reliance on solar power flowing into the California grid means gas generators near Los Angeles must ramp up supply quickly once the sun sets. But where will the fuel come from with Aliso Canyon only partially operational?

Norman Bay, then FERC’s chairman, warned of blackouts last year and worked with California grid operators to stave off problems last summer. Blackouts were avoided, but the situation may have gone from stable to dire in the past week.

Regulators say that if or when Aliso Canyon reopens, its storage capacity will be only one-third of what it used to be. California utility regulators and the site’s owner, Southern California Gas, issued a warning Jan. 23 that customers should cut their gas use or face a blackout.

Thermostats should be lowered to 68 degrees, clothes washed in cold water, and gas stoves and appliances left unused. The advisory will remain in effect until further notice.

“By conserving natural gas during this critical period, SoCalGas customers can help lower the risk of possible natural gas and electricity shortages” — ie, blackouts and brownouts.

All but 5 percent of Southern Californian residents use natural gas for home heating, and 60 percent of the electricity used in California comes from natural gas power plants.

Moura says any further loss of natural gas supply would be a serious problem. Policy decisions the state made a decade ago banned fuel oil and other fossil fuels that could produce electricity if natural gas supplies were disrupted.

Increasing use of renewables is also making it harder for large baseload gas-fired power plants to remain profitable in the California electricity market that is valuing one resource over another.

Renewables vs. natural gas

Last year, the large La Paloma gas plant in California announced it was being forced out of business because of market forces created by the Golden State’s climate change and renewable energy mandates.

Philip Moeller, a former FERC commissioner, says that will be a problem FERC addresses in 2017, and that there is talk about tweaking market rules so baseload plants such as La Paloma are no longer undervalued.

He now is senior vice president of energy delivery and chief customer solutions officer at the Edison Electric Institute, which represents the utility industry. He served with Clark as the other Republican on the Federal Energy Regulatory Commission during the Obama administration. The five-member commission has two Democrats and two Republicans, and the chairman typically belongs to the same party as the president. Trump last week, however, named Democratic commissioner Cheryl LaFleur to be acting chairwoman of the commission.

Moeller thinks gas plants under financial strain have a strong argument for compensation from states since they provide a vital service.

“If they are providing something to the grid that is essential for reliability, they should be compensated for it,” Moeller says.

John Hughes, president and CEO of the Electricity Consumers Resource Council, disagrees.

“The simple answer is no,” says Hughes, who represents large industrial users of electricity, which are typically allergic to anything that drives up cost. The problem is the “flawed market design” of the regional transmission operators that FERC oversees, he says. “A single clearing price for all resource types is incapable of efficiently compensating long-term investments inherent in baseloaded generators.”

A scheme of ad hoc payments to reward baseload plants doesn’t solve problems, Hughes says, adding that previous arrangements not overseen by the feds “did a better job compensating different resource types.”

Nuclear experiment

Some states are enacting programs outside federal processes to boost baseload nuclear power plants by giving them clean energy credits, essentially paying them to stay online.

New York’s Democratic Gov. Andrew Cuomo did that last year by including nuclear power in the state’s renewable energy mandate. Moeller expects New York to be sued sometime this year over the plan.

Merchant utilities, including a number of natural gas plant operators in the Northeast, are challenging New York’s zero emission credit scheme at FERC. The utilities argue that Cuomo’s clean energy program upsets basic market principles that should encourage competition and drive generation costs down.

Moeller says it’s probably better to address power plant closures through the commission process rather than through the states. “It’s a little bit more focused on actual markets and the compensation that can come out of a market-based product that pertains to reliability services,” he said.

The line between state and federal jurisdiction over incentives for power plants in federally overseen electricity markets has been blurred in recent years. The Supreme Court gave the commission the upper hand last year, asserting the federal government’s jurisdiction in setting gound rules for paying big power plants.

Clark and others expect Northeastern states eventually removing themselves from FERC’s oversight to pursue aggressive climate policies.

Many say this would be a mistake. “The Northeastern states are notorious for policies that de-industrialize their economies. They are nothing if not consistent,” Hughes says.

R Street Institute, a free-market think tank, wants Trump to support FERC’s competitive markets to keep energy prices low, foster new technologies and drive out market-distorting incentives.

“Low natural gas prices are transforming the electricity sector, clean-energy technologies are increasingly competitive and innovators are at work identifying the next generation of solutions,” R Street said in recommendations to Trump. “It’s time for all forms of commercialized energy, fossil and renewable alike, to compete in the open market by prioritizing a phase-out pathway for all energy subsidies and other distortionary policies.”

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