Better Late than Never: NERC Plays Catch-Up and Concludes the Grid Is Well-Prepared for Expected Renewables Growth

The North American Electric Reliability Corporation (NERC) has reaffirmed that environmental progress and electric reliability are indeed compatible. With smart planning, the amount of electricity generated from clean energy sources will grow without disrupting safe and reliable electricity services.

NERC oversees high power electric grid reliability and in doing so, provides assessments of grid reliability on a regular basis, and also opines on the reliability impacts of particular programs of interest, like the Clean Power Plan (CPP), the nation’s first-ever limits on carbon pollution from power plants. Today’s release was NERC’s second attempt at studying the Clean Power Plan (the first report on the proposed Clean Power Plan had its shortcomings). This analysis shows some real improvements. NERC is finally catching up to market realities and correcting past analytical flaws, which brings it to conclude that high levels of renewable energy are expected regardless of the CPP, and that these renewable energy additions will not negatively affect the power system’s ability to provide reliable electricity to customers. NERC’s assessment underscores that implementation of the CPP would only reinforce the changes that are already happening anyway in the power sector: our much-needed transition to clean energy is underway and accelerating.   

Grid planners have all the tools they need with significant renewable energy buildout on the horizon

NERC examined various CPP  scenarios using two different models, and its assessment is consistent with several recent studies (NREL, Rhodium Group) – there will be a significant near-term growth of renewable energy capacity driven by the recent extensions of the federal Production Tax Credit (PTC) for wind energy and Investment Tax Credit (ITC) for solar energy and rapidly falling renewable technology costs. NERC projects a large buildout of renewables before 2022 in the reference case, with wind and solar capacity increasing by approximately 110 GW between 2016 and 2030. Renewables continue to grow throughout the compliance period, with or without the CPP, driven by the continuation of state Renewable Energy Portfolio Standards (RPSs) and the outlook for continued technology improvements expected to drive down renewables costs and improve performance. NERC’s assessment shows that the CPP is expected to drive another 20 GW of wind and solar by 2030 (refer to figure below). To further examine the impact on the grid of significant increases in renewable energy generation, NERC evaluated a High Renewables Penetration CPP case with even faster technology advancements and performance improvement using NREL’s projections. The High Renewables case projected a total of 140 GW to 164 GW of wind and solar by 2030 and even in this case, NERC remains positive about the ability of planners to provide essential services. In fact, there are several examples of NERC working groups already assisting in the transition to a cleaner grid, as the system undergoes a “fundamental shift to a resource mix that relies less on conventional generation resources such as coal, nuclear, etc., to more asynchronous, distributed and storage-enabled resources such as wind, solar, and storage.”

NERC’s modeling also projects up to 46 GW of coal retirements by 2030 in the reference case, with the CPP expected to drive an additional 27 GW of retirements. This lines up well with projections in other analyses, including EPA and M.J. Bradley & Associates. Importantly, NERC indicates that it has no “serious concerns about these retirements threatening grid reliability.”

Some curious aspects of the study could use refinement . . .

NERC has made come a long way since its last round of CPP analysis, making some important corrections to key assumptions. In particular, NERC updated its representation of the capital costs of renewable energy projects to reflect the latest information from the National Renewable Energy Laboratory (NREL). This change alone makes this study more credible than last year’s analysis. Still, there are some improvements that could make NERC’s latest analysis even better.

Fuel prices are among the most critical assumptions in analyses projecting the impacts of pollution limits for the power sector because they determine to a large extent how much it costs to operate coal and gas power plants. It is generally very challenging to predict future fuel prices. Many analysts examine fundamental market dynamics and the resource supply of fuels to make predictions, but these are merely high-quality guesses based on the best information available. Now that natural gas prices are hovering near historical lows, the consensus among analysts is that the market for natural gas will remain soft through the remainder of the decade (see BNEF, UBS). NERC’s study deviates from this consensus and assumes low near-term prices but then projects a fairly drastic jump. It adopts New York Mercantile Exchange (NYMEX) prices in 2016 and 2017 and bridges those with EIA’s Annual Energy Outlook 2015 Reference Case gas prices in 2018 and onwards. In NERC’s reference case, natural gas prices increase from approximately $2.40/MMBtu in 2016 to approximately $5.60/MMBtu in 2030 ($2015, see the figure below).

This leads to some of NERC’s more puzzling projections. Natural gas generation peaks in 2018 and then declines through 2025 as prices rise. This trend is mirrored by a sharp drop in coal generation in 2018 followed by resurgence through 2030, as coal regains a competitive edge due to the upswing in gas prices. NERC’s assumed gas prices also result in natural gas plants being “on the margin,” meaning that natural gas units (not higher-emitting coal generation) are primarily the first plants to be displaced as the market share of cleaner generation grows. Depending on fuel prices and other market conditions in practice, clean generation could replace a mix of both coal generation and gas generation.

NERC’s High Nuclear Retirements case is another example of how the natural gas price assumptions may have skewed the results. To evaluate the grid reliability impact from higher than anticipated nuclear retirements, NERC assumes a case where nuclear units retire at a much faster rate than is presently forecasted by EIA, with nuclear retirements increasing by approximately 31 GW between 2016 and 2030 in this case compared to the other scenarios. However, NERC neglected to consider that the primary driver of these retirements, if they were to occur, would likely be continued low natural gas prices rendering the economics of running a nuclear plant less attractive. NERC should have adjusted its gas prices downward accordingly to create a consistent scenario.

. . . but the message is still clear: We are already planning for renewable energy to play an increasingly important role in our electricity mix.

There are a few other outstanding matters that NERC seems to leave unanswered, particularly with respect to its assumptions on electricity demand and how it adjusted some of the constraints that were imposed on renewable energy growth in its previous analysis. Even so, NERC has made major improvements which bring its findings and projections on renewables growth in line with the other studies on this subject. Along with these studies, NERC reaffirms the fundamental shift towards clean generation is underway. The CPP will have a role in reinforcing and accelerating these changes to ensure that urgently needed emissions reductions are achieved. The planning process is already underway to ensure that grid reliability is maintained during the transition. The lights will stay on as the grid advances to integrate renewable energy and other clean energy services, and the Clean Power Plan will further incentivize these developments and accelerate our progress towards a clean energy future.