- Explores and develops market-based solutions.
Any efforts at reducing US greenhouse gases (GHGs) must squarely address the electric power sector, which accounts for over one-third of the nation’s GHG emissions. Nearly half of the nation’s electricity generation—and more than 80% of power sector GHG emissions—comes from coal-fired power plants, many built more than half a century ago. Retiring those plants will be critical to reducing carbon emissions. In addition, half the nation’s nuclear reactors—accounting now for nearly 10% of the country’s electricity — will come up for retirement during the decade 2030-2039. While a number of lower-emitting technologies are available—including natural gas, nuclear, and renewable sources—none is a panacea. EDF will conduct a focused analytical effort to spotlight the coming “generation gap” and to explore options for how to address it, with an emphasis on market-based policies that create economic incentives to accelerate the development and deployment of new low-carbon technologies.
August 25, 2011
With support from the Alex C. Walker Foundation, Environmental Defense Fund (EDF) is conducting a study to spotlight the looming gap in generation capacity due to existing plant retirements and to explore options for how to address it, with an emphasis on market-based policies that create economic incentives to accelerate the development and deployment of new low-carbon technologies.
We have so far completed two of three phases of the study: creating an Excel-based generation model that allows us to identify the gap and assessing the technical potential of different technologies to fill it.
We are aiming to finish phase three, an electricity capacity planning model for the United States, within the month. This will allow us to assess different policy scenarios in the most quantitatively rigorous way.
Our final report, to be completed by October, will have three components: an analysis of the projected gap using both generation and capacity models; a survey of technological options to fill the gap; and a comprehensive look at short-term policy interventions possible to incentivize the necessary deployment.
The Alex C. Walker Foundation’s generous support has enabled EDF to conduct a study to highlight the looming electricity generation gap and explore the best ways to fill it.
While working on the underlying models—one aimed at identifying the generation gap, and the other an optimization model generating capacity planning options for the U.S.—it soon became apparent that the most valuable output from this project would be the actual models rather than a static report.
The two models, while not yet public, have already informed EDF’s own thinking regarding future electricity generation. Moreover, we are presently revisiting both models in a follow-up project, with the goal of making versions of each available to EDF board members and the interested public later this year.
In the meantime, the report’s preliminary findings paint an interesting picture of the U.S. energy landscape and possible future scenarios.
The Energy Overhaul
By 2020, up to 30% of U.S. power generation facilities will need to be replaced to maintain current capacity levels. For 2030, the number can be as high as 50%.In short, the United States will soon be replacing its installed power generation base while going at full speed -- a challenge similar to rebuilding a car as it hurtles down the freeway.
For policymakers, and for society as a whole, this shift raises fundamental questions. What percentage of our future power supply should come from fossil fuels or renewable sources – and which ones? How quickly must we begin building new capacity to meet rising demand? Since power plants of any generation type take at least a few years to build, proper planning and policy is critical to ensure that the country continues to have sufficient power for its needs.
This report began as an investigation into the purported near-term “generation gap,” the difference between demand and production, with an eye toward EPA regulations. However, we soon discovered that long-term consequences dwarf short-term impacts. The key policy question is how to drive long-term planning decisions and what the trade-off is between different sources.
We examined the current U.S. power generation mix and discussed how it could evolve over the next few decades: How much and what type of generation capacity will be added over the next 30 years? We developed two modeling tools to aid this exploration. One (the “Gap model”) helps estimate how much new generating capacity we’ll need and when. The other (the “CapPlan model”) helps predict which energy technologies could meet our growing need, and show how the mix could change, given factors like capital costs or charging for pollution.
It became clear that wise policy choices today will have large impacts on guaranteeing clean, reliable, and affordable power in the United States in the future. The main drivers behind changes in long-term generation needs are retirement ages of coal power plants, and the scale of energy efficiency and demand response measures implemented.
The Cost of Pollution
The key factor determining the future U.S. power generation mix in our model is to what extent polluters pay the cost of pollution. Little else matters as much. Currently, about 45 percent of electric power in the United States is produced by coal-fired power plants. The cost of coal, in terms of health and environmental impacts, are considerable. But they are paid by society, through, among other things, higher rates of illness and higher health care costs.
We considered four of the main pollutants emitted by power plants: carbon dioxide, nitrogen oxides, sulfur dioxide, and mercury. Having polluters pay for the full cost of their pollution means a dramatic shift toward other less polluting sources of power, like nuclear and renewable energy sources.
Capital Costs? What Capital Costs?
The impact of pollution costs dwarfs that of capital costs, which turns out to be a much less critical factor in determining what kind of power generation capacity gets built. This holds even for nuclear plants, which are expensive to build and license. Our model found that even if the capital costs of zero - or low - emission power plants were dramatically reduced, coal would continue to be the most economic source of electricity until 2030 – if no price were paid for pollution.
This becomes particularly apparent for nuclear energy. Capital costs are high at the moment--so high, that a 10 percent increase in capital costs would decrease the need for new nuclear builds to zero by 2020. However, even a 50 percent decrease in capital costs by 2040 would still have less impact on new nuclear capacity than appropriate carbon pricing.
Natural Gas Versus Renewable Energy
A key question is how natural gas influences the future generation mix. In particular, will low natural gas prices crowd out cleaner forms of energy?
Our baseline model considers natural gas prices at $5 per million Btu in 2020. If prices remain at around half of today’s levels, or $2.5 per million Btu in 2020, natural gas generation will crowd out nuclear, pointing to a continued shift in the role of natural gas to one of base load generation. By 2030 and 2040, the tradeoff between natural gas at low prices and nuclear becomes even more dramatic.
Interestingly, natural gas does not displace wind at low prices largely due to different generation characteristics. If natural gas prices doubled to $10 in 2020, production would decline largely in favor of onshore wind generation, an effect more pronounced by 2030 and 2040. In short, lower-than-projected natural gas prices crowd out nuclear rather than renewables because base load generation depends on cheap fuel. Higher-than-projected natural gas prices favor wind over nuclear, since at such high prices, natural gas never becomes a base load fuel.
The looming energy generation gap is a complex issue, and we appreciate the opportunity to develop appropriate tools to assess the options for developing clean, reliable, and affordable power in the United States in the future.
Financial Report: Walker Expenses
Consultant Research: 10,000
Office & Overhead: 0
Note: Due to refocusing the bulk of the work on building the two Excel models and publishing the report electronically, we applied the budgeted printing costs to cover personnel.
The need for a farsighted energy and climate policy is clear. Markets on their own will not be sufficient, because carbon emissions remain a massive negative externality whose true price is not reflected in energy markets and because private investments in research and development create positive externalities (in the form of knowledge spillovers to other firms and society at large) that dilute the economic incentives for R&D. Government policies will therefore be central.
Too often, energy policy has involved the government rewarding favored technologies rather than letting market forces determine which will emerge. The scale of the problem demands a solution that considers a portfolio of technologies and uses economic incentives to encourage the development of the next generation of low-carbon generating technologies, while removing uneconomic barriers to deploy existing ones. With a strong commitment to market-based policies, EDF is well-positioned to carry out such an analysis.
Failure by Congress to enact cap-and-trade legislation and likelihood of more partisan gridlock has shelved plans to pass comprehensive climate policy. Yet the urgency of solving climate change has not abated, nor has the need for a market-based solution: given the scale of the market failure at the root of climate change (negative externality imposed by greenhouse gases emissions), the ubiquity of carbon, and the need for massive capital investment to transform the world’s energy systems, a lasting solution must put a price on carbon, either through a carbon tax or a cap-and-trade program. As we develop the bipartisan political will for such a long-term solution, however, it is imperative to explore near-term steps that can help put the economy on a lower emissions trajectory. The need for a coherent and farsighted national energy policy provides such opportunity--and the benefits would extend far beyond the US where the need for low-carbon electricity generation is even more acute.
(Check sent: 12/13/2010)