You get what you pay for. Clean power mandates in the US mandate that we buy megawatt-hours of clean energy, but they don’t mandate that those sources be reliable. This isn’t to say that clean energy can’t be reliable, but rather that it is mis-priced. Increasingly, this is causing conflicts for utilities, who have purchase obligations that conflict with their obligations to serve their customers. That conflict need not exist – but fixing it will require re-thinking how we structure our clean power mandates.

Buying by the MWh

For the past 33 years, the US has maintained policies that have obligated utilities to preferentially buy power from clean generation sources. First came 1978’s (federal) PURPA law, then the renewable mandates that came from state renewable portfolio standards in the 1990s and more recent feed-in-tariffs and net-metering for select technologies. The consistent feature of all these rules has been a mandate on regulated utilities to purchase clean energy at a known price per megawatt-hour.

Much good has come of these laws, and it is safe to say that most of the solar, wind, small hydro, biomass, geothermal and cogen capacity in this country today (roughly 15 – 20% of the US generating fleet) exists by virtue of these rules. 

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When those sources were a small part of the system, these $/MWh mandates were sufficient. However, we’re entering a new era that requires a bit more sophistication to accommodate economic need. Lots of rational investments have been made in response to $/MWh incentives (RECs, PTCs, etc.) but it is purely coincidental when those investments are also delivering reliability. Increasingly, that’s creating problems for grid managers whose job is to ensure that electricity is available at the right place, at the right time at the required voltage and current. Bonneville Power’s recent efforts to curtail wind production in the northwest are the tip of a much larger iceberg.

The mastermind problem

The problem is readily solvable with a more sophisticated price structure. Like the old game Mastermind, we have the right pegs, but they’re in the wrong holes. When BPA is dumping wind power because of excess hydro while California utilities struggle to meet renewable mandates, it’s fairly clear that capital has been deployed in the wrong places. Whether the problem is generation, transmission or demand is a detail – the underlying issue is misallocation of capital in response to inaccurate pricing signals.

The problem is not simply the absolute price per MWh, but rather the entire bundled contract. Utility and grid managers regularly can and do make decisions about how to provide energy (MWh) at specific times and locations, how to provide capacity (MW), spinning reserve, power factor control, voltage stabilization and any number of other commodities which in aggregate provide a functioning electrical system. Each of those can and should be considered as a distinct commodity.  But for the most part, those decisions are made external to clean power contracts, which place a value almost entirely on the delivered MWh. The result is economically the same as paying for oil infrastructure out of income rather than gasoline taxes – inefficient allocations of investment capital, and inefficient operation of same.

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Those economic problems are also creating political problems. As long as clean power pricing ignores grid reliability, we will persist in buying cleanliness independent of reliability – and creating a perception that the two are independent. Geothermal, biomass, cogen and other baseload clean sources can provide reliability benefits equal to or greater than nuclear, natural gas and biomass, but are rarely contracted to provide those services.

These problems are most obviously manifest by large scale wind, which (generally speaking) places large volumes of intermittent energy many miles away from load centers, forcing utility managers to figure out how to ensure adequate energy supplies at the load in spite of the wind farms. But wind per se isn’t the problem; the problem is the price structure. One could contemplate a pricing structure that provided value for capacity, energy, voltage control, power factor modulation, time- and location-specific premia, spinning reserve and clean energy attributes. Such a system would reward intermittent & baseload, clean and dirty, local and central power generation sources with prices specifically to the value they create. There is no reason it could not also provide appropriate economic signals to install transmission capacity where necessary to connect low cost power sources to high value markets.

To be sure, expecting such economic transparency and efficiency in modern electric markets is hopelessly naïve. Actually getting to the end state described above would require massive power market deregulation, extensive FERC guidance and state implementation of same, growth in consumer protection and – most importantly – a huge political lift, insofar as it would imply a wealth transfer from regulated monopolies to consumers.

But here’s the rub: you don’t need to change any laws to make this happen. Utilities, after all, are the ones saddled with the obligations to serve and to buy. There is no reason that they could not modify their own purchasing structures to enter into bilateral contracts with clean energy sources that incorporated all of these variables. (Ironically, this is much easier to do in a fully regulated utility.) To be sure, such a change would require the approval of utility regulators, but consider their alternative? The generation fleet is capacity constrained. The need for clean energy is pressing. And the quickest route to unemployment for a utility commissioner is a blackout. Why not craft pricing structures that eliminate unnecessary regulatory conflicts?

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