COVID Shows Need For Clean Air And Cheap Energy. Utilities Can Get Both Via “All-Source Procurement.”
- Apr 27, 2020 12:30 pm GMTApr 24, 2020 9:20 pm GMT
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COVID-19 has reminded Americans of the importance of cheap electricity and clean air – consumers and businesses are looking for ways to save money, and people who breathe dirty air suffer higher mortality rates from the virus. One of the quickest ways to overcome both challenges, at least in the U.S. power sector, has been replacing fossil fuel generation with renewable energy.
However, the way utilities procure new generation hasn’t kept pace with fast-falling renewable energy prices, often resulting in investments that cost consumers too much money while emitting more greenhouse gases and conventional air pollutants than if renewable energy were evaluated on the same basis as coal and natural gas. So how can regulators help ensure utilities invest in new generation that saves money and cleans the air?
New research from Energy Innovation and the Southeast Alliance for Clean Energy shows how “all-source” procurement can provide utility regulators with a strategy to cut costs and air pollution across the electricity grid. As we build a more resilient economy, could this technology- and resource-neutral approach change the utility generation procurement dynamic for good?
Utility sector experts will discuss this research and which states could be next to reform their utility procurement policies in a webinar on April 30th. Click this link for more information or to RSVP.
“Shockingly” cheap wind and solar in Colorado through all-source procurement
Colorado demonstrates how this unique all-source approach to resource procurement can create “shockingly” cheap wind and solar project bids, which will save Colorado ratepayers an estimated $200 million.
Utilities in states like Arizona, Georgia, Kansas, Missouri, and New Mexico have reached the same long-term planning crossroads, giving their regulators an opportunity to change the procurement process.
State regulators largely determine their electricity resource mix through these procurement processes, so implementing strategies to capture renewable energy’s benefits can help utilities get the cheapest and cleanest possible mix of new generation. This long-overdue change will be essential for utilities to meet ambitious clean energy targets being set in states and utilities across the country.
Making room for renewables
Renewable energy dramatically reduces air pollution compared to coal and natural gas, but their fast-falling prices also mean they can be dramatically cheaper than fossil fuels. Unsubsidized costs ranged from $28-$54 per megawatt-hour (MWh) for wind projects and $32-$42/MWh for utility-scale solar, according to Lazard’s 2019 levelized cost of energy analysis. Including subsidies pushes these down to $11-$45/MWh for wind and $31-$40/MWh for solar. Natural gas combined cycle plants, on the other hand, range between $44-$68/MWh range, while coal falls between $66-$152/MWh.
Current utility procurement processes vary greatly in how they evaluate renewable energy’s cost, climate, and public health benefits. Vertically integrated utilities wield substantial power over how procurement happens - they are both monopolies and monopsonies, serving as the sole electricity seller to customers and the lone wholesale power buyer in their service territories.
As a result, vertically integrated utilities can tilt the procurement process toward fossil generation and the assets that serve it while excluding competition from cleaner sources of power. The decisions made in such an environment tend to favor excessive generation and a utility’s bottom line over clean air and customers affordability.
Utilities procure new generation resources in one of three ways:
- A single-source request for proposal (RFP), which is usually developed internally and narrows the competition by defining the preferred resource from the outset.
- A comprehensive single-source procurement, which outlines megawatt-based acquisition goals for different resource categories through a planning process.
- An all-source procurement, where the ability to meet capacity requirements is open to the full range of technology options available.
The new report evaluates resource procurement by four vertically integrated utilities (Xcel Colorado, Georgia Power, Public Service Company of New Mexico or PNM, and Minnesota Power) and reviews six others. These case studies and market reviews show all-source procurement is the gold standard that allows renewable energy to compete on a level playing field in a highly regulated industry.
What a model all-source procurement looks like
Many utilities are greenlighting new gas-fired power plants and running old coal generation – even at a financial loss – as long as they can, but regulators can help correct this market bias. Though most all-source procurement covered in the report were initiated without regulatory review and approval, state regulators can strengthen the process by adopting or revisiting five best practices:
- Define the need—not the technology—first. Regulators should use resource planning proceedings to determine future generation needs based on forecast load and existing plant retirements, but without specifying a particular resource.
- Require a competitive, all-source procurement process. Four of the report’s case studies showed markets provide robust responses to all-source RFPs. System planning models are capable of comparing multiple technologies and selecting the right mix based on actual bids, instead of choosing within generically defined silos.
- Review and approve the process in advance. Regulators should assess the procurement’s assumptions and terms first rather than after the fact. For Xcel Colorado, a full regulatory review process at the outset ensured resource procurement followed planning.
- Ensure utility ownership of generation is not at odds with competitive bidding. While procurement practices often include information-sharing restrictions with utility-affiliated bidders, they can maintain a bias toward self-build projects. Regulators should renew procedures that define appropriate utility participation.
- Revisit fairness, objectivity, and efficiency rules. The diverse options available to meet electricity demand create new complexities in evaluating procurement. Regulators must be on watch for tactics that undercut competition and limit transparency, such as fast-tracked timelines and overreaching confidentiality clauses.
Xcel Colorado’s example shows these principles in action, where the utility and the state’s public utilities commission structured a competitive, all-resource procurement that ultimately replaced two coal power plants with a mix of wind, solar, battery storage, and a relatively small amount of gas-fired capacity.
Beyond all-source procurement within utility business model reform framework
All-source procurement is just one policy solution to start cutting costs and cleaning the air – regulators can also look to the broader category of utility business model reform, which includes procurement practices as a single lever.
The goal of utility business model reform is linking a utility’s bottom line with public policy objectives—essentially, rethinking how a utility can be compensated to do things such as lowering bills and reducing air pollution, and what legislative and regulatory hurdles are stopping utilities from achieving this alignment. For instance, decoupling utility revenue from the amount of energy it delivers and instead rewarding utilities for boosting efficiency and minimizing system costs can achieve this goal.
Leveling the playing field among generation resources through fair procurement is an important piece of this goal, but the transition to a cleaner electricity grid doesn’t stop there. Performance incentive mechanisms can reward strategic demand reduction through efficiency and demand response tools. Regulators can facilitate early retirements of coal and natural gas through a steel for fuel swap where operational costs savings from “steel” (new wind and solar assets) replace uneconomic, fuel-intensive power plants. Financial tools like securitization, where utilities issue bonds to help raise capital, and accelerated depreciation can also help balance the costs of early retirement for coal plants.
Carefully considered, forward-thinking procurement policies help bolster thriving competitive energy markets. The plummeting costs of renewable energy will win in competitive procurement processes, allowing states to reach their climate goals. In an age increasingly defined by the COVID pandemic’s economic and health impacts, they can also help build a stronger economy and healthier population.