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Thinking Beyond Trump

Why power companies should be investing now in carbon-free electricity

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The first offshore wind farm in the U.S. near Block Island, Rhode Island started delivering commercial electricity last December.
Image Credit: Edison Sub-District Office / CC BY-NC-ND 2.0 / Flickr
The first offshore wind farm in the U.S. near Block Island, Rhode Island started delivering commercial electricity last December.
Image Credit: Edison Sub-District Office /
CC BY-NC-ND 2.0 / Flickr In March 2017, wind and solar power accounted for 10% of U.S. electricity generation for the first time. (Source: EIA) The levelized cost of energy considers a plant’s expected lifetime and operation cycle and spreads those costs over an assumed financial lifetime. These estimates show that electricity from coal will be much more expensive if utilities have to use carbon capture and sequestration (CCS) to meet future emissions limits. (Source: EIA)


When utility executives make decisions about building new power plants, a lot rides on their choices. Depending on their size and type, new generating facilities cost hundreds of millions or even billions of dollars. They typically will run for 40 or more years — 10 U.S. presidential terms. Much can change during that time.

Today one of the biggest dilemmas that regulators and electricity industry planners face is predicting how strict future limits on greenhouse gas emissions will be. Future policies will affect the profitability of today’s investments. For example, if the United States adopts a carbon tax 10 years from now, it could make power plants that burn fossil fuels less profitable, or even insolvent.

These investment choices also affect consumers. In South Carolina, utilities were allowed to charge their customers higher rates to cover construction costs for two new nuclear reactors, which have now been abandoned because of construction delays and weak electricity demand. Looking forward, if utilities are reliant on coal plants instead of solar and wind, it will be much harder and more expensive for them to meet future emissions targets. They will pass the costs of complying with these targets on to customers in the form of higher electricity prices.

With so much uncertainty about future policy, how much should we be investing in non-carbon electricity generation in the next decade? In a recent study, we proposed optimal near-term electricity investment strategies to hedge against risks and manage inherent uncertainties about the future.

We found that for a broad range of assumptions, 20% to 30% of new generation in the coming decade should be from non-carbon sources such as wind and solar energy. For most U.S. electricity providers, this strategy would mean increasing their investments in non-carbon power sources, regardless of the current administration’s position on climate change.

Hedging against risks

Many non-carbon electricity sources — including wind, solar, nuclear and coal or natural gas with carbon capture and storage — are more expensive than conventional coal and natural gas plants. Even wind power, which is often mentioned as competitive, is actually more costly when accounting for costs such as backup generation and energy storage to ensure that power is available when wind output is low.

Over the past decade, federal tax incentives and state policies designed to promote clean electricity sources spurred many utilities to invest in non-carbon sources. Now the Trump administration is shifting federal policy back toward promoting fossil fuels. But it can still make economic sense for power companies to invest in more expensive non-carbon technologies if we consider the potential impact of future policies.

How much should companies invest to hedge against the possibility of future greenhouse gas limits? On one hand, if they invest too much in non-carbon generation and the federal government adopts only weak climate policies throughout the investment period, utilities will overspend on expensive energy sources.

On the other hand, if they invest too little in non-carbon generation and future administrations adopt stringent emissions targets, utilities will have to replace high-carbon energy sources with cleaner substitutes, which could be extremely costly.

Economic modeling with uncertainty

We conducted a quantitative analysis to determine how to balance these two concerns and find an optimal investment strategy given uncertainty about future emissions limits. This is a core choice that power companies have to make when they decide what kinds of plants to build.

First we developed a computational model that represents the sectors of the U.S. economy, including electric power. Then we embedded it within a computer program that evaluates decisions in the electric power sector under policy uncertainty.

The model explores different electric power investment decisions under a wide range of future emissions limits with different probabilities of being implemented. For each decision/policy combination, it computes and compares economy-wide costs over two investment periods extending from 2015 to 2030.

We looked at costs across the economy because emissions policies impose costs on consumers and producers as well as power companies. For example, they may lead to higher electricity, fuel or product prices. By seeking to minimize economy-wide costs, our model identifies the investment decision that produces the greatest overall benefits to society.

More investments in clean generation make economic sense

We found that for a broad range of assumptions, the optimal investment strategy for the coming decade is for 20% to 30% of new generation to be from non-carbon sources. Our model identified this as the best level because it best positions the United States to meet a wide range of possible future policies at a low cost to the economy.

From 2005-2015, we calculated that about 19% of the new generation that came online was from non-carbon sources. Our findings indicate that power companies should put a larger share of their money into non-carbon investments in the coming decade.

While increasing non-carbon investments from a 19% share to a 20% to 30% share of new generation may seem like a modest change, it actually requires a considerable increase in non-carbon investment dollars. This is especially true since power companies will need to replace dozens of aging coal-fired power plants that are expected to be retired.

In general, society will bear greater costs if power companies underinvest in non-carbon technologies than if they over-invest. If utilities build too much non-carbon generation but end up not needing it to meet emissions limits, they can and will still use it fully. Sunshine and wind are free, so generators can produce electricity from these sources with low operating costs.

In contrast, if the United States adopts strict emissions limits within a decade or two, they could prevent carbon-intensive generation built today from being used. Those plants would become “stranded assets” — investments that are obsolete far earlier than expected, and are a drain on the economy.

Investing early in non-carbon technologies has another benefit: It helps develop the capacity and infrastructure needed to quickly expand non-carbon generation. This would allow energy companies to comply with future emissions policies at lower costs.

Seeing beyond one president

The Trump administration is working to roll back Obama-era climate policies such as the Clean Power Plan, and to implement policies that favor fossil generation. But these initiatives should alter the optimal strategy that we have proposed for power companies only if corporate leaders expect Trump’s policies to persist over the 40 years or more that these new generating plants can be expected to run.

Energy executives would need to be extremely confident that the United States will adopt only weak climate policies, or none at all, into future decades in order to see cutting investments in non-carbon generation as an optimal near-term strategy. Instead, they may well expect that the United States will eventually rejoin worldwide efforts to slow the pace of climate change and adopt strict emissions limits.

In that case, they should allocate their investments so that at least 20% to 30% of new generation over the next decade comes from non-carbon sources. Sustaining and increasing non-carbon investments in the coming decade is not just good for the environment — it’s also a smart business strategy that is good for the economy.

Jennifer Morris is a research scientist at the MIT Joint Program on the Science and Policy of Global Change. This post originally appeared at The Conversation.


  1. STEPHEN SHEEHY | | #1

    Risks of over or under investing in renewable power production vary. In states like GA, a vertical integrated utility can stick ratepayers with costs of building new power plants. But in states which have required the decoupling of delivery of electricity from production, someone building a power plant bears the entire risk that it won't be able to sell the power, either because it's too expensive or too dirty.

  2. Expert Member
    Dana Dorsett | | #2

    20-30%. seriously? That's an undershoot by more than half!
    "We found that for a broad range of assumptions, 20% to 30% of new generation in the coming decade should be from non-carbon sources such as wind and solar energy. "

    How ridiculously conservative could that be?

    Last year (2016) more than HALF the new generating capacity was utility-scale wind & solar!

    The capacity factors of new gas and new wind are comparable, and wind &solar are already cutting into the capacity factors of existing gas plants.

    The levelized cost of new wind & new utility scale solar is now already competitive with combined cycle gas (at near record-low gas pricing!)

    Storage still has a way to go, but storage + solar is already cost-competitive with gas fired peaking.

    I haven't read the study to examine the "....broad range of assumptions...". but it seems more likely going with ONLY 20-30% of new generation in the coming dedade from non-carbon sources would be more expensive than the 50%+ non-carbon status quo!

  3. Expert Member
    Dana Dorsett | | #3

    Garbage in = garbage out
    If one compares the EIA's levelized cost projections for 2022 (in picture #3: ) to Lazard's estimated un-subsidized levelized costs were in 2016, you'll find that...

    ... the LOW end of EIA's projections for 2022 was ~$60/Mwh (going up to $140/Mwh)...

    ... was about as expensive as Lazards HIGH cost solar estimate for 2016. ($61/Mwh)

    EIA has one of the worst track records of predicting both the cost and installation rate of renewables of any organization watching this stuff. The EIA has had instances of even mis-predicting even the past, making projections that the cost of solar X years in the future was more expensive than it cost over the prior 2-3 years(!).

    If this study uses EIA cost projections as an underlying assumption it's utter crap, since they're using cost assumptions for solar at LEAST 2-3x higher that is reasonable (even higher than solar actually costs today, before subsidy.) The EIA's projected levelized cost of wind for 2022 is ~50% more expensive than it was in 2016, which is better than 200-300% too high, I suppose, but it's clearly out of touch with the market reality. This stuff is getting cheaper year-on--year, not more expensive and at a pretty fast learning curve. Using Bloomberg New Energy Finance, Lazard, or Greentech Media for present & future levelized cost estimates would be more aligned with reality.

    If the study weren't behind a pay wall I might dig into it in greater detail, but it seems so wrong on the face of it I'll keep the $25, spend it on pizza instead.

  4. Expert Member
    Dana Dorsett | | #4

    As if on schedule...
    The DOE released a report today that the Sun Shot Initiative has succeeded:

    Utility scale solar's installed cost is now averaging below a buck/watt (pre-subsidy. all-in, installed price), and under 6 cents /kwh (=$60/Mwh).

    That is below the low end of the scale of the EIA's projection for 2022 found in picture #3, and thus presumably below the cost assumptions in the economic analysis.

    Making utility-scale decisions based on stale price data and analysis like this is crazy, but all too common. That goes double (or triple?) whien it comes to grid storage. There are no easy solutions here, since utility decision making is slow, and the cost of the technology learning curves is WAY out ahead, but guidance indicating "...20% to 30% of new generation in the coming decade should be from non-carbon sources such as wind and solar energy." based on demonstrably bad data is a dis-service to the decision makers & regulators.

    This stale pricing data combined with a long decision making process problem is coming up with increasing frequency. The California Independent System Operators deliberations over Puente point gas peaker analysis (using 2014 pricing for the PV & battery alternative) being just one among several recent examples, as covered recently by GTM:

    (The full podcast is worth a listen, for the policy wonks & fans: )

  5. JC72 | | #5

    Good stuff Dana

  6. Expert Member
    Dana Dorsett | | #6

    More on how stale data affected the Puente power plant decision.

    Even though it's been approved, it's not a done deal!

    The utility's position is summed up at the end:

    "The utility said it is "speculative" to assume that carbon-free resources "can be developed on the scale and at the cost needed to competitively replace the Puente project by 2021."

    True that.

    But it's also speculative to assume that carbon-free resources wouldn't be able to clear that hurdle.

    The history of the past two decades is that conservative future cost estimates of renewables have consistently and considerably overstated by utilities & analyst within any 5 year period you care to choose. The cost & implementation levels that have come closest have been the "pie in the sky" projections of what's possible (not really predictions of what will happen) by organizations such as Greenpeace.

    So when a utility exec is calling it "...speculative...", one has to ask "What ISN'T speculative, in this rapidly changing scenario?" The down side risk of betting on the carbon-free stuff four years out is low compared to betting on the gas-fired "sure thing", using recent history as a guide.

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