Regulatory support needed to encourage investment as natural gas crowds out traditional generation

The U.S. electric industry need only look at its own volatile history to glean some insight into how it should navigate the uncertainty of the path forward. In a word: diversify, panelists at the Edison Electric Institute (EEI)’s Financial Forum said on Nov. 11.  

Though diversification of the fuel mix theoretically is a top priority for many utilities, the impetus to invest in generation isn’t there, as gas prices have made other baseload forms of fuel, such as nuclear, uneconomic. Just two weeks after winning a legal battle over the Vermont Yankee nuclear station’s license renewal, Entergy (NYSE:ETR) on Aug. 27 said it would shut the plant down because of “artificially low” [subscription required] energy and capacity price signals in ISO New England.  

“For most utilities across the nation, it’s a decision of whether you’re going to do gas or gas,” Ben Fowke, chairman, president and CEO of Xcel Energy (NYSE:XEL), said at the Financial Forum in Orlando, Fla., on Nov. 11. “I truly think that the gas economics have changed everything. It’s been a benefit to consumers as we’ve done the infrastructure work necessary, but [it] has crowded out almost all the traditional investments.”

Ultimately, a myopic focus on natural gas as the solution for reducing greenhouse gas emissions or serving as back-up generation for intermittent renewable energy will backfire. If carbon emission reduction goals get more aggressive, a nuclear renaissance will be necessary, Fowke added. The country is on track to reduce emissions 30% from 2005 base levels by 2020, and the industry has been able to do so while keeping prices competitive, in large part because natural gas prices have enabled the retirement of less efficient coal generation, he said.

“But post-2020 how much more carbon do we want to reduce?” he asked. “We have to establish what the goal’s going to be. If it’s a 30% reduction, then we’re already there. If we’re going to do 80% that we hear, it’s going to be tough and it’s going to be more expensive … and the nuclear renaissance will have to come back.”

Fowke and Duke Energy (NYSE:DUK) President and CEO Lynn Good both cited Germany as an analog for a country that has tried to move to one primary energy source, to significant consequences.

“We’ve spent a fair amount of time … looking at the experiment that’s been going on in Germany for over a decade, where there’s a combination of public policy mandates accelerating renewables, at the same time coupled with the decision [to close] nuclear,” Good said. “The net result of all of this is more carbon emissions, higher prices, and reliability issues on the grid.”

As natural gas prices and demand forecasts are projected to remain low, it will be hard for utilities, which traditionally have led the effort to invest the hefty amounts of capital needed in electric generation, to make such a business case. With less investment in fuels that are not natural gas-related, generation diversity goals will suffer. Such dynamics behoove regulatory support, Fowke said.

“I think it really screams for a good balance of the regulatory framework that would encourage diversity, recognizing that it might not be the absolute cheapest option today,” Fowke said.

He suggested that the industry scrutinize and perhaps revamp rate design, which he said was decades old, and start to send “the right economic signals” by moving to a fixed charge for the grid that reflects what the true costs are for the different customer classes – commercial, industrial and residential – “so we don’t allow the future to be one where business has eroded because of policy, not economic bias.”

Low gas prices are allowing customers the opportunity to generate energy themselves, he said, and that trend could further marginalize utilities’ role.

“If we’re not careful, regulated utilities will be cherry picked,” he said. “It’s not going to be easy to change what’s been done. If we don’t [get started], I think it really will impact what we look like in five years.”

 

About Rosy Lum 525 Articles
Rosy Lum, Analyst for TransmissionHub, has been covering the U.S. energy industry since 2007. She began her career in energy journalism at SNL Financial, for which she established a New York news desk. She covered topics ranging from energy finance and renewable policies and incentives, to master limited partnerships and ETFs. Thereafter, she honed her energy and utility focus at the Financial Times' dealReporter, where she covered and broke oil and gas and utility mergers and acquisitions.