NRECA recently released a report on overall trends in the U.S. electric industry and their impact on electric cooperatives. The Electric Industry Generation, Capacity and Markets Outlook offers insights into the evolution of generation assets and how the needs of co-op consumer-members fit into the overall national demand for energy.
Two of the report's authors from NRECA's Business and Technology Strategies Department—Lauren Khair, a senior analyst for economics and industry, and Michael Leitman, a senior analyst for economics and business—discuss the top takeaways in the following Q&A:
While retirements of aging fossil fuel plants are expected to continue, your report suggests these facilities still have a critical role to play in powering the grid?
Leitman: Renewables are putting pressure on coal and nuclear resources. There's still a role for fossil fuels in the energy mix, though the shift from coal to gas is continuing. The steady increase of renewables is expected to continue, but natural gas became the largest source of generation nationwide in 2017.
Khair: Cooperative coal plants are normally newer than other coal plants in the industry. These plants could potentially provide a hedge against variable output from renewables as well as overreliance on natural gas. With renewable penetration, we are also seeing a huge amount of cycling of coal and natural gas plants, which can have significant impacts on their operations and maintenance costs.
How are these trends affecting the co-op coal fleet specifically?
Leitman: The availability of other resources in a region, how specific fuel units are dispatched, and their economic operation and maintenance will determine the future viability of co-op coal plants. While co-op-owned plants have closed and future closures have been announced, their rate of closure is lower than national trends.
Nationally, smaller coal plants are closing, but location, particularly those plants serving predominately rural areas with few other generation options, will still play a very important role in grid reliability.
Khair: Coal and natural gas resources are directly competing for dispatch in many regions, which makes coal plants sensitive to natural gas prices. According to the Energy Information Administration, there is a direct correlation between natural gas prices and the operation of coal plants. Lower natural gas prices mean more natural gas generation and less coal generation, whereas higher natural gas prices mean less natural gas generation and more coal generation.
With natural-gas-based generation expanding, are there concerns that pipeline capacity and proximity to new plants are being adequately addressed?
Leitman: If we continue to build gas plants, we're not going to have enough pipelines to actually operate them in some regions. You already have pipeline constraints on natural gas in the Northeast and saw it in the Midwest with the polar vortex earlier this year. During extreme winter weather, priority is given to residential customers of natural gas delivery for heating, which can restrict availability for power generation. Power plants that don't have firm supply contracts will then have to shop the spot market, but prices can be high and there is no guarantee of availability. Taking into consideration where pipelines can be built is very important for new plant siting. It takes significantly more time to get pipelines built compared to the design, construction and commission of a new combined-cycle plant.
Khair: Co-ops in areas where there is a lot of pipeline infrastructure or the ability to build it are well-positioned for new natural gas generation. You have seen a lot of new builds in the eastern region, especially Pennsylvania, where you have a lot of supply as well. However, pipelines are becoming fully subscribed, and it's become nearly impossible to build new pipelines, which will inhibit future plant construction in that region.
Now that utility-scale renewables are considered proven technology and cost declines and public acceptance are driving industry investment, what role will renewables play in the fleet generation mix?
Leitman: As not-for-profits, co-ops are unable to directly access tax credits, and it's been easier just to sign a power purchase agreement allowing credits to help lower the overall costs, especially for large wind projects. It is a win-win for both parties. But as the wind tax credits phase out, co-ops are re-evaluating whether to own or continue to purchase renewables.
In terms of solar, which has been growing rapidly nationwide and where tax credits phase out later, we are seeing more power purchase agreements for larger projects, including some in combination with storage.
Khair: With more complex projects that combine two or three different kinds of generating resources, you're still going to see many co-ops opting for PPAs near-term because of the greater complexity. This is a period of real change for the utility industry. If the government keeps extending tax credits, then co-ops aren't going to get involved in widespread ownership, but a phaseout could lead to more direct investment. There are significant operations and maintenance challenges with renewables starting to pop up, which could also be a factor affecting cooperative ownership.
The expansion of organized markets, the growth of natural gas reserves, and the emergence of utility-scale renewables are changing how generation and transmission cooperatives operate. What is likely to be the near-term impact on the generation fleet?
Khair: Many G&Ts are choosing to diversify their portfolios by adding new natural gas and renewable resources, while others are choosing to buy from the market. The co-op generation fleet continues to evolve, with G&Ts adding resources that make the most economic sense depending on their region.
As power market operators see utility-scale renewables as the low-cost option, what are the challenges co-ops and other utilities face in placement and build-out of new and upgraded transmission corridors?
Leitman: Regional transmission operators and independent system operators are playing increasingly important roles in transmission planning and cost allocation. Outside of these organized markets, bilateral cooperation with neighboring utilities present many of the same challenges. For co-ops, the primary concern is that the correct projects are being built and that costs are allocated fairly.
What are the dangers of too much reliance on renewables and natural gas?
Leitman: All energy resources have value, but there remain challenges. These include intermittency with renewable resources like wind and solar, difficulties in building transmission to move power where it is needed, and issues of fuel supply and extreme seasonal demand for natural gas, especially in areas where there's competition with end users like homes and businesses reliant on the fuel for heating. Each generation option provides unique benefits to the overall grid and collectively helps to avoid reliability issues.
What about nuclear power? Is there still a major role for co-op investment in nuclear technology?
Leitman: Nuclear is an important resource. Several co-ops own shares of nuclear plants. Some states have adopted policies to protect their nuclear plants, recognizing their value as non-emitting baseload resources.
Khair: While there are no more large-scale nuclear projects planned after the current Vogtle expansion in Georgia, many in the industry are keeping an eye on the development of small modular reactors. These technologies could potentially provide a path to future deployment of new nuclear generation.
What do co-op directors and staffers need to know about the overall message of the Electric Industry Generation, Capacity and Markets Outlook?
Khair: Market forces continue to drive rapid evolution in the electric sector. These market fundamentals are impacting co-ops nationwide. Co-ops are meeting these challenges head on guided by business practices that make good economic sense for their members. This report seeks to provide a high-level overview of recent and projected trends to help directors and staff make informed decisions.