Skate Where the Puck Is Going to Be
Hall of Famer Wayne Gretzky once said, “A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be.”
Strangely enough, when I think about what lies ahead for electric utilities and state regulators, I think about Gretzky’s greatness. And then I think about the amusement of watching 6-year-olds on the ice, where all the kids chase the puck in a dizzying cluster, bumping into each other in a real-life dramatization of Brownian motion. In their initial responses to EPA’s new Clean Power Plan, it appears that too many utilities and too many state regulators may bear a closer resemblance to the kids than to Gretzky.
Today, everyone seems to think that complying with the Clean Power Plan is where the puck is. States (and utilities) are in hot pursuit of least-cost compliance strategies, and many observers believe the simplest and cheapest solution is to increase natural gas-fired capacity and generation. A careful assessment, however, reveals looming in the background a host of other rules, initiatives, and market trends that are forcing other changes on electric utilities. We see aging fossil fuel plants, dramatic cost reductions for renewable energy, increasingly smart grid technologies, growing fears about water scarcity in some regions, and EPA rules for mercury, haze, and cross-state air pollution. Just this week, EPA finalized a new national standard for ozone pollution that will almost certainly necessitate additional power plant emission reductions. When this bigger picture is considered, a “dash to gas” for CPP compliance may not make as much sense. (For more detailed explanations, see No Rush: A Smarter Role for Natural Gas in Clean Power Plan Compliance and Smart Gas Investment).
What’s a utility to do? What’s a state regulator to do?
Skate to where the puck is going to be.
Electric utilities across the country have always been masters of long-term planning. They know that major infrastructure projects can take a long time—up to a decade or more—to conceive, plan, and execute. More than half of all states require utilities to develop long-term integrated resource plans (IRP), where the goal is to identify the best mix of supply-side resources (like power plants and transmission lines) and demand-side resources (like energy efficiency and distributed generation) to meet expected customer service requirements into the future at least cost. But the truth is that utilities routinely make and execute resource plans everywhere, whether mandated or not.
Instead of playing where the puck is today, myopically focusing on Clean Power Plan compliance, utilities and states would do well to revamp their resource planning processes to ensure that they acquire a portfolio of resources able to serve customers well in light of all of the trends and regulations looming in the background. RAP has suggested using a process it calls integrated, multi-pollutant planning for energy and air quality (IMPEAQ).
An IMPEAQ planning process could build upon existing IRP processes, where they exist, or be developed from scratch. It could even reflect a refinement of IRP processes rather than a wholesale reinvention. The key distinction is that traditional resource planning processes have been overseen by energy regulators and have sought primarily to identify the least-cost resource portfolio that meets energy objectives. By contrast, an IMPEAQ planning process would be overseen by energy and environmental regulators and would target multiple energy, public health, and environmental objectives simultaneously. The CPP has already raised communication between these regulators to an unprecedented level. In effect, IMPEAQ would be a marriage of the IRP process familiar to utilities and energy regulators to the state air quality planning processes familiar to environmental regulators.
For example, we know that the Clean Power Plan will be litigated for years to come, and the outcome of that litigation is far from certain. We also know, with respect to the new ozone standards, that the specific implications for individual power plants won’t be known for years. Many utilities and state regulators are understandably concerned about investing resources today in a particular compliance strategy, because of uncertainty about the ultimate compliance requirements that will apply to their assets.
An IMPEAQ process could identify resource portfolios that minimize regulatory risk. The preferred resource portfolio might not be the one that has the absolute lowest cost under a presumed “baseline” scenario, but instead be one that has relatively low costs under a wide range of possible scenarios. What’s more, because utilities routinely develop resource plans, doing them in this integrated fashion would allow potential compliance strategies to be explored even if the utility (or its regulators) intend to challenge the legality of the CPP or other rules. (For a thorough treatment on regulatory risk, see Practicing Risk-Aware Regulation: What Every State Regulator Needs to Know.)
The idea of identifying a flexible, affordable, low-risk resource portfolio can extend well beyond the Clean Power Plan and ozone issues to incorporate other risks and uncertainties, such as more stringent sulfur dioxide emission standards, extended droughts, higher natural gas prices, and grid technology developments. After executing an IMPEAQ process, for instance, a state or a utility may choose to pursue greater energy efficiency because it reduces emissions of all pollutants cost-effectively. Or it may secure additional wind and solar supply options as a hedge against water scarcity. It may even identify and implement approaches that reduce emissions sufficiently to insure against future non-attainment designations or other negative economic or public health consequences.
Consumer advocates and environmental justice groups should welcome an IMPEAQ-like approach to planning. In fact, they should insist upon it. It’s a smart way to minimize the risk that ratepayers will have to bail out utilities whose poor investment choices result in stranded costs. Worst case, all parties will have better information about the potential costs and benefits of different resource portfolio choices. IMPEAQ is also a smart way to make sure all of the impacts of resource choices, including localized environmental impacts that disproportionately affect some communities, are factored into long-term planning decisions.
Resource plans are being developed today. They will be developed tomorrow, and next year, and five years from now. Each one that is completed without using an integrated IMPEAQ-like approach represents a lost opportunity and greater potential for stranded costs or avoidable public health and environmental impacts. Resource planning is not a new process imposed by EPA through a rule, but rather a process that already occurs routinely. It may offer the best way to bridge the gap between those who want to get on with Clean Power Plan (or mercury, ozone, etc.) compliance and those who think the rules are illegal. Smart resource planning can inform us about how costly (or not) those rules will be and how risky (or not) our choices will be; it will tell us where to skate.
— With contributions from Ken Colburn