The following is a contributed article by Grant Smith, senior energy policy advisor at EWG
Nothing exemplifies the irrational utility business model more than the billions of dollars companies have wasted on the massive buildout of natural gas capacity over the last decade, ignoring obvious market trends favoring renewables and energy storage.
One great tool to end this financial mismanagement would be enforcing the once prominent "used and useful" standard through which states could mandate that new power plants be completed and providing service before a utility can recover costs from ratepayers. And those generation resources must remain economic, or useful, throughout their lifecycles.
But states have scrapped or severely weakened this requirement across the U.S.
And their approval of new, unnecessary natural gas infrastructure also rests in part on power companies' misleading claims in their investment plans.
Natural gas won't solve the climate crisis, and the industry will only become less profitable and inefficient, joining oil as yet another energy source of the past. We need an ambitious clean energy future that embraces decentralized power through residential rooftop solar, energy storage, wind, solar and other wise investments.
S&P Global reports that Wall Street analysts and others "argue that U.S. utilities are locking themselves into a generation of gas plants that are likely to become uneconomic and shut down long before their planned retirements," otherwise known as stranded costs.
A recent Carbon Tracker analysis finds about one-third of U.S. natural gas plants are losing money, and utilities could face nearly $25 billion in stranded assets for new facilities.
S&P Global describes how we arrived at this point:
- "Many utilities' business models reward them for building new infrastructure, whether economically viable and essential or not.
- Overburdened regulators often lack the resources and the expertise to thoroughly examine utility generation planning, or to fight flawed plans.
- And state legislators who receive generous backing from big utilities often accede to their requests."
EWG's analysis similarly finds that centralized monopoly utilities have manipulated planning documents to encourage state approval of greater gas capacity, even when cheaper and cleaner energy options are available. And EWG also finds several states have amended laws to give utilities full cost recovery from power plant investments regardless of market changes.
State policies encourage unnecessary gas expansion
As far back as 1984, Richard Pierce, professor of law at George Washington University, tried to understand when utilities should be able to recover the costs of bad investments from ratepayers — and how much they should be free to claim. He noted, "the forecasts actually used by the industry as a basis for investment decisions appear to reflect bias or, at the least, naivete in assumptions with respect to . . . structural changes in the market for electricity."
The questions are still relevant.
EWG reviewed five cases when utilities, in proceedings for approval of power plants or in planning documents, focused their data to promote construction — from 2017 to the present — of likely unneeded natural gas plants. These include Minnesota Power, Southwest Indiana-based CenterPoint, formerly Vectren, Duke Energy, Xcel Energy and DTE, formerly Detroit Edison. Their plans manipulate facts and distort reality by:
- Exaggerating future electric demand
- Manipulating the timing of renewable resource or battery storage capacity additions
- Underestimating the cost savings or potential for energy efficiency measures
- Projecting overly optimistic natural gas prices
- Inflating the costs of solar and wind addition
- Underestimating the capability of wind and solar to assist with grid reliability
Duke's 2018 planning document proposed a substantial buildout of natural gas in North Carolina. The plan prompted pushback from the state attorney general's office, advocates, and the North Carolina Sustainable Energy Association and others. They argued the projected natural gas costs were too optimistic, that Duke ignored solar's benefits, and that shifting to a portfolio of renewables, energy efficiency and battery storage would save ratepayers billions of dollars. However, regulators ultimately accepted Duke's plan.
CenterPoint's plan for 2019 and 2020 proposed building two small gas combustion turbines, but some advocates say the costs are vastly underestimated. Although the plan offers a more diverse and cleaner energy portfolio than Duke, critics say it still exaggerates costs for battery storage, unnecessarily restricts solar, and delays additional renewables until the distant future, among other criticisms. Regulators are yet to issue a final decision on the plan.
The criticisms help show that gas is too costly and not viable long-term.
Vote Solar and the Energy Transition Institute estimate that nearly $5 billion in Duke's existing and planned gas investments will become stranded assets.
Policy analyst John Burritt McArthur studied the $100 billion-plus in stranded assets for nuclear power plants when the energy wholesale market was deregulated in the 1990s. He wrote, "Regulation was not intended to shield careless investment or overinvestment. Such conduct prevents least-cost service and deprives consumers of just and reasonable rates."
Market mayhem without important safeguards
The National Association of Regulatory Utility Commissioners identifies two standards that have historically been used to impose market discipline on monopoly utilities:
- Regulators, in approving power plants, must determine whether an investment is "prudent" — necessary and within reasonable cost.
- The "used and useful" standard.
But an EWG survey of four states — North Carolina, Georgia, Florida and Indiana — finds the "used and useful" standard has essentially been eliminated, making it easier to approve gas plants.
Florida law allows for recovery of financing costs for gas plants during construction. This shifts construction risk to the ratepayer, and it's usually reserved for costly nuclear power plants.
Without the two important safeguards in place, utilities can take wild financial risks, safe knowing that states will be receptive to their cost recovery efforts, regardless of whether the power sector is sending clear signals to invest in cleaner energy.
Reinstating the used and useful standard is justified by Supreme Court rulings that recognize market changes as reason enough, within certain limits, for rejecting stranded cost recovery.
Referencing these rulings, power analyst and Federal Energy Regulatory Commission Administrative Law Judge Scott Hempling says a utility investment "based on an obligation established by government entity, is no longer certain of recovery from ratepayers."
Improve resource planning by reinstating ‘used and useful'
EWG calls for establishing a clean energy grid that embraces forward-looking power sources, slashes energy bills and fights the climate crisis. This system would put the burden on utilities to prove their energy investment plans are necessary — and that they provide power people need.
To achieve this, states must revise their laws to reinstate and embolden the used and useful standard, forcing utilities to adapt to the evolving energy market and end bad investments.
States must also stop deferring to utilities for resource planning and instead require transparent proposals that include realistic prices for truly available resources.
Utilities shouldn't expect full recovery for stranded gas costs when they should have known better, and they ignored data and forecasts on the changing energy market:
- In a 2014 report, the Renewable Policy Network for the 21st Century found that government, nonprofits and the energy industry consistently underestimated projections for wind and solar power in the U.S. Renewable energy exceeded projections made in the 2000s for 2020 by 2010.
- Since 2012, the Energy Information Administration says projections for new solar and wind capacity exceeded those for natural gas in all but two years — and that gap has widened since 2019.
- As early as 2015, an analysis by the Union of Concerned Scientists warned of natural gas plants' becoming stranded assets.
- Since 2009, data gathered by Lazard shows a steady decline in new wind and solar costs and those technologies' becoming more competitive with existing natural gas plants.
- EIA data show utility-scale battery costs fell 70% from 2015 to 2020. Electric vehicle battery costs have dipped 87% since 2008, CleanTech Media says.
We need to achieve market discipline for utilities and hold them accountable for their poor investment decisions about existing and new natural gas plants. This requires a strict regulatory regime that starts with revising state laws to expose monopoly utilities to market risk. There is plenty of evidence of bad energy planning. Now is the time to act on it