The US faces important challengers for defining their energy policy. The US has a strong dependence on fossil fuels, and despite it is one of the biggest producers of them, they are, by far, the biggest consumer, so it relies greatly on imports. That implies geopolitical issues as well as security concerns. From the environmental and health point of view, a combination of economic liberalism, plenty availability of natural resources and ‘not-in-my-backyard’ policies have lead the young country to not concern about environment so much as European countries where these problems are perceived closer. That can be seen, for instance, in the high level of pollution of some places in the US, the lack of commitment with the Kyoto protocol or the individual car-based transportation system.
Nevertheless, the good availability of resources and the adequate economic situation (maybe not the best nowadays, but for sure better than the rest of the world) could facilitate the necessary change to a greener economy if the political will is strong enough.
In the graph bellow, the sources and sinks of the energy consumption of the US can be seen. Almost 80% of the energy comes from dirty and finite fossil fuels, mainly petroleum. The two main consumers sectors are Transportation (27%) and Electric Power (38.6%).
Transportation is a big contributor to the energy, environment and health issues in the country. There are many policies which can be implemented in this area but the dependence on liquid fuels and the spread US neighborhood development are two important obstacles for the development of a new transportation system.
The first difficulty is partially solved by current technology. There are available new types of fuels but all of them still have relevant difficulties to trigger a change in the market. Hydrogen is not produced in enough quantities yet, in addition of the security concerns related with the great inflammability of the gas. Biofuels are already introduced, but the competition with food markets and the difficulties for introduce biodiesel in the US market (lack of diesel fleet and gas stations network) are important issues yet. Natural Gas (NG) vehicles face the same problems; despite the low price of NG makes interesting this fuel for transportation, mainly feasible for trucks. Electric Vehicles (EV) are in the radar nowadays as the solution, but they will need a change in the electric sector first, to be a real environmental and energy solution (since an EV today is actually powered by coal, NG, nuclear and a little bit of renewables). In addition, the less autonomy issue is an obstacle for consumers, despite technology is improving it very fast.
The spread US neighborhood development is a great difficulty for setting up an efficient and economically feasible public transportation system in mostly cities within US. Some important programs are being implemented nowadays, as Los Angeles metro expansion, high-speed rail in California, and others, but it seems difficult that they will imply a great change in energy consumption in the whole picture. They are actually more focused on solve traffic congestion and local pollution problems.
So, despite Transportation has an important role in the US energy puzzle, it might be very difficult to produce important changes through policies in a short term. However, actions in Electric sector could be more effective and relevant in modifying the energy consumption pattern. Indeed, Electric sector is the biggest consumer with a 38.6% of the total energy usage. Electric sector consumption comes mainly from the activity of ‘Generation’, that is actually, the transformation of primary fuels into electric fuel or electricity, easier to transport and use for innumerable machines. Generation also is responsible for the majority of the air pollution and green house gases (GHG) emission in the sector. (Some emissions are produced in transportation due to SF6 gas used in switchgear, but we can avoid it in this whole picture).
Generation is an activity pursued mainly by electric utilities and some independent power producers (IPP) and, despite there are some thousand of power plants, it could be easier to regulate and address them than convince almost 200 million drivers to switch to brand new EVs or public transportation. In addition, technical solutions to deal with the problem are already plenty available.
This paper is going to be focused on it, trying to propose policies for the Electric power sector for addressing the energy issue in the US. First, the current situation of electric generation is going to be exposed, as start point for posing policies recommendations. In addition, forms of implementation are going to be suggested, extremely important in a huge country where federal, state and local administrations share the authority on the power sector.
2. US Electric power sector
The U.S. electric power grid serves more than 143 million residential, commercial, and industrial customers, through more than 6 million miles of transmission and distribution lines owned by more than 3,000 highly diverse investor-owned, government-owned, and cooperative enterprises; resulting in probably the biggest and complex machine in the world.
Nevertheless, there is not a unified national policy on power sector, and the majority of the competences are held by States in a very heterogeneous way, and only some general interest and security issues are responsibility of the Federal government (through FERC and DOE). Important issues as the generation mix, rates, utilities regulation are State competences. (in many cases, even counties or cities competences).
The current market organization is the result of more than 100 years of evolution. The first electric system was set by Thomas Edison in New York in 1882 for serving 59 light consumers in Wall Street. The plant which powered that system was called Pearl Street Station and it generated DC current from a coal-fired steam generator. From that, the market was growing pushed by technology innovation. Regulations and laws were catching up when they were required for ordering the market and provide a scheme through clients and companies were protected, or when terrible blackouts occurred (for example in 1965 and 2003).
The resultant model today, is a complex system where the vertically-integrated utility is the most usual model, but liberalized markets also exist. Vertically integrated means that the utility is a little monopoly in the zone where it serves, doing generation, transportation, distribution and supply of electricity. The oversee of this monopoly is assigned to state regulators, called Public Utility Commissions (PUC), or municipal governments (as the case of LADWP). These regulators set the rates and approve new plants and lines, among other functions. There are about 3,200 utilities, 2,200 Publicly-owned but only represent 17% of sales and 818 are cooperatives with 12% of sales. The 242 remaining are Investor-owned, and they are most important ones since they represent almost 60% of sales.
About power generation, currently the main source continues being coal (42%). Natural gas represents a 25% and nuclear plants the 19%. Renewable are the 13%, being 8% hydro power, 3% wind, 1,4% biomass, 0,4% geothermal and solar less than 0,1%. So, despite the great political and media coverage of new renewable technologies, they actually represent a little bit of the cake. Just to compare, in countries like Spain, around 20% of the electricity in a year is only produced by the variable wind.
The plenty availability of coal in the US (second producer after China) joined with its low price (comparing historically with gas) and ease of use (few operation risk than nuclear), have ended in being the most preferred technology. However, the implications of its use on emissions are important, since coal-firing is the worst air polluter, locally and globally. Due to its solid condition and chemical composition, burning coal produces bad gases as NOx, SO2 and particles. Some poisoned mercury is also liberated due to its minimal presence in coal. All of them provoke well-known air pollution and health issues in the plant surroundings, and even farther problems as acid rain. Those issues are partially hidden by locating coal plants in remote and low populated zones. Nevertheless, the global impact as a GHG (CO2) producer is even greater. Since coal formula is mainly carbon, when reacts with oxygen, CO2 is greatly produced. NG and petroleum formulas contain more hydrogen instead, so the combustion produces less CO2 and more H2O (which is not considered a problem in global-warming curse). Burning NG generates between 40-50% less CO2 emission than coal and 25-30% less than oil. (The real average data for the US are: NG 1,135 lbs CO2/MWh, coal 2,249 lbs CO2/MWh, oil 1,672 lbs CO2/MWh, from EPA).
It means that considering the current mix and making some simple calculations, for every 1% of coal generation which was switched for NG generation, a reduction of around 1% of GHG emission will be achieved in the electric power sector, caeteris paribus. In addition, burning NG is more efficient due to the higher temperatures which can be reached (the young genius Carnot demonstrated it in 1824 with his famous equations), so for the same electrical output, less fossil fuel will be needed. Switching to nuclear or renewable will be even better, since it will produce a reduction around 3.5% in emissions per 1% of coal taken out. Switching to oil makes no sense, since oil is more valuable for transportation as liquid fuel.
So, it seems that coal is a bad guy in the US energy and environmental problems. In next section, some policies will be posed to deal with it.
Another difficulties has to be considered in power polices definition. The current power market model of regional monopoly-supervision is probably not the most adequate for introducing strong reforms which try to solve a national problem (type of tragedy of the commons here). The main concern of the regulators (PUCs, municipalities) is to guarantee supply and keep rates lower in its area, since problems related with both of them are politically sensitive. That does not leave a big margin to make experiments or push for changes, despite the California market reform in 2000 was a pretty remarkable example but a sad fiasco. The system is destined to be conservative in the investments and the results are a problematic lack of capacity in transmission lines and an old and obsolete equipment. Difficulty in building new transmission lines (owned by utilities) is a big issue in developing renewables, since, unfortunately, the places where the resource exists, are not the same where consumption is. Transmission lines usually go through territory of different utilities, regulators and States, and it is not clear how to allocate the costs of the lines in such heterogeneous jurisdiction scheme, despite the Federal Energy Regulatory Commission (FERC) is trying to deal with it (Order 1000).
3. Policy recommendations
So, with all the tough restrictions those have been presented before, the definition of the US energy policy should be cautious but smart, introducing mechanisms which allow easy and small changes every year but addressed in the right direction to produce a big change in next decades scope. Small steps in the right direction lead to destiny, as a good pilgrim knows.
The principles or restrictions which drive the policy definition have to be cost-effective, politically realistic and objective-oriented. The goal is clear: reduce fuel imports, reduce emissions and allow economic prosperity.
Taking into account this, the energy policy should be focused in one simple thing: Reduce generation from coal and replace it for a combination of NG and renewables.
Local and global range emissions would be obviously reduced, and the rest of goals would be achieved without exceed the restrictions. Coal is greatly mined in the country and is relatively cheap, so doing that change cost-effective and from autochthonous sources is the challenge. Nuclear is discarded due to the great investment costs, the growing opposition after Fukushima disaster and political issues. Moreover, it is not recommended despite it does not contribute to global-warming because of the greater health risks that implies, and the unsolved solution for the nuclear waste disposal. Only one nuclear plant is being built nowadays in the US, the Vogtle project in Georgia, which will need 10 years of development and it will be the sole new nuclear project to become online since Three Mile Island accident in 1979.
Promoting renewable technologies has obvious benefits to reach the target: they do not produce emissions, they do not need import energy, they do not jeopardize lives in case of failure, and they create jobs and industry. In this sense, there is much work to do, since the current percentage of renewables in the mix is lower. However, the cost of energy produced by renewables is still considerably higher than coal, in spite of technology innovation is lowering this price every day. Till grid parity was achieved (cost of renewable equal market reference), regulators, utilities and consumers probably will not be eager to pay more for electricity. Moreover, the grid upgrades and back-up generation that they need, pushes the balance against them.
However, this over-cost can be easily minored by increasing NG generation, which also contributes to reduce emissions from the current situation. Increasing NG generation would require almost nothing new investments. In the figure below, it is presented the current coal generation (the less efficient plants in green); and in blue the generation potential of NG combined cycles already online but currently not working at plenty capacity. (in fact, these plants are working much less hours than those for they were conceived).
As it can be shown, there is a great potential of switching coal to NG, at very low cost. Underutilized NG combined cycles do not need infrastructure upgrades since they are already connected to the grid and the gas supply network is more than enough to deliver all the plants. The reason why they are not plenty utilized is because coal used to be cheaper and because, in reality, utilities decide their generation program regarding their own interest (many times not lowering the cost since they are going to recover it through the negotiated rates with PUCs).
The price of natural gas has been historically growing every decade, since it used to be tied to oil (so it is in the rest of the world). But the discovery of the new ways to make profitable natural gas from shales, have revolutionized the market. The great increasing in shale gas production has sunk the prices in the last few years, and the projections predict that the availability of NG will increase in US.
However, a warning has to be done here; this fortune’s gift can become a curse if it is used as a substitute for renewables instead of for replacing coal. That would be a strong temptation unless appropriate regulation and policies were set, since in absence of GHG control, cheap gas can be converted in cheap electricity, good for utilities’ revenue and politician’s image.
To conclude, the successful energy policy would be to change coal for renewables and natural gas, balancing this combination depending on the evolution of the generation cost of both technologies and the efforts that consumers were willing to assume.
4. Policies Implementation
It is not only important to recommend energy policy, but to suggest how implement it. And that is crucial in a country with such complex and distributed jurisdiction in power markets. Here, some ideas are going to be given to address with the practical sense of the energy reform. They are directed to different administrations, federal, state and local:
- The definition of the strategic energy plans are nowadays responsibility of the departments of energy of every State according with its PUC. It could be more convenient that these plans (where the switch from coal to NG/renewals can perfectly be included) were agreed with a federal agency as the Department of Energy (DOE) and FERC. It makes sense since the effects of the electricity production not only involve a sole State, but the whole country (regional and global emissions, imports of fuels…)
- Since Federal agencies have a narrow margin to impose legislation to States (litigation can convert the planning process in a nightmare), the Federal agencies can try another strategy. They can offer conditioned funds (for example those from ARRA) to those States which achieve the objectives set by Federal, for example, to reach a certain level of renewables, to coordinate energy plans, to open market for transparency, to coordinate lines with neighbor States, etc. The State have the option, not the obligation, to do the things right and get the funds (politicians would love to win them). It is making and incentive and leave competition works.
- Municipal and local utilities should be under control of State regulators of PUCs, and the municipality governments should endorse it. Despite we respect personal freedom, it is totally unfair and biased that municipal utilities (as LADWP) do not have the obligation of the State Renewable Portfolio Standard, and they can arrange their generation structure as they want. It is unfair that, for example, in Los Angeles, consumers pay less for their electricity than in Orange County, because LADWP generates more with coal and do not have the obligation of buying renewables as SCE. And it is unfair because emissions from this decision affect equal both consumers.
- Maintain and update the tax incentives to renewables. Without cancelling all subsidies (including those oil, gas and coal have), that it is not a bad idea at all; it is better to maintain, at least, the current incentives for renewables, as Investment Tax Credit (ITC) and Production Tax Credit (PTC). Moreover, a long term strategy should be done, to avoid the stop and go in investments that the sector suffers. Wind power is a good example, and just this year we are seeing the same stop as 2004 because the PTC has not been renewed yet for 2013. These ups and downs do renewables more expensive because companies and banks need higher loan rates to compensate the variable regulation risks.
As it has been explained, Transportation and Electric Power sector are the two main causes of the energy consumption in the US, and both of them rely so much on fossil fuels. Transportation is mainly dependant on petroleum (94%) because, however it could be hard to understand when you visit the gas station, it is actually the cheapest liquid fuel that can be found today, with the current logistic chain. For sure that there are alternatives, but it is difficult its introduction due to the great upfront investments they need. Even the EV will not be the solution unless Electric power sector changes before.
However, decisions taken in the Electric sector can be more effective and reduce emissions and consumption. Energy efficiency improvements has not been considered in the paper, despite they are totally recommendable, because they will be probably compensated with the increase in energy demand due to population and economic growth (forecasts say that the increasing on demand will be around 1% every year, and the energy per capita will decrease slowly till a 20% of current in 2035).
In Electric sector, the most obvious action seems to be reducing dirty coal and introducing renewables (zero emissions, zero imports but still expensive) with a combination of natural gas (less emissions, no imports thanks to shale gas and cost-effective). Achieving the changes is a challenge with the current market organization and regulation, so the political determination has to be strong enough to go together in the right direction and leave apart lobbies and particular interests in order to fulfill the general interest.
- US Energy information Administration: www.eia.gov
- The World Bank http://data.worldbank.org
- World coal Association http://www.worldcoal.org
- Environmental Protection Agency http://www.epa.gov
- California Energy Commission http://www.energy.ca.gov
- Multiple Authors, The Future of Natural Gas, An Interdisciplinary MIT Study, June 6, 2011
- Multiple Authors, The Future of the Electric Grid, An Interdisciplinary MIT study, December 5, 2011