Excerpt from The Utility Sector’s Business Case for Deep Decarbonization, by Gavin Bade, Utility Dive, June 13, 2017
A lot can happen in two years.
At the Edison Electric Institute’s 2015 annual summit, executives from the nation’s largest investor-owned utility companies were skeptical of decarbonization.
A board of CEOs told reporters that President Obama’s Clean Power Plan would raise costs and potentially present reliability issues. In the words of AEP’s CEO Nick Akins, the proposed regulation needed to be reworked so that its carbon targets are “reasonable and rational.”
Fast forward two years — and the policy environment looks quite different. The Trump administration is in the process of rolling back the Clean Power Plan and recently announced the U.S. will withdraw from the Paris climate accord.
“I really feel in many ways that our sector would be well served to get out in front of this and let the world know that we’ve got this one — we will deal with this issue,” he said. “And as a result, we really ought to be in a position to pull in the transportation sector’s energy demand and general industry’s energy demand as well.”
Anderson said his utility discovered it could affordably cut carbon 80% from 2005 levels by 2050 during the planning process for the Clean Power Plan. “We learned there’s no sucker’s choice here,” he said. “You can have a healthy economy and have a healthy environment at the same time.”
Anderson said DTE is not alone in planning for deep decarbonization — a point reiterated by Jan Vrins, global energy practice leader at Navigant, a leading energy consultancy. He said he sees similar planning from his other utility clients.
“Now I think utilities are starting to think alongside their large customers in terms of two things,” he told Utility Dive. “One is electrification of transport, electrification of things like heat or cooling … and then another big one is [electrifying] industries.”
Over the next few decades, decarbonization represents “the growth path for the electric utility industry,” Anderson said, giving power companies a solid business case to push forward on carbon cuts despite regulatory upheavals. But analysts stress that reaching those targets is easier said than done, and a prolonged absence of regulatory pushes could slow decarbonization efforts.
DTE’s carbon plan
DTE’s plan to cut carbon anticipates a stark change in its power mix over the next few decades. While the utility gets 65% of its power from coal today, it anticipates retiring three coal plants with 11 coal production units in the early 2020s and completely phasing out the resource by 2040. By that time, it expects a fuel mix of 40% gas, 30% wind, 20% nuclear and 10% solar — a 75% carbon cut from 2005 levels.
Anderson said those forecasts were the product of planning for the Clean Power Plan, which aimed to cut carbon emissions from existing plants 32% by 2030. As EEI’s environment chair, Anderson led discussions on how to “build some industry consensus around our position on the CPP.”
“We had to take the first really hard long-term look on how emissions could evolve at our company and what it would cost,” he said. “What I learned from the process was that we could deeply decarbonize DTE Energy and we could do it in a way that’s affordable. And to be honest, it didn’t take esoteric technology assumptions.”
Along with that conclusion, Anderson said DTE officials came to several key positions on the energy transition. “I and my senior team have come to the conviction that we have a responsibility to deal with this issue,” he said, “and I really thought that responsibility was going to play its way out through the Clean Power Plan not only for my company, but for the country.”
With the CPP rollback and Paris exit, “I can’t tell you how many questions I get from concerned citizens about, ‘What does this mean?’” he said. “As all of this inbound came in and as it looks like the landscape has changed, we just decided the time was right to be transparent about what we think our future is … and in the process show some leadership on the subject.”
But it wasn’t just customers pushing DTE to count and cut carbon. It’s major shareholders who are concerned as well. “In advance of our annual meeting, I had people reach out to our top investors and we were 15 for 15 with environment/sustainability being a topic they wanted to hear more about — specifically wanting to hear where we’re going,” Anderson said. “And we hear it from our customers too … 80% of our customers when we poll them want you to move in that direction.”
While many utilities initially bristled at the costs of the Clean Power Plan, Anderson said he and his team came to see decarbonization not only as a positive, but as the central driver of growth for the power sector in the 21st century.
“Our ability to deliver on environmental outcomes is really the thing that’s going to drive growth in our industry in a time when underlying [power] uses right now are declining,” he said. “Pulling in broader industry is the path to significant investment in our sector. Long term, electricity wins if environmental concerns are a key and dominant consideration.”
“I don’t think we’re unique. Whenever you take a regulation like that and look forward a few decades, you know this is for real…”
The DTE CEO said his position is not an outlier in the electric power sector.
“I don’t think we’re unique,” he said. “Whenever you take a regulation like that and look forward a few decades, you know this is for real and you take a look with a level of seriousness about what’s possible that you might not have before.”
Vrins agreed, saying he sees his utility clients angling to electrify transportation and industry around the world. “I see utilities more and more looking for ways to team up with entire industry sectors, so mining companies or something like that, or even with the oil and gas companies,” he said.
While corporate sustainability goals are nothing new, Vrins said a new generation of specific climate targets is spurring industries to look to electrification.
“The difference now is that explicit science-based targets are being set for the entire supply chain of large corporations,” he said. “Then probably in the very near future they will have mandatory financial reporting where large companies globally have to report on the progress they’re making toward those targets.”
All this carbon cutting could result in a windfall for the power sector, said Sue Tierney, a principal at the Analysis Group. In her analysis of more than four dozen studies on deep decarbonization, she found that some anticipate that “electricity demand will have essentially doubled compared to where it is today as a result of those changes.”
“Energy efficiency is considered a key ingredient in every one of these studies, and that means … a profile of continued flat demand that is offset by the increased electrification of the economy,” she said.
The carbon caveats
Other coal-reliant utilities have announced similar plans to cut carbon, even as they seek to extend the life of their existing plants. FirstEnergy, for instance, in 2015 announced a goal to cut carbon 90% by 2045 while it was in the middle of a bitter regulatory fight to secure subsidies for aging coal generators. It has not, however, detailed any plans on how it will get there.
Whether these utilities and others follow through on those ambitious carbon cuts remains to be seen. While CPP planning helped DTE determine its carbon cuts, Anderson said a prolonged absence of federal carbon regulations could lead utilities to lag on or reassess deep decarbonization goals.
“I think in the near term [decarbonization] is going to keep growing,” he said. “I think there’s enough in motion, enough aging infrastructure, enough push from customers and investors that it will keep going.”
However, he said, “if the entire economy is going to push to 80%, you probably need a framework that pushes you there. But I am not convinced that the fact that CPP is going to be rescinded is going to stop this train.”
But even if utilities stick to their targets, 80% decarbonization will be a stiff challenge, said Tierney. One of the themes she pulled from her review of carbon literature is that decarbonization to this point, fueled largely by coal-to-gas switching and efficiency, has been “easy.” “Going to even 50% reduction is what I’ll call modest improvement in carbon emissions relative to today, but going to 80% reduction or even farther is going to be hard,” she said.
It’s critical that the power sector figure out the decarbonization puzzle, however, as the rest of the economy will likely rely on it. “Just about every one of the studies I look like has a theme … and that is that electrification of the economy is really part of the critical success factor to getting to an 80% reduction,” she said. “So this literature makes it clear that electrification has to move very deeply into those sectors as well as the industry cleans up its footprint.”
Today’s choices, tomorrow’s power
Beyond challenges of predicting the realities of future technology, the assets power sector companies put in the ground today could also prove an impediment to deep decarbonization.
Last year, Oxford researchers published a study on the “2 degree capital stock,” in which they estimated that if the world wants to hit Paris accord’s goal of limiting warming to 2°C this century “no new investment in fossil electricity infrastructure (without carbon capture) is feasible from 2017 at the latest.”
Given that the transport and industrial sectors continue to increase emissions, researchers wrote that the capital stock is likely already depleted. That means the world is already behind the needed trajectory of emissions reductions, and investment in more long-lived fossil fuel assets could commit the planet to some of the more serious impacts of climate change.
Tierney said that her literature review confirms the capital stock issue as a serious one. “The more we invest in capital stock that is inconsistent with deep decarbonization, the more we are creating incumbents who will fight against addressing decarbonization,” she said.
“I think combined cycle plants that are built today to run baseload will probably run much less in 2050 as the penetration of renewables becomes much deeper,” he said. (Phoenix just purchased PV+battery storage for 4.5 cents/kwh). Some analysts say a big opportunity to address the capital stock challenge could come in the mid-2020s, when a glut of natural gas generation installed early in the century will likely become depreciated. If there are viable zero-carbon dispatchable resources that can take its place, there could be an opportunity to not just not just supplement the existing generation fleet, but actively replace significant fossil fuel capacity.
But whether those dispatchable renewables or other zero-carbon resources will be cost effective in that timeframe remains to be seen, and the 2°C goal likely requires much more generation switchover than the natural gas opportunity of the mid-2020s would provide. In the meantime, Tierney said the power sector needs to prepare to “address stranded costs as part of the transition.”
“That may need to change depreciation cycles in financial markets, really a lot of work,” she said. “But when I said we were not really good at describing how we were going to get there, it’s behavioral, social, accounting rules, regulatory rules, pricing — there are so many changes that are built up into that question.”