Ensuring Resilient and Efficient Electricity Generation: The Value of the Current Diverse U.S. Power Supply Portfolio

IHS Markit report says that eroding cost effective diversity in U.S. power grid will result in greater price fluctuations, higher power bills and create negative impacts throughout the economy

The U.S. power grid is on track to lose cost effective power supply diversity, a trend that will raise the cost and variability of power bills and create negative macroeconomic impacts that ripple out through the broader U.S. economy.

Current policy-driven market distortions will precipitate a less efficient diversity portfolio where some U.S. power systems will have no meaningful contributions from coal or nuclear resources and a smaller contribution from hydroelectric resources. They will rely on a tripling of the current 7 percent reliance on wind, solar and other intermittent resources, and on natural gas-fired resources to supply the majority of generation.

To illustrate what is at stake if nothing is done to arrest the erosion in the cost-effectiveness, resilience and reliability of the current U.S. power supply mix, IHS Markit compares the actual industry performance of recent years (2014-2016) with that of a less efficient diversity portfolio case over the same time period.

The comparison between the two portfolios found that the current diversified U.S. electric supply portfolio:

  • Lowers the cost of electricity production by around $114 billion per year
  • Lowers the average retail price of electricity by 27 percent
  • Avoids an annual loss of $98 billion in consumer net-benefits from electricity consumption
  • Reduces the variability of monthly consumer electricity bills by around 22 percent
  • Mitigates an additional $75 billion per hour cost associated with more frequent power supply outages

Comparing the broader economic impacts of the less efficient diversity case to the IHS Markit baseline simulations for the U.S. economy indicates the following macroeconomic impacts from the resulting increase in retail power prices:

  • A decline of real U.S. gross domestic product (GDP) of 0.8 percent, equal to $158 billion (2016 chain-weighted dollars)
  • A reduction in 1 million jobs
  • $845 less in real disposable income annually per household

The most straight-forward option to preserve the consumer net-benefits of grid-based power supply— Eliminating market distortions—may not be politically feasible.

Therefore, an alternative approach would involve regulatory approval and implementation of offsetting market interventions such as:

  • Market rule changes to align security-constrained price formation with power system marginal generating costs to accurately reflect in market-clearing prices the cost of reliability and resilience
  • Payments for cost-effective generation attributes such as the value of contributions to power system resiliency and the value of environmental attributes

To do this requires appropriate changes in operating and planning rules and standards at the federal, state, and RTO/ISO levels.

Ensuring Resilient and Efficient Electricity Generation: The Value of the Current Diverse U.S. Power Supply Portfolio

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