Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

As any good author should, whoever took the pen for the Department of Energy's big study on the reliability of the U.S. electricity system put their most important point high up. It was right there on the first of 181 pages:

The U.S. electricity industry is facing unprecedented changes.

I said it was important, not mind-blowing.

Which is about all that can be said for what is a detailed and rather wonky assessment of the state of affairs on America's grid. Anticipation ahead of the report dropping on Wednesday night centered on politics to a great degree, particularly with regards to how far it would tilt toward the administration's fuel-du-jour, coal, and away from renewables. There was some of that on display, with a repeated emphasis on the need to shore up struggling "baseload" -- read: coal and nuclear -- plants for the sake of resiliency.

All in all, though, it was pretty muted relative to expectations. It is, after all, hard to escape the reality that impersonal forces such as weak demand and cheap natural gas supply bear much of the responsibility for coal's problems. Equally, while about 50 gigawatts of coal-fired capacity has closed in the past six years, net, according to Bloomberg New Energy Finance, it cannot really be argued at the national level that the mix of U.S. power has become overly concentrated. Far from it:

Manifold Destiny
Despite the closings of coal-fired plants, the mix of U.S. power from different sources is more diverse than ever
Source: Energy Information Administration, Bloomberg Gadfly analysis
Note: Concentration of U.S. electricity generation among coal, petroleum, natural gas, nuclear, hydro, biomass, geothermal, solar and wind sources. A score above 2,500 indicates a high degree of concentration.

The report will no doubt push the Federal Energy Regulatory Commission to at least hold hearings on potential reforms to wholesale power markets, where prices have been suppressed by both flat demand and an increase in generation from sources such as wind and solar power. The latter, once built, run whenever they are available and have zero fuel costs, so they tend to take share from other sources like coal plants and can even, at times, lead to negative pricing (which is bad for the old top and bottom lines).

There is a legitimate discussion to have about how to optimize power pricing to send the right signals to the market, not just for the immediate purposes of shaping supply and demand but also investment and innovation. It is, however, very much up for grabs as to what that looks like. Proponents of renewable energy tend to emphasize a combination of solar and wind power, batteries, natural gas and sophisticated demand modeling and management. Coal's fans tend to emphasize the comfort of having ... big piles of coal lying around nearby.

Regional market managers, such as PJM Interconnection operating in several mid-Atlantic and Midwestern states, have instituted several market reforms designed to reward factors like having available generating capacity or managing demand, but further reforms are demanded. Furthermore, what works in one region won't necessarily in another, given America's balkanized power markets and the overlapping authority of state and federal regulators.

Anthony Clark, former FERC commissioner and now a senior adviser at law firm Wilkinson Barker Knauer LLP, summed up the problem in a recent white paper from which the DoE quoted in its study:

The current markets are still procuring affordable power, but many state public policy makers no longer see that as the only goal. It is little wonder we hear some decry that the markets are not delivering what people want. It is because they were never designed for job creation, tax preservation, politically popular generation, or anything other than reliable, affordable electricity.

This is the succinct adjunct that fleshes out the DoE's even more succinct line about "unprecedented changes."

The U.S. power market has long been geared toward producing as many kilowatt-hours as possible, as reliably as possible and as cheaply as possible. That model only works if demand keeps growing and reliability and price are all anyone cares about. Neither of those things hold true today. U.S. electricity consumption peaked in 2007. Meanwhile, concerns about pollution, including climate change, are established drivers of policy, to varying degrees and in varying jurisdictions, whether you happen to agree or not. The most recent exhibits of the effect of these changes are Southern Co.'s and Scana Corp.'s failed coal-gasification and nuclear projects, respectively.

More than anything else, the grid study reaffirms that the first era of the U.S. electricity market, lasting roughly a century, is over and that the market mechanisms have fallen way behind the times.

Its usefulness in pointing the way forward is less clear. As Clark's white paper pointed out, politics tend to demand things that the current market mechanism doesn't deliver. And while the DoE study was less overtly political than had been feared, it would defy common sense to pretend that the administration's desire to bolster coal miners and general antipathy toward carbon mitigation won't shape the discussions -- and confrontations -- to come. 

For those investing in power infrastructure, though, it won't change one critical fact. In a world of cheap gas, flat demand and falling prices for renewable-power technologies, building large-scale, rather than scaleable, power sources is a massive, multiyear, multi-administration gamble. Price accordingly.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in New York at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net