As we navigate uncertain times in our economy, we become more aware of the importance of basic needs, like electricity. Times of uncertainty can shine a spotlight on the concerns and priorities that will drive future planning decisions for businesses and for our electric grid.
Resiliency, reliability and cost effectiveness guide the planning of electricity generation systems. Last month’s edition of Customer Insights revealed the cost landscape has tipped recently toward natural gas and renewables. The 2010s saw the beginning of a major shift in the fuel mix generators used to produce electricity for the U.S. It’s important to frame this shift not simply in terms of cost to build new generation, but to consider resiliency, reliability and how our generation mix is poised to support economic growth and delivery during times of uncertainty.
How has the fuel mix changed?
During the past ten years, we’ve seen changes in the fuel mix used to generate electricity. Coal is no longer the key driver in producing power.
Drilling into what happened throughout the last decade, non-hydroelectric renewables (primarily wind and solar) grew the most – from 3.7% of annual generation in 2010 up to 10% by 2019 for overall growth of 171%. For most of the past decade renewable energy grew significantly as wind farms expanded in the Great Plains and Texas, and as new solar plants spiked in California and the Southwest.
The second largest producer and dominant new player on the scene was natural gas. Natural gas-fired generation grew from 23% up to 35% of the total electricity generated annually in the U.S. throughout the past decade.
Nuclear and other fuel sources held steady, which means the growth in natural gas and renewables directly displaced coal. Coal-fired generation shrank from the dominant fuel source in 2010 at 45% of the generation mix down to 28% by 2019. An interesting side note, which is evident in the chart below, while the generation mix has evolved, overall demand nationwide has remained flat at nearly 4,000 annual terawatt hours. While the economy grew over the course of the past decade, electricity use did not – which likely means our economy is becoming more energy efficient.
The plan for the 2020s across the U.S. is for more of the same – more renewables, more natural gas and less coal. Many states have Renewable Portfolio Standards (RPS) which mandate a certain percentage of a state’s energy load is required to be served by qualifying renewable generation by a specific date. These RPS requirements, along with the fact that wind and solar are the cheapest generation technology in many parts of the country, will drive continued renewable energy growth.
Natural gas plants are the only central station generating facilities that are being built in our country today, and it’s because of cost. Coal is too expensive to compete, even before assigning value to its significant environmental cost. Nuclear is also expensive (no new nuclear plants are planned in the U.S.), but many states have enacted legislation to support costly nuclear plants as these plants are significant sources of carbon-free energy. For the time being, it appears coal will keep shrinking, nuclear will continue to hold steady, natural gas will continue to grow at a slower rate and renewable energy will keep accelerating.
How does this affect the energy buyer?
As an energy user, the generation mix is important to you because it sets the parameters for the energy market and for your participation as a buyer. For instance, in today’s market, electricity prices are strongly correlated to natural gas prices which have been historically low. With more renewables coming onto the grid, we’ll likely see prices even lower since wind and solar have no fuel costs and minimal marginal operating costs.
The graph below provides historical NYMEX natural gas prices compared to AEP – Dayton Hub electricity prices back to June 2012. In June 2010, NYMEX prices were nearly $5.56/MMBtu vs. AD price at $38.62/MWh. On March 13, 2020 NYMEX price was $2.35/MMBtu vs. AD price at $25.48/MWh.
The counterbalance to lower energy prices from renewables is that capacity and transmission charges based on peak demand hours will likely play a larger role in determining your overall energy spend. As this next decade of generation planning plays out, you as an energy buyer can take matters into your own hands. Larger energy users should be looking at asset-based solutions (on-site generation, energy storage and fuel cells, for example), to help offset costs. At the same time, all energy users should consider understanding their peak energy use hours, and the value in controlling those hours, which may reduce their overall capacity and transmission costs.
For more information
If you are interested in learning more about the generation mix or how your company might take advantage of low renewable energy costs, contact Evan Howell, Director of Energy Services at firstname.lastname@example.org or call Evan at 312-488-2211. If you are already working with an AEP Energy sales representative, they will happily work with you to plan the best energy strategy for your business.
Subscribe to Customer Insights today to have them sent directly to your inbox as soon as they are published.