How Did Energy Policy Become a Key Risk to Grid Reliability?

Episode ID S3E12
December 13, 2023

Winter storms and cyber attacks are commonly thought of as the risks to electric reliability. But now joining that list is energy policy. In this episode of Power Plays, Jim Matheson, the CEO of the National Rural Electric Cooperative Association, delves into how the aggressive timeline for EPA’s proposed rules to reduce power plant emissions threatens electric system reliability, especially for co-ops.  

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Jim Matheson: It happened last year on Christmas Eve, the year before, we saw Winter Storm Uri and the impacts in Texas. I don't want to see that happen anymore in this country. We feel like these margins are getting really thin and the potential for outages continues to grow. Let's get in some front of it before we have more and more of those bad circumstances.

Teri Viswanath: That’s Jim Matheson, the CEO at the National Rural Electric Cooperative Association, or NRECA. And he’s referring to the country’s power plant reserve margins and the possibility that energy policies might be contributing to grid reliability risk.

Hello, I’m Teri Viswanath, an energy economist at CoBank and your co-host of Power Plays. I’m joined by my colleague and a managing director here at CoBank, Tamra Reynolds. Hi Tamra.

Tamra Reynolds: Hey Teri. According to the North American Electric Reliability Corporation, or NERC, there are five major risks to system reliability — grid transformation, extreme events, security (including cyber security), and aging infrastructure. But topping their list this year is energy policy.

Going back at least five years now, NERC's reliability assessments have noted a steady deterioration in grid reliability. But this latest assessment was the first time that the organization singled out state and federal policies.

To understand what’s happening here and maybe, well, whether we might have another winter event ahead, we caught up with Jim.

Here’s how he framed the challenges of boosting those reserve margins. 

Matheson: When you work in the electric sector, you're working in a capital-intensive industry where building infrastructure is, in and of itself, a complex proposition.

These are not things you stand up in a couple of months, whether it's the power plant itself, whether it's the transmission line, whether it's the natural gas pipeline to deliver natural gas to a power plant. Then if you want to connect to the grid, sometimes it's hard to find an interconnection opportunity for that in a timely way. There's all these factors that pile on each other that create greater risk and greater uncertainty in terms of completing a project in a timely way.

Viswanath: Jim’s comment directly addresses the identified NERC risk of aging infrastructure and replacement. But the evolving story is not simply a ‘status quo’ replacement.

Matheson: We have a situation where demand for electricity is growing in this country, and that's a good thing in so many ways. It's growing because of just basic economic growth. It's growing because manufacturing is onshoring back to the United States. It's growing because other segments of the economy are being electrified to further decarbonization. You're putting more strain on the existing grid when you have greater and greater demand.

So number one, we're not making investments in the transmission grid in terms of accommodating that extra electrical demand. We're also, in the broader definition of grid, we're not investing in the generating capacity to make the electricity to meet that demand. That is really in a nutshell, big picture. What's driving this concern about reliability is that demand is growing and supply is not keeping up with it.

Worse yet, in some circumstances, we're reducing supply. We are shutting down power plants before the end of their useful life. We are replacing them at times with intermittent resources, primarily solar or wind, which have a role to play, but they're not part the same as always-available generating capacity that you get from a nuclear plant or a coal plant, or a natural gas-fired plant.

These are the forces coming together to start to ask these questions about how do we keep the lights on a reliable basis in an economy that today relies on electricity in a substantial way and in the future, electricity's going to be more important in terms of our economy of functions every day.

Reynolds: To meet future demand, global generating capacity could conceivably double by 2050. Jim makes an important point about the need to reconcile with what we need to build to achieve reliability. And the process needs to start now.  

Matheson: It's interesting the Electric Power Research Institute, their acroynym is EPRI, just published a study this summer showing that industrial electric demand in this country had been flat to declining for the last 30 years. It's going up now -- which is good news for our economy. It means manufacturing's coming back.

The other big driver in the industrial side are these data centers. The reliance we have as a society on the digital world and on the cloud and on the need for this computing capacity, is just skyrocketing.

I know that an entity was approaching a co-op in Georgia and said, "We want to put a data center in your territory. It's going to need 1,500 megawatts." That's larger than most power plants. The appetite for use of computer capacity in the world is not going to go away.

There's public policy encouraging greater electrification, electrification of the transportation sector, electric vehicles. There's encouragement to go to electric heat pumps instead of natural gas furnaces. Electrification is an important tool to lower overall carbon intensity in our economy. The electric sector is being asked to do a lot. It's difficult to build anything in this country. A new solar plant, a new wind plant, a new natural gas-fired power plant.

This is starting to have an impact in various parts of the country on limiting the opportunity for economic development. I'll give you a quick example.

The Tennessee Valley Authority or TVA made an announcement in August of this year, that they can no longer support new projects within the valley that are over 5 megawatts of load with firm power. They cannot commit to be able to meet the needs of new loads with firm power. It can be interruptible. That has a real chilling effect on economic development in that region.

Viswanath: But, back to our main discussion…It now appears that our public policy could somehow derail plans for meeting electricity growth. Following their recent reliability assessment, industry publications headlines mention that “NERC is now saying public policy poses a risk to grid reliability.” And Jim believes, we should all be concerned.

Matheson: Look, that's the world that electric utilities work in, but it seems like these risks and these uncertainty seem to be escalating right now. A big part of that is just based on how public policy is developed and how it's applied.

The EPA has made this proposed rule for greenhouse gas emission reduction. It really is a remarkably aggressive and ambitious rule because it's not based on current technology. It's almost what we like to call an aspirational rule that we hope the technology is ready under the specific deadlines that are listed in the proposed rule. What they're talking about for all fossil fuel generation is that they've recommended two particular technology options to reduce carbon emissions. One is the deployment of carbon capture and sequestration at coal and natural gas plants. The other is to transition those plants to be firing on clean hydrogen.

Viswanath: You see, the EPA’s proposed rule lays out basically three viable pathways for existing and new coal or natural gas plants. These plants can cease or significantly reduce operations (so that they only serve as back-up generation). Or, they can co-fire with hydrogen or cleaner fuel alternatives. Or, they can rely upon carbon capture for 90% of their emissions. Consequently, it probably boils down to massively leaning into hydrogen -- or carbon capture. And, the rub is that we haven’t commercially built out these systems.  

Matheson: In both cases, those are technologies that may be promising for the future someday, but they are in no way ready for primetime and application today. What's interesting is the timing of this. Basically, if you own one of those generating facilities, you have to have it ready and in place, these new technologies starting in 2031. That may sound like it's a long ways away, but it's really not when you look at the effort it takes to invest in these systems. If the technology doesn't work, then it doesn't matter what the deadline is if that the technology doesn't work. That's the crux of the challenge with this rule.

Reynolds: The EPA is putting the primary focus on new base load plants, because they operate continuously and therefore generate the majority of emissions. Low-load power plants, or “peaking units,” used at a capacity of 20% or less and intermediate load plants would have less stringent standards. But the challenge is that the rule would go into effect in less than a decade.

Matheson: There are a couple of other things I should mention. Even if you were able to deploy all of this carbon capture and sequestration and all this hydrogen, you're going to have to build an amazing level of new pipelines throughout this country to be the infrastructure to allow that to happen. Again, I don't see how that can happen in a practical way when it's so difficult to get a permit to build anything in this country, but clearly can't happen in the timeframe where we're supposed to be ready to go in 2031.

I think that this is causing difficulty for owners of those power plants. They don't know where they're going to go going forward. It freezes a moment in time in terms of making good decisions, and that causes reliability to be at risk. That's our concern with the rule.

Viswanath: This year, I spent a lot of time considering carbon capture technology. In fact, I recently mentioned that the largest climate policy contribution of the Inflation Reduction Act might likely be the market incentives tied to carbon capture for high-emitting industries.

But, I see the near-term opportunities from high-purity carbon streams, such as gas processing — where about 75% of the technology is currently applied — and ethanol production. Longer-term opportunities could unfold for power, but these projects need more support and the co-op industry has a deep bench of experience here.

Matheson: I think electric cooperatives have some background on these issues. We are looking at, as a community, carbon capture projects. Number one, at the Dry Fork facility in Wyoming that's owned by Basin Electric, we have a test center that's been up for years for it to allow different people to come in and test new technologies for carbon capture. We have a project that is moving forward with Minnkota Power called Project Tundra that is going to be a significant, and in some ways, the first and the largest actual carbon capture and storage application in the United States of the coal-fired power plant.

That's a circumstance with the location and the geology for the sequestration of the carbon. It works there in that location in North Dakota. It's still a really expensive project and it's got significant federal funding now to make it work. The point is, is we do have experience in these technologies as a co-op community. We do have some sense of knowing what we're talking about. Hydrogen, there's a little less experience because it's even further off in terms of being ready for commercial application, particularly across the whole country. We're not saying these technologies are never going to be available, but we're saying mandating that they have to be put in place by 2031 is just completely unrealistic, and it's bad policy.

Reynolds: While there are new federal incentives, at the end of the day, they may not fully cover costs. So, co-op members will ultimately shoulder the burden for compliance. And that bill might prove to be unaffordable.

Matheson: There's two broad areas of concern for this proposed rule. Let's be clear, this is a proposed rule. It's not law yet today. Number one, it's relying on unrealistic and unachievable technologies to be assigned to these generation sources that today are always available. You shut them down and replace them only with intermittent resources that aren't always available.

Wind and solar have a role in a portfolio, but it's very difficult to say you're going to get rid of all of your always-available generation because that's what it takes to make the grid work. For  electric cooperatives, there's great concern about negative impacts on reliability, but there's also, quite candidly a great concern about cost.

Within the electric cooperative community, let's remember that rural electric cooperatives serve 92% of all of the persistent poverty counties in America. When we talk about affordability in the co-op world, we really mean that, because we're non-for-profit entities owned by the consumers we serve. We have no shareholders to absorb any of these costs. Every economic impact that goes in the direction of electric cooperative lands on that consumer's electric bill. That is another concern we have about the proposed rules, the affordability as well.

Reynolds: As NERC points out, there is an accelerated pace of integrating new resources on the bulk power system and there is going to be a significant lift required to more advanced tools and grid infrastructure improvements to ensure reliable and resilient integration. For our communities, we also need to make sure that we do this in a cost-effective manner, right?

Matheson: It's a concern because it's in the mission statement of every electric cooperative: reliable, affordable power. That's their mission. That's what they believe in. That's what they do every day. We don't want to get to a point where they're not able to complete that mission. Last year, on Christmas Eve, we had rolling blackouts in nine states in the mid-Atlantic because there was a real cold snap and there wasn't enough electricity to meet the need.

We even had a one-generation and transmission cooperative who had a natural gas fire power plant, and they had a firm contract for natural gas. Guess what? There was no gas delivered to the power plant to make electricity. Natural gas is important part of how we make electricity in this country. There's a shortage of delivery systems for natural gas in this country too, in terms of increased gas pipeline capacity. We've seen it happen.

Viswanath: I think Jim’s point is important to understand. The rural communities are home to 99% of onshore wind projects and a growing share of utility-scale solar projects. That said, there is a time-lag in the timing of investments for rural communities. My research suggests that the co-op thermal fleet is on average 3-5 years younger than the entire U.S. power plant fleet. So, early retirement of rural power plants, means their communities will unequally bear the cost of a shorter investment cycle, as Jim explains.

Matheson: The timing of when electric cooperatives invested in a lot of their base load generation was late '70s, early '80s. Those plants still have a lot of useful life left and a lot of them are being put in a position where they may have to be shut down early. There's that impact of not completing the benefits of that investment in the past.

On top of that, it's all this new cost associated with all the new investments that would have to be made to replace that capacity, and the capacity isn't going to be as reliable.

Viswanath: But, this doesn’t mean that clean energy investment is slowing down in rural communities.

Matheson: Electric cooperatives do recognize the value of a diversified portfolio, including renewables. In fact, if you look at the interest in renewables for electric cooperatives, let's just take a look at the new program at USDA where $10 billion was appropriated by Congress for an investment in clean energy projects, specifically designed to reduce carbon. That's the metric by which USDA is going to evaluate the applications that funding that come in. That $10 billion is part of a cost share. That's the federal portion of these projects.

My gosh, the electric cooperative community responded with-- they requested $24 billion of that federal money, so it was more than double oversubscribed. That's the federal share. The total cost of all those projects is $93 billion of clean energy projects from co-ops in 45 states. Let's be clear. The electric co-ops are not about it must be fossil and nothing else. We are saying we want the flexibility to make decisions for what makes sense in our local area, and we recognize the value of a diversified portfolio and with appropriate incentives, we're going to make investments in new technologies.

But on the flip side, we don't want a one-size-fits-all mandate, which is what this proposed EPA rule is that says unless you can deploy these technologies, which you can't because they're not viable, you're going to have to shut these plants down. That's where the rub comes on the overall reliability question. I did want to make sure we had the understanding that the electric co-op community is not saying, "Let's freeze this moment in time and never do anything new." In fact, electric cooperatives have really stepped up to the plate and demonstrated their interest in deploying a wide range of technologies in a portfolio approach to do the best they can for their consumers.

Reynolds: That’s a great point, Jim. I think it's important to acknowledge too that NRECA is not alone. The Public Power Association and the IOU lobbying agencies are also on board with trying to protect those that matter to them from a utility standpoint. I think that's having the ability to be unified on something that's so important to the future of the reliability of the electric grid is critical. I applaud you guys for coming to the table together about that. That's not something that often happens.

Matheson: Yes, it's important for the electric sector to have as unified a voice as possible. Quite frankly, I think the co-ops are the most aggressive on this issue, but there's no question that the comments filed  by the investor owned- utilities and by the municipal utilities, the comments they filed to the EPA raised the same issues we did about the reliability concerns.

At the end of the day, when the lights go out, where does the consumer look? They look to their utility provider and say, "What happened?" They're not going to go, "Oh, it was Washington D.C., it was the EPA that did this." Those of us who had that responsibility to keep the lights on every day, I think while there are other entities that have commented on this proposed EPA rule, I think the utilities are the ones that ultimately, at the end of the day, have to keep the lights on. I think their voice, the utility voice should have a pretty significant role in how this rule is evaluated and considered by others.

That's why we're trying to raise these concerns about the rule. We don't think it could be fixed, by the way. I mentioned earlier, this EPA rule is a proposed rule. They've taken public comment. Some people may think, "Oh, the rule can be adjusted here." We're not saying that at all. Electric cooperatives have said to the EPA, "You got to withdraw this rule completely. There's no way to fix this to make it work. You got to take it off the table." That's our approach to this whole issue.

Reynolds: Jim, I know you said that the EPA power plant rule is not “fixable,” so what sort of policy direction would you propose?

Jim: What else can we do? Well, clearly it would be helpful if we could have a policy that reformed our permitting and siting process in this country.

That is a huge impediment to investing in new infrastructure. We're not saying remove all restrictions or permitting requirements. We're saying, let's have an understandable, predictable process, and let's have it where it happens on a defined timeframe so we're not taking years of uncertainty to find out what the answer is. I'd also suggest that, at least in the co-op world, we do respond to incentives. I  believe the new program at USDA has been well oversubscribed for investment in clean energy projects, but give us the flexibility to make the decision that we want.

When public policy has a one-size-fits-all approach, I can tell you there are 900 electric cooperatives that are members of our national association. Their circumstances are very different across the country. Our policy objectives often say build in flexibility, so at the local level, local decision-makers can make decisions to fit their circumstance. We want energy policy that would allow for that flexibility to make good decisions. Those would be some of the broad strokes I would describe in terms of where policy could move in a constructive way.

Viswanath: But at the end of the day, we still need to work through this rule. This EPA rule was proposed in the spring of 2023 and there was a mad scramble to file comment. I know that NRECA filed substantive comments as did a number of individual cooperatives across the country. The EPA now has to review about a million comments. With the final rule which might be out next spring might reasonably still look like the ‘unworkable’ proposal.

Matheson: When you propose a rule like the EPA did, even if it's ultimately not-- goes into law and it may take a few years and go through a process of litigation before that's resolved, in the interim, you've got people in a state of limbo.

I think it's just important for us all to take a step back and see if there's some more reasonable, timely, predictable way to work through these issues and make decisions about how we have a viable electric structure in this country. There's a lot of passion out there and a lot on different issues and sometimes there's a lot of more ideologically driven rhetoric but at the end of the day, the complexity, the electric grid in the electric system merits a more thoughtful conversation because of the level of detail it takes to make it work.

That's really, again, I think what electric cooperatives try to do, is they try to be the truth-tellers and they try to be the voice of reason. I say this all the time, the only motivation we have when we're arguing for policy is we want to make sure that member at the end of the line that when he flips the switch, lights go on. At the end of the month, he can afford to pay the bill.  And that drives all of our policy advocacy at NRECA. In this discussion about electric reliability we're having right now, that's sort of the north star that guides everything we say and it and it continues to be the right one.  

Reynolds: That’s Jim Matheson, the CEO of NRECA with his outlook on policy risks and the EPA power plant rule. I hope you’ve found this conversation helpful and I want to thank our listeners for joining us for yet another great year for Power Plays.

Viswanath: Come back in the New Year, where we start off an in-depth discussion on grid automation. Happy New Year to all of you! Bye for now.

Disclaimer: The information provided in this podcast is not intended to be investment, tax, or legal advice and should not be relied upon by listeners for such purposes. The information contained in this podcast has been compiled from what CoBank regards as reliable sources. However, CoBank does not make any representation or warranty regarding the content, and disclaims any responsibility for the information, materials, third-party opinions, and data included in this podcast. In no event will CoBank be liable for any decision made or actions taken by any person or persons relying on the information contained in this podcast.

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