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North American power transition needs resiliency, policy-driven approaches: execs

19 May 2021 William Fleeson

Energy executives from across North America believe there is a need for resiliency as well as policy-driven change as the continent's power sector transitions to lower carbon electricity.

Speaking at the Columbia Global Energy Summit, Sophie Brochu, CEO of Hydro-Québec, a province-owned Canadian utility, insisted that only public sector leadership could drive progress toward decarbonization.

The decision-making must be "policy first, market contribution after," Brochu said. "Not the other way around."

Brochu further underscored that policy benchmarks, rather than the work of individual industrial players, would be the most enduring approach to lowering GHG emissions.

"Standards—we need them. Without them, things won't happen. 'Let the market decide' is not a good policy," she said.

Investment

Many of the power sector problems faced in recent memory -- not least Winter Storm Uri, which in February knocked much of Texas' grid offline -- resulted from a "disaggregated policy environment" in need of reform, said Cheryl LaFleur, the panel's moderator. LaFleur is a fellow at Columbia University's Center on Global Energy Policy, and served as a commissioner, including as chairman, of the US Federal Energy Regulatory Commission between 2010-2019.

While failures in the system tend to generate the headlines, Tania Ortiz Mena, CEO of IEnova, said the energy transition provides a "wonderful opportunity" to increase reliability and create jobs. IENova is a Mexican infrastructure company controlled by US-based Sempra Energy.

Switching to lower-carbon energy, especially low-cost US natural gas available by pipeline, could benefit Mexico's already robust manufacturing sector, Mena said. At the same time, she said Mexico must invest further in its pipeline infrastructure. Mexico experienced blackouts and supply-chain disruptions during Uri, as the country imports about 70% of the gas it uses from the US, she said.

Investments in transmission infrastructure, including the poles and wires that carry power to businesses and homes, is another priority for a more resilient grid—and can deliver benefits across the Mexico-US border, Mena said.

"Mexico has underinvested in transmission for many, many years," Mena said. The system "needs strengthening" in order to keep transmitting power—and to help in the effort to cut GHGs from Mexico's economic activity, she said. Much of Mexico's manufacturing base burns diesel and other carbon-intensive fuels, so a move to lower-carbon gas would benefit the economy and the environment at the same time, she said.

Painful lessons

Paula Gold-Williams, president and CEO of CPS Energy, a South Texas utility, brought a smaller company's perspective to the event. She gave a frank appraisal of her state's lack of preparedness for weather events like Uri.

"The list of lessons learned was long and painful," Gold-Williams said, and faulted Texas' electricity market structure, and the state grid's isolation from neighboring regional power systems, with compounding the risks posed by severe storms.

"The design is broken," she said. "We need to move away from an energy-only system."

The state's energy grid, known as the Electric Reliability Council of Texas (ERCOT), operates on an "energy-only" model. That means utilities are paid only for the power—the actual electricity—that is delivered to ratepayers. Energy-only advocates say the model encourages competition and low-cost solutions, which keep an individual's electricity bill low.

The alternative, known as a capacity market, encourages utilities to build extra capacity -- more power plants than a system usually needs -- so that extra power is on hand for a hard-to-predict future event, like a storm. Extra capacity can also mean extra costs for customers.

Utilities must plan under one of the two models in order to project costs and future revenues for the power plants they build. In both systems, much of the cost is passed on to ratepayers, which is allowed by the regional regulator.

In times of peak demand, ERCOT and other energy-only grids charge "scarcity pricing"—a market-based calculation that prices electricity like any other high-demand commodity. Advocates for energy-only systems say that ratepayers avoid paying for capacity investments that might not ever be needed.

Energy-only critics counter that having no extra capacity can leave a region unprepared for those rare times of need, with disastrous consequences. Those critics see vindication in the Uri storm experience.

"Five straight days of scarcity pricing is not good for the customer," Gold-Williams said, referring to the sustained high prices some paid after the storm.

ERCOT came under acute pressure during and after the February power crisis. The grid system faced "near collapse" during Uri's worst effects—but conditions were "not at all clear" that having a capacity market would have prevented Texas' extended outages, according to IHS Markit analysis released at the time.

Now in its seventh year, the Global Energy Summit runs 18-20 May.

Posted 19 May 2021 by William Fleeson, Senior research analyst for Executive Briefings, IHS Markit

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