Despite the COVID-19 pandemic’s unprecedented impact on the U.S. electric utility industry, there is a new opportunity for policymakers, investors, and utility companies to vigorously rebound in their clean energy transition efforts. The World Economic Forum points to the concept of 'system value' as the approach needed to get the transition back on track. Essentially, system value is a holistic method of measuring the impact of clean energy policies and solutions.
Creating system value
As the Forum notes, there is more to the clean energy transition than the cost of energy. The focus should be on system value, reflecting benefits for society, the environment, and the economy as well as for energy system stakeholders such as shareholders, customers, and employees.
System value is a more holistic approach to making decisions about investments or policies. It takes into account not only the levelized cost of energy but also other outcomes such as CO2 emissions, water footprint of energy generation, air quality and human health, job creation, access to energy, and the ability of the grid to withstand natural disasters. A renewables-based energy system brings many beneficial outcomes that need to be considered and does not have to be more expensive than fossil fuels. The utility consortium Southwest Power Pool (SPP) has the lowest electricity prices in the United States, but its share of wind in the electricity mix is close to 25%.
In making future investments, it is key for U.S. electricity utilities to look through the system value lens. Transmission investment, for example, could create as many as 60,000 to 110,000 jobs each year, while supporting an estimated 4.9% reduction in 2025 emissions.
Pre-pandemic, the major transition trends shaping the U.S. electricity industry that we had identified included:
- Increasing electrification of buildings, vehicles, and industry.
- The growth of green technology, including utility-scale renewable generation and distributed energy generation.
- Development of the 'network of the future,' transforming grids with greater resiliency and flexibility and more storage options.
- Motivated enterprise customers committing to sustainability goals and investment in wind and solar, often through power purchase agreements (PPAs).
- Greater activism on the part of consumers and investors to push utility decarbonization efforts.
- Increased focus within cities to advance clean energy transition.
These trends are still evident but COVID-19 has impacted all of them. For example, the move toward local government natural gas bans in new buildings has slowed. And, while long-term forecasts for electric vehicle (EV) sales are bullish, global EV sales are expected to drop by 43% in 2020 as customers delay purchases because of economic uncertainty.
Similarly, deployment of utility-scale renewable generation is down, with projections for U.S. wind development lower by 5% and solar development down by 10%. U.S. rooftop solar installation has fallen dramatically, dropping 70% just in the second quarter of 2020. Utilities have suspended many non-critical activities, including energy-efficiency efforts.
The pandemic’s effects on the network of the future are less visible, but we are seeing shifting load impacts — often with later morning peaks — and accelerating use of renewables, with renewable share of generation exceeding coal for a record 64 consecutive days. Lower overall demand has allowed renewables’ share of the market to rise.
Enterprise customer goals have also changed. Enterprises are wary of incurring short-term losses because of low electricity prices and have been slower to initiate PPAs stipulating renewable fuel sources. In addition, companies in many sectors are cash-strapped and unable to move forward with PPA deals.
The pandemic has slowed consumer and investor activism by monopolizing attention and resources. Cities, meanwhile, are enjoying better air quality but are also facing major budget shortfalls, affecting not only services and staffing but also longer-term energy and environmental programs.
Four solutions for recovery
While utilities had been building momentum toward a transition to clean energy, the pandemic has delayed many ongoing efforts as companies scramble to deal with operational, staffing, and customer issues. Because of travel restrictions and decreased demand, greenhouse gas emissions including CO2 have declined, but industry action is needed to get the permanent transition to clean energy back on track while promoting and building upon the concept of system value.
U.S. utilities can foster recovery and build system value in four key areas:
1. Renewables expansion: Our analysis shows that multiyear extensions of investment tax credit (ITC) and production tax credit (PTC) as proposed by the Solar Energy Industries Association (SEIA) and the American Wind Energy Association (AWEA) can increase solar capacity by 25% and onshore wind by 14% over 2025 base-case scenarios. Additional process and infrastructure support can help expand the nascent offshore wind industry.
A five-year ITC extension would drive additional solar capacity beyond current projections, across the utility-scale, distributed non-residential and residential sectors. A proposed PTC extension for offshore wind, as well as development of the onshore supply chain for offshore wind — through actions such as adding more regulatory staff review to the Bureau of Ocean Energy Management or modernizing shipyards to support construction and maintenance — could deliver an estimated 14 GW of onshore wind capacity through 2025. This is a 56% increase over base-case projections and extends into the high range of the AWEA’s 2025 projections.
2. Transmission investment: Greater transmission investment and process improvements as proposed by the AWEA can stimulate job creation, unlock congestion, and expand renewable capacity, creating net benefits for consumers and the environment. However, this calls for forward-looking transmission planning that reflects and incorporates public policy requirements.
Broader transmission cost allocation can promote development of transmission infrastructure. Establishing a federal siting authority for electric transmission lines could bypass the roadblock presented by the state siting process, which often requires multiple states to approve lines.
Physical and digital system upgrades are also needed to deliver more variable generation. Over 70% of U.S. transformers are more than 25 years old. These and other investments in transmission and distribution (T&D) networks could facilitate further penetration of renewables and increasing electrification while maintaining power system reliability.
3. Efficiency investment: Multiple international agencies, including the IEA in its Sustainable Recovery report, have proposed increasing energy efficiency. In terms of system value, energy efficiency in the United States employs more workers than any other clean energy field at nearly 2.4 million U.S. workers pre-pandemic.
The 2009 Recovery Act yielded large benefits in energy efficiency, but today there are still numerous additional opportunities for efficient retrofits and smart technology implementation in areas including schools, weatherization of homes and federal facilities. As the 2009 Act demonstrated, financial incentives accelerate investment.
4. Demand optimization and electrification: Greater reliance on renewables creates greater need for demand optimization through storage and smart electrification, so that utilities can better balance load with variable supply.
There are many opportunities to boost infrastructure and assets to aid load management. The government can accelerate storage deployment through the proposed storage ITC and invest in EVs in the form of buses and other public-use vehicles. Programs encouraging investment in heat pumps via rebates and other mechanisms can have a major impact as well.
COVID-19 has slowed but not halted clean energy transition. By making the right investments within the system value framework, U.S. utility companies, government agencies, and other stakeholders can succeed in an environment in which job creation, environmental factors, and societal impact are weighed along with more traditional metrics such as customer satisfaction and shareholder value.