Many factors can affect the price and reliability of energy throughout the country. AEP has long advocated the need for a national energy policy to serve as a road map for how our country will generate and deliver electricity in a reliable, cost-effective manner over the long term.
We believe a national energy policy must recognize regional differences and needs. The best approach would be a national framework that gives each region the flexibility to make choices and investments based on what makes the most sense for that state or region. For example, wind power in some western states, such as Oklahoma, is cost competitive with traditional fuel sources because these regions have excellent wind resources. In other states with a greater proximity to coal and a lack of wind resources, a different mix of energy investments may be more appropriate. Regional transmission organizations and state utility commissions are already approaching the issue this way, and we support this approach. However, absent a cohesive national energy policy to stitch the pieces together, companies have little incentive to make strategic long-term investment decisions, such as building new generation capacity.
There are some important aspects of an energy strategy that also need to be addressed:
- Preventing overdependence on one fuel source and maintaining fuel diversity:
Maintaining reliable service requires a diverse fuel portfolio. We need every resource at our disposal – coal, natural gas, renewables, nuclear, hydro, energy efficiency and demand response.
- Infrastructure investment and transmission development:
In addition to environmental compliance costs, the electric utility industry will need to invest as much as $2 trillion over the next two decades to refurbish and replace existing infrastructure and to build new facilities to meet the nation’s future energy needs. With investments this large, it is easy to see why we need a national energy policy to allow our industry to plan with more certainty over the long term.
- Establishing the right pricing models:
Developing pricing models that recognize the total value of energy services, including use of the grid by distributed generation resources and the value of energy efficiency services.
- Rational energy and environmental regulations:
Because Congress has not been able to enact legislation based on a rational environmental and energy policy, the U.S. Environmental Protection Agency (EPA) is using its authority under existing environmental laws to adopt new rules that will impact this industry over the near and long term. Our industry will make a huge investment through the end of this decade to comply with new EPA regulations affecting power plants. Our comments on EPA’s initiatives often include information essential to full consideration of the collateral impacts of new regulatory programs and revised environmental standards. We are also working with our state regulators to assure that they have adequate information to seize any new opportunities for flexibility in their implementation plans for the new regulations. Although we have already made significant investments to reduce emissions at our coal-fueled plants, more investment is needed. For AEP alone, to comply with existing EPA regulations, we will need to invest approximately $3 billion to $3.5 billion between now and 2020 in our remaining coal units.
Gas/Electric Market Harmonization
Energy has been the backbone of this nation’s economic growth and prosperity for decades. It is common for the natural gas and electric utility industries to work together, as they have done for years. Today, the electric utility industry consumes more than 30 percent of the natural gas consumed in the United States to generate electricity. Coal unit retirements and the development of abundant shale gas reserves, are pushing the electricity sector to rely even more heavily on natural gas.
This growing interdependency presents challenges as well as opportunities. From an environmental perspective, natural gas is a more favorable fuel. But the misalignment of the gas day and the power day for purchasing and scheduling supplies to ensure reliability is the largest challenge for AEP as we increasingly rely on gas for power generation. Under the current market design, AEP has to commit the availability of its natural gas generating units to the regional transmission operator before we even know whether gas supplies or transportation capacity are available on the interstate pipelines. The alternative is for AEP to purchase and schedule the gas before we know whether the generating unit will be selected by the regional transmission operator to generate. Neither option is optimal for reliability. This issue has lingered for two decades but has only recently come to the forefront of energy policy discussions.
At one time, fuel oil was often used as a back-up for gas plants in the event natural gas supplies were not available. But a combination of cost and environmental regulations has limited the use of that option. As we depend more on gas to generate electricity in the wake of impending coal unit retirements, it is more urgent to better align the gas and power industries in terms of supply logistics.
Today, to expand the pipeline capacity to deliver gas supplies for power generation when needed, the gas industry typically requires a firm financial commitment to reserve the capacity for the required volume on a 24 hour/7 days a week basis, each day of the year and over an extended contract term. This would require us to reserve and pay for firm transportation costs to serve our plants, whether we need it or not, on a regular basis. Electric generating units do not operate on that schedule, especially gas peaking units that may operate only a few hours of the day or a few days of the year when electricity demand is high. This is particularly problematic for merchant generators who do not have a mechanism to recover firm transportation costs when the plant is not operating.
In an effort to better understand the interdependency of the electric and natural gas industries, the Federal Energy Regulatory Commission (FERC) asked both industries to provide information, particularly regarding the role the agency should play in coordinating the two markets. AEP has been actively engaged in the FERC initiative that began in 2012. In March 2014, FERC issued a notice of proposed rulemaking to better align the natural gas operating day and scheduling practices by interstate pipelines with the electric industry. The commission is seeking to address the incongruities between the gas and electric industries.
An example of potential reliability issues during peak demand periods occurred in January 2014. PJM Interconnection reported that at one point during a period of extreme cold that month, more than 9,000 MW of gas-fueled generation was off line due to an inability to deliver gas to the facilities. This extreme cold significantly boosted demand for natural gas for both electricity generation and heating purposes. In this case, power generators are not considered priority customers in terms of human needs; local gas distribution companies that have long-term contracts to meet their winter peak demands for heating are given priority status on the pipelines. With demand so high and supply constrained, one of AEP’s gas plants was limited in its availability when it was needed most.