Regional transit organizations and independent system operator power grids have faced significant challenges over the past few years. The fragility of Texas’s power grid was on full display during winter storm Uri. New England burned fuel oil to keep the power on through the winter. Electricity prices are surging in California and throughout the midwest amid reliability concerns. On these grids, where independent power plants auction off their electricity, subsidies and regulations have distorted the market and left many Americans concerned about the affordability and reliability of their electricity.
Energy markets are complicated. The best of intentions can nevertheless lead to terrible consequences. Each of these grids is unique and has different state-level regulations, risks, opportunities, and customer needs. In any complex system, top-down policies can have significant unintended consequences. Tax credits for solar and wind farms are one intervention that left grids increasingly vulnerable to shocks that harm consumers.
Tax credits give intermittent renewables an edge
Solar and wind power are intermittent renewable sources of power. Solar panels depend on the sun, which can be obscured by clouds, and wind power is dependent on the wind, which can vary dramatically with the weather. Because their output is a function of the environment, it may be greater or lower than forecasters predict. On the other hand, firm producers of power like coal and nuclear plants provide a consistent and predictable amount of electricity.
In 2021, Texas installed 7,352 megawatts of solar, wind, and battery storage, almost three times more than California’s 2,697 megawatts. This shift didn’t happen because Texans care far more about emissions than Californians. It happened because of Texas’ regulatory environment, coupled with the greater availability of affordable land.
Part of the reason that so many projects were specifically built in 2021 was the December 31st, 2021 deadline to receive access to federal tax credits. Qualifying wind projects built before this date will receive between 1.5 and 2.5 cents per kilowatt-hour for the next 10 years. Similarly, qualified solar projects were eligible to receive investment tax credits. Projects installed in 2020-2022 were eligible for a 26 percent tax rebate on their investment, while projects installed in 2023 will receive a 22 percent investment tax credit. These subsidies have increased demand for these technologies and fueled competition between producers. At the same time, the costs of buying and installing wind or solar systems have plummeted over the last 12 years.
Unintended consequences and grid fragility
Tax credits pay the producers for their energy, even if no one wants it. During peak sunlight, localities with significant solar plants produce more energy than is demanded. The same holds true in localities with a lot of wind turbines on windy days. This energy often goes to waste because it is not currently cost-effective to store it. During these times when supply outstrips demand, projects receiving tax credits will bid $0/kWh or even pay the grid to take the electricity. At first blush, this seems beneficial because it drives down the cost of electricity during peak production hours.
However, other methods of electricity generation do not receive these same tax credits. By driving down the market-clearing price for energy during times of peak production, less flexible generators like coal and nuclear plants often struggle. These generators make more money when the sun goes down or the wind stops blowing, and they make up a greater proportion of the energy mix.
But non-peak revenues might not be enough to keep these plants operational in a distorted market. In particular, these market dynamics combined with historically cheap natural gas have caused hundreds of coal plants to retire and shut down over the past seven years. Likewise, many nuclear plants have struggled. Nuclear plants have been buoyed by $6 billion allocated to the Civil Nuclear Credit Program to help stay online and ensure the continued availability of their low carbon, affordable, baseload energy.
While disadvantaging other sources of power and retiring nuclear and coal plants may have been predictable outcomes from the intermittent renewable tax credits, increased grid vulnerability to various shocks was not likely intended. New England legislators didn’t support these credits because they wanted a grid dependent on fuel oil to get through the winter and Texas policymakers did not intend to create a grid vulnerable to winter storms: but this is what their actions created.
Reliability is a prerequisite to affordability and sustainability
Americans have been fortunate that these shocks have not caused more harm. The Texas grid almost required a black start, restarting part of a grid after a full shutdown. New England was able to keep its power on by using fuel oil, despite its economic inefficiency and higher emissions. There’s no guarantee that grids in these regions are headed towards a more robust and reliable future. The grid operators are aware of these issues, but they are limited in their ability to ensure increased reliability while navigating regulations and market realities.
An America with a regulatory environment more amenable to nuclear power will be able to deliver reliable, affordable, and sustainable energy. Changes to energy markets that do not pay special care to ensure all Americans will have access to reliable, baseload energy place both affordability and sustainability at risk. A government that is unable to deliver affordable and reliable power will not find the political will to facilitate a transition to a more sustainable future.