Efficiency makes clean energy cost-competitive with new gas power plants

Blog Post | September 23, 2019 - 11:59 am
By Maggie Molina, Senior Director for Policy

Clean energy, including wind, solar, storage, energy efficiency, and demand flexibility, has reached an economic tipping point and is now cost-competitive with natural gas power generation, according to a new study by the Rocky Mountain Institute (RMI). Dig into the report’s findings, and you’ll see that energy efficiency and demand flexibility play an outsized role. The study finds that including these least-cost, demand-side resources more than triples the near-term market for clean energy to replace new gas power plants.   

Across the United States, utilities and energy developers have announced plans to spend about $70 billion building new natural gas power plants. RMI finds that clean energy portfolios (CEPs) are lower cost than 90% of the proposed gas capacity. It concludes that these planned investments in new gas power plants are at significant risk of becoming stranded assets or obsolete. CEPs present an alternative to new gas power plants and can deliver both large cost savings and emissions reductions.

Source: RMI. 2019. The Growing Market for Clean Energy Portfolios

The outsized role of efficiency and demand flexibility

The RMI analysis, The Growing Market for Clean Energy Portfolios, finds that energy efficiency and demand flexibility each deliver about one-fifth, or 40% combined, of the energy capacity needed to avoid new combined cycle gas turbines in the US. The opportunity for demand-side resources is even higher in some regions — more than 50% in the Midwest and West and more than 40% in the Northeast/MidAtlantic.

Energy efficiency is also important for avoiding new gas combustion turbines, providing a tenth of the capacity needed to avoid all new such turbines. Here, demand flexibility and storage play the largest roles because these turbines primarily provide power during peak hours.

The capacity contributions from demand-side solutions are large, but their cost savings are most striking. While wind, solar, and storage resources would deliver $3.5 billion in customer savings, efficiency and demand flexibility would add another $25.5 billion.

The potential savings from efficiency are large, but will not happen on their own. That’s why we need policy solutions to drive investments in efficiency when and where they’re most needed.

State efficiency policies are needed to make CEPs work

Utilities do not traditionally have the incentive to invest in energy efficiency, but state policies flip the script and can motivate them to do so. Three key policies include next-generation energy efficiency resource standards, utility business model changes (performance incentives and revenue decoupling), and integrated resource planning. 

While states have made progress on these policies, they can still do more to design and scale policies that ensure efficiency delivers the needed savings. Only 27 states currently have long-term efficiency requirements for utilities and a similar number of states have established utility business model changes such as decoupling and/or performance incentives to align utility profit motives with energy efficiency outcomes. While many states conduct integrated resource planning, few fully value the potential contribution of energy efficiency and other clean energy resources.

Recent policy successes can provide a model for others

In the Midwest, where there is large opportunity for clean energy portfolios, we see examples of states that are getting these policies right. Michigan and Minnesota established robust utility efficiency policies and have made improvements in recent years.

Michigan enacted an energy-savings target in 2008. In 2016, it extended electricity savings targets of 1% per year and established a new integrated resource plan process that includes the utilities’ supply-side and demand-side energy capacity. Since 2008, utilities have been able receive performance-based incentives for implementing energy efficiency programs. The 2016 legislation tweaked those incentives. As a result of these comprehensive policies, Consumers Energy developed an ambitious IRP, which ramps up energy efficiency savings to 2.0% of electric retail sales per year. Efficiency is a critical component of the plan, allowing for no new additions of fossil fueled generation over the 20-year planning period and an 80% reduction in CO2 emissions (from 2005 levels) by 2040.

Minnesota enacted its own energy efficiency resource standard (EERS) in 2007, setting electricity saving goals for utilities of 1.5% of retail sales each year. Utilities can earn performance incentives for energy efficiency programs and must file integrated resource plans with the regulatory commission. Xcel Minnesota, the state’s largest utility, has committed to replacing its last two coal plants with a combination of resources, including about 800 megawatts of energy efficiency.

No time to waste

While the opportunity for cost-competitive clean energy has reached a tipping point, much work remains, and we cannot delay. RMI’s analysis finds that ignoring demand-side resources delays the clean energy opportunity by eight years, on average. The chart below shows when clean energy becomes less expensive than new gas; the clean energy portfolios in dark blue on the left include efficiency and demand flexibility while those in light blue on the right (WSS – or wind, solar & storage) exclude these demand-side resources and as a result are not cost competitive for several more years. 

Source: RMI. 2019. The Growing Market for Clean Energy Portfolios

States should move now to enact new efficiency policies or strengthen those already in place, including efficiency resource standards, utility performance incentives, revenue decoupling, and integrated resource planning. 

While many states have established these foundational policies, others have not, and still others such as Iowa and Ohio are rolling back efforts already in place. Even states with successful policies will likely need to scale up existing efforts to deliver the level of savings and emissions reductions identified in the RMI study. The good news is that the foundational policy tools for efficiency have been tested and they work. Now is the time for all hands on deck to prioritize energy efficiency as the heart of a clean energy future.