From Scott Carlberg

The old phrase about the danger of “putting all your eggs in one basket” is true, especially in our energy system. News and press releases may tout the advantage of one kind of energy generation over another: Wind, solar, hydro, gas, biomass, wave … but read that news with care. When all the chips are placed on one alternative, it can be risky.

This is an important energy concept. This column hits it head-on.

Risk management is about diversifying for safety or more dependable results. Same with energy. Variety is the spice of life. “While political narcissists may hate or favor one energy source, consumers are best served by a … diversified portfolio [that] will create the best options. Each type of energy can play a constructive role [biomass, coal, geothermal, hydroelectric, natural gas, nuclear, oil, sun and wind]. We shortchange ourselves when we reduce our options or discard production facilities that are efficient and that we already paid for,” said Forbes in Energy Diversity Helps Consumers.

Cost and availability are the two watchwords. Here’s a look at the money side of the issue. “Engineering and economic analyses consistently show that an integration of different fuels and technologies produces the least-cost power production mix. Power production costs change because the input fuel costs — including for natural gas, oil, coal, and uranium — change over time. The inherent uncertainty around the future prices of these fuels translates into uncertainty regarding the cost to produce electricity, known as production cost risk,” according to the report, The Value of US Power Supply Diversity. 

Strength lies in choices: “A diversified portfolio is the most cost-effective tool available to manage the inherent production cost risk involved in transforming primary energy fuels into electricity. In addition, a diverse power generation technology mix is essential to cost-effectively integrate intermittent renewable power resources into the power supply mix,” says the report.

Beyond price is the ability of various fuel sources to cover for power generation that may not be available. This is a bit more complex. Said the report, “All types of generating fuels and technologies can provide the first dimension of risk management—the portfolio effect. However, only some types of fuels and technologies can provide the second dimension of risk management—the substitution effect.”

Satellite image of Texas wind turbines (NASA)

A chilly central Texas morning this year shows the importance of substitution and energy diversity. “Wind was little help, as with output from turbine farms fell to about 1.6 gigawatts for that period, compared with around 10 gigawatts most days last week,” reported Bloomberg News. Power plants down for maintenance and nary a breeze spiked Texas wholesale electricity prices about 700%. There was no electric supply to tap easily and cheaply.

Power is needed when it is needed. Said The Value of US Power Supply Diversity: “Power plants need to be dispatchable* to provide the substitution. As a result, the benefits of expanding installed capacity diversity by adding nondispatchable resources such as wind and solar generating technologies are less than the equivalent expansion of power capacity diversity with dispatchable power plants such as biomass, conventional fossil fueled power plants, reservoir hydro, and nuclear power plants. Therefore, not all diversity in the capacity mix provides equal benefits.”

Power availability is huge. For instance, no matter how much someone may be willing to pay, solar power is not available when the sun is down.  Wind energy is not producing when it is calm. Hydro is not going to work at any cost if there is no water. (We understand that power can be stored on a limited basis.)

Energy diversity is important. A US House hearing several years ago logs this commentary – it’s a bit long, but is a useful view: “Perhaps the most important measure of diversity for the electric power sector is the practice of fuel diversity. The U.S. has an abundance of energy resources that can be used to generate electricity, including coal, natural gas, uranium, wind, solar, water, biomass and geothermal. These fuel sources each have a unique cost profile based on both supply and demand of the fuel as well as the unique generating technology required to turn chemical, solar or kinetic energy into useful electrical energy. However, each fuel type and technology present different risk characteristics in terms of availability, reliability, cost, and performance. As such, fuel diversity among these energy resources will lower the overall risk of the generation portfolio and provide for a more reliable and cost effective electric supply.

Capacity diversity is achieved by constructing baseload, intermediate and peaking facilities in addition to intermittent facilities (e.g. wind and solar), which may or may not be available to generate electricity at any given time. When properly deployed, each type of resource can synergistically operate during the various fluctuations in supply and demand to reliably support customer needs and requirements.”

Each kind of fuel has advantages and disadvantages to factor into an energy profile.

Back to the Value of US Power Supply study, and seven factors it says will shape US power supply diversity for the US. From the report:

  1. Energy policy development. US policy heavily influences the US power supply mix. Implementing an all-of-the-above energy policy requires properly internalizing the value of fuel diversity.
  2. Market structure. Market flaws distort wholesale power prices downward and result in uneconomic retirement and replacement of existing cost-effective generation resources. This issue and any market structure changes to address it will significantly shape future power plant development.
  3. Energy policy discourse. Preserving the value of fuel diversity depends on public awareness and understanding. The extent and nature of public education regarding the value of power supply diversity may strongly influence public opinion.
  4. Planning alignment. Alignment of fuel and technology choices for power generation with engineering and economic principles is critical to efficient and reliable supply. There is no single fuel or technology of choice for power generation, and all forms of power production have economic, environmental, and reliability impacts. (Italics and bold from ECC.)
  5. Risk assessment. To incorporate system considerations into plant-level decisions, prudent fuel price uncertainties must be used with probabilistic approaches to decision making.
  6. Flexibility. Flexibility and exemptions in rule making and implementation allow for the balancing of costs and benefits in power supply systems and may help preserve highly valuable diversity in systemwide decisions as well as on a small but impactful individual plant scale.
  7. Scope. Including fuel price risk and additional storage and transportation infrastructure costs is crucial when evaluating reduced diversity scenarios in comparison to the cost of maintaining and expanding fuel diversity.

These points are smart for the Carolinas. Having a balance of nuclear, solar, hydro, wind, gas, along with added storage, a tuned-up infrastructure and conservation, create a logical risk management strategy that ensures that consumers have more options for energy security. We won’t have all our eggs in one basket.



*ECC wrote about what dispatch means last July. See it here.