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Energy Policies Impact Electricity Rates

Energy policies impact electricity rates.  January 20th marks the beginning of a new administration in Washington, D.C.  Each administration has its own unique agenda. While it will take some time for campaign rhetoric to transform into actionable policies and programs, we can take an educated guess at what is likely in store for energy.  Energy is core almost every aspect of the economy including energy sector jobs, the cost of consumer goods, and how much we spend to cool and heat our homes.  We have studied the opinions from leading non-partisan policy analysts and boiled it down to three key areas.

Renewable Energy

From 2005 to 2015, electricity generated from renewable resources more than tripled.  Renewable energy has grown from novelty status to being a solid contributor to our generation fuel mix.  There has been speculation that the new administration will cut funding for renewable energy research.  The new administration may also eliminate subsidies designed to help renewable generation compete with fossil fuels.  While the nature and scope of any changes to renewable energy programs remains to be seen, things may not be as dire as some are predicting.

First, tax incentives for homeowners and businesses will slowly phase out in the coming years. The Solar Investment Tax Credit will no longer be available for homeowners after 2021.  Commercial customer solar projects qualify for only a 10% tax credit after 2021.  This is the schedule put in place by the Obama administration and approved by Congress in December 2015.  Although the Trump administration could propose accelerating the schedule, the current schedule has broad support.  It does not seem to be a likely target for modification.

States are often the biggest drivers of renewable energy through their renewable portfolio standards. The federal government supports renewable energy demand through mandates on its own facilities (e.g., office buildings and military bases).  However, states implementing minimum renewable energy requirements on utilities and electricity providers have been a far more effective driver of growth.

The biggest impact will likely be on imported renewable energy components including solar cells and panels. Domestic production of solar components has not been competitive with Asian manufacturers.  We are likely to see imports of these items tied to larger comprehensive trade deals.  Those trade deals could influence the price of solar energy equipment and affect the U.S. solar energy market.  Time will tell how this administration’s trade deals impact distributed solar generation.

Coal-Fired Generation

Coal-fired electricity generation has experienced a significant downturn in recent years. According to the U.S. Energy Information Administration, coal accounted for almost 50% of net electricity generation in 2005.  By 2015, coal’s contribution to electricity generation dropped to only 33%.  There are two primary causes of this downturn.  The first deals with federal and state environmental policies and regulations.  These include air and water quality, solid waste disposal, land use restrictions, and general mining and reclamation requirements.  The impact of these stricter regulations has been a significant increase in the costs associated with both mining coal and using it as fuel in electricity generation.

The second cause of the downturn in coal is the increased availability of natural gas as a cleaner –burning alternative. Shale gas reserves have made plentiful quantities of relatively inexpensive natural gas available for electricity generation.  Coupled with the regulatory squeeze on coal, the economics of mining coal for electricity generation have steadily worsened.

The problem with the coal industry is that it does not turn on a dime. Mine planning and permitting is an intensive multi-year process.  Investors are also unlikely to support the construction of new coal-fired generation.  Even if the new administration loosens coal-related regulations, it will not reverse coal’s long-term outlook.  In other words, coal-friendly regulations and policies will not change the fundamental economic disadvantage of coal compared to natural gas.  At best, the coal industry will simply decline a little more slowly.  A slower decline has definite advantages including additional time for job transition and allowing growth of renewable energy to help fill the void.

Natural Gas Generation

Electricity rates and natural prices go hand-in-hand. Even when coal accounted for the majority of electricity generation, natural gas fueled marginal generation and swayed electricity prices.  Natural gas production has largely filled the void in generation created by the downturn in coal.  Hydraulic fracturing of shale gas reserves is mostly regulated at the state and local level.  Shale gas is a great boon for jobs and economic growth.  Therefore, it has not been overly constrained by regulations and policies.  Transporting the gas from production fields to population centers, however, is another matter.

Natural gas transportation often involves interstate commerce and coordination by federal regulatory agencies. The new administration can make a significant impact on energy by facilitating natural gas and other fuel transportation projects.  Several sources cite this as the primary energy policy change anticipated from the new administration.  Increased transportation capacity should relieve regional supply constraints and serve to keep natural gas prices low.  Low natural gas prices should result in cheap electricity.  Cheap electricity lowers the cost of manufacturing and frees up household spending for other uses such as purchasing durable goods.

In summary, it is far too early to tell what impact this administration will have on the energy market. Early indications are that the fuel transportation sector of the market will enjoy a friendlier environment.  This could serve to keep natural gas prices and, therefore, electricity rates at or near historic lows.  While renewable energy will continue to grow, the solar electricity market will need the benefit of favorable imports and friendly tariffs.  This is especially true after the residential tax credit expires after 2021.

Disclaimer:  The contents of this article are based solely on my assessment of publically available information regarding market fundamentals and announced policy changes.


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