How We Need To Evolve America’s Power Grid To Enable A Clean Energy Future

This is part two of our series on overcoming barriers to 100% clean energy.

For decades, two halves of the United States’ power grid have worked together like a heart and arteries, reliably pumping electricity from power plants to customers. The bulk power system has functioned as a big, fossil-fueled muscle, sustaining the distribution network downstream.

This solid but sclerotic model cannot keep pace in today's race toward clean energy. A fundamental power sector transformation is underway as states and utilities increasingly adopt renewable energy and climate targets while wind and solar prices keep tumbling.

To support this paradigm shift, both sides of the bulk energy system must evolve from a one-way feed to a robust and better integrated equilibrium.

In part one of this series, we explored distribution network barriers holding back an accelerated clean energy transition, including a complicated deployment environment and hostile incumbents. In part two, we discuss four barriers in the bulk electricity system and how smart energy policy can help overcome them.

Rebuilding the machine

Clean energy has unmistakable momentum worldwide, with solar capacity expected to increase 50% over the next five years. But investment has fallen short of what's needed to meet climate goals, and simply building new solar farms will not secure necessary emissions reductions.

We need a faster and more comprehensive electricity system upgrade – that retains the grid resilience and reliability crucial to our modern economy – to deliver cleaner energy to buildings, factories, and transportation.

The electric bulk power system is essentially a single machine tightly coupled to an economic, financial, and regulatory system. Faster clean energy deployment requires rebuilding this machine with different parts that work differently, are financed differently, and are regulated differently.

Barrier one: entrenched assets

America’s rapid clean energy transition needs more than adding clean sources to meet new demand or replace aging dirty sources – we must retire and replace dirty generation and associated infrastructure while supporting the new clean technologies. This means retiring coal plants, decommissioning pipelines, and shutting down mines.

It also means investing in new infrastructure like transmission lines to diversify supply, energy storage to provide grid flexibility and balance variability, electric vehicle charging networks and improved public transportation to shift away from gasoline cars, and smarter cities to use energy more efficiently.

Cleaning up the grid provides a foundation for cleaning up other sectors of the energy economy. In turn, these sectors can provide flexibility to the grid by modulating demand.

This infrastructure shift stimulates additional clean energy investment by opening up demand and improving grid operational abilities, de-risking renewable energy projects, and ideally retiring fossil fuel infrastructure with minimum disruption. The main barrier here is that building big new projects, especially inter-regional ones, is very difficult – especially if it also requires displacing old ones.

Another part of this barrier is that while retiring fossil fuel infrastructure is broadly beneficial, it also negatively impacts some investors and communities: New infrastructure can replace old in some places, but not always.

And even though the clean energy sector supports more than 3 million jobs, this transition could cause short-term pain. Established interests will act as a brake on progress without policies that address their concerns.  

While political fights are inevitable, an integrated approach to infrastructure redeployment can reduce impacts and improve benefits. Recently passed legislation in Colorado, for example, allows issuing low-cost bonds to refinance existing balances on uneconomic coal plants at lower interest rates while cheap clean energy replaces expensive fuel. It provides financial support to communities affected by retirements funded by consumer savings.

The U.S. bulk power system has begun this transformation: U.S. EIA data shows coal's decline compared to rising renewables. But achieving the speed and scale required to address the climate crisis requires pushing beyond business as usual.

Barrier two: inflexible electricity markets

A bulk power system with variable renewable energy at its core works differently than one based on fossil fuels. The old paradigm meant large power plants humming along to meet relatively fixed peak demand. But the new paradigm based on variable clean energy leaves many older plants unable to match the ups and downs of residual net demand. 

The resulting gaps between supply and demand in wholesale electricity markets are inefficient and expensive to fill because these markets are ill-suited to accommodate the full potential of resources like demand response and battery storage. The traits that make these clean complementary resources interesting—small, distributed, quick to deploy, and cheap but with fixed capital costs and energy limits—also make them anomalies for markets developed to serve bigger, slower, pricier assets financed through prices set by fuel costs and a mostly free pass on pollution.

The clean energy transition requires markets able to assimilate new variable resources like wind and solar as well as existing complementary resources through efficient value signals. They can also help ensure new sources of long-term storage or demand management become available as we squeeze out the last fossil-based assets.

Barrier three: inadequate financing tools

Properly valuing clean energy in real-time markets is a good first step, but these technologies will not get built without ways to consolidate this value over longer investment time frames. Financing in the bulk power system is very sensitive to red tape or antiquated regulations where friction translates to risk, and risk increases costs and delays. This makes structural misalignment between current means of financing new and future resources a huge barrier.  

New financing structures that de-risk the up-front capital costs of renewable energy projects and their complementary resources, allowing consumers to efficiently hedge their exposure to scarcity, and connecting multiple buyers to sellers in voluntary long-term contracts (e.g., LevelTen’s aggregation and portfolio  models) can overcome barrier three.

Ideally, policy encouraging these new structures will also funnel additional capital from sources beyond Wall Street into clean energy and optimize long-term grid investment with economic development (e.g. create new flexible customer demand that stimulates investment in clean energy generation and accommodates more variable resources).

Barrier four: old-school policies

Solutions for breaching the barriers above must be undergirded by good policy that changes along with the new paradigm and facilitates the clean energy transition. Current regulations and regulated market structures form a barrier favoring incumbents, keeping fossil fuels around longer, and making it harder for new clean energy resources to displace them.

While resources such as demand response and battery storage have some limits, especially under old energy system paradigms, they can provide new and different kinds of grid services than conventional ones—often within minutes or hours instead of days. Policies like the Federal Energy Regulatory Commission's Order 841, aimed at removing market barriers for energy storage players, can help update the system.

Legacy business models have also evolved around existing resources in ways that are unsustainable in the energy transition. Business models depending on financial rewards for infrastructure that passes a regulatory test often handicap new resources and market participants that could deliver cheaper and cleaner services. Forward-thinking policies incentivizing performance and services over crude investment, like performance-based incentive mechanisms, can accelerate the clean energy transition by integrating renewable energy while controlling costs. 

While utilities may lose some traditional profit opportunities, the clean energy transition will create plenty of new revenue opportunities, like providing backbone services for distributed energy resources and beneficial electrification (e.g., electric vehicle chargers and building electrification) or improving bulk grid infrastructure (e.g., high voltage transmission lines).

Managing the transition from the old to new paradigm requires policymakers rebuild a plane in mid-flight – managing the continuous, cheap, and dependable delivery of energy services while the underlying resources providing these services undergo radical change. The natural reaction is to be conservative and reactive, but this will slow the transition, and ultimately prove counterproductive to fiscal prudency and other social priorities. 

Policymakers should instead focus on designing and implementing beneficial policy interventions while striving for maximum transparency to manage the transition to an unknown but more desirable clean energy system.

The stakes are high—but so is the opportunity

The power sector can continue leading the clean energy transformation if we:

• Facilitate the fair and smooth early retirement of fossil assets while stimulating investment in clean resources.
• Encourage markets to evolve along with new financing structures that are adapted to the transition.
• Maintain a constant focus on rationalizing policy and providing maximum transparency to all stakeholders.

It can then act as a platform for decarbonizing other economic sectors—buildings, industry, and transportation—through electrification, and provides lessons for managing change across the entire energy economy.