Many utilities earn guaranteed rates of return for the capital they invest in new generation capacity, with those costs passed on to their customers in the form of bill increases. In states where utilities can own and operate their own gas-fired power plants but must compete with third-party developers of clean energy projects, this creates an incentive structure that encourages them to pursue the more lucrative option. These incentives are even stronger for investor-owned utilities in states with vertically integrated energy markets — the type of utility serving most of the U.S. population — which are obligated to maximize shareholder returns above all else.
Utilities also face financial penalties for closing down power plants before they’ve earned back their construction costs via electricity sales. And utilities and regulators remain leery of replacing conventional power plants that can be ramped up and down to meet electricity demand with renewable energy resources whose power output relies on the wind and the sun.
But ever-cheaper lithium-ion batteries can store hours of excess wind and solar power to cover those gaps. The tax credits offered by the Inflation Reduction Act provide enough of a financial boost to make the combo of clean energy and energy storage less costly than newly built gas plants in almost all circumstances, according to an analysis by climate think tank RMI. (Canary Media is an independent affiliate of RMI.) The same tax credits also make clean energy and energy storage an increasingly cost-effective option for replacing almost all the country’s remaining coal plants, according to analysis by think tank Energy Innovation.
These pressures have played out in regulatory battles over utility investment plans across the country. Duke Energy, which operates in six states, is sparring with environmental and consumer groups in North and South Carolina over its proposal to build about 2 gigawatts of new gas plants in the region — the costs of which it can fully recover from ratepayers. Duke’s opponents have commissioned studies that show more large-scale solar and battery systems could deliver lower-cost energy to Duke’s customers — but under state law, Duke may only own half of the solar-battery projects built to meet its future needs, with third-party developers able to compete to build the other half.
The sheer scale of the clean energy resources that must be built to achieve an 80 percent reduction in carbon emissions by 2030 is daunting. Duke plans to build about 12 gigawatts of wind and solar power through 2030, the fourth-largest clean power expansion tracked in Sierra Club’s new report. But that’s only enough to replace about one-fifth of its fossil-fuel generation, the report notes.
Clean energy growth faces barriers beyond cost. Solar and wind projects across the country are looking at yearslong delays in connecting to power grids. Opposition to building clean energy projects from communities and local and state governments is also slowing development.
But the Sierra Club report points out that many utilities that cite these barriers to clean-energy progress are also failing to incorporate the financial and regulatory boosts coming from the Inflation Reduction Act. Only a handful of utilities have baked the law’s investment tax credits into the cost-benefit equations that determine the mix of clean power versus fossil-fueled power plants they plan to build over the coming years.
Utilities represented by the Edison Electric Institute trade group are also fighting plans from the Biden administration to impose emissions limits on existing fossil-fueled power plants via regulations being proposed by the Environmental Protection Agency, the report states.
Even utilities earning better grades from Sierra Club have a long way to go to achieve their carbon goals. Florida Power and Light, which is largely permitted to build and earn a rate of return on the majority of clean energy projects in its service territory, received a B grade for its plan to retire all of its coal plants by 2030, and while it built 4 gigawatts of new gas plants since 2019, it has no more in its future plans.
As a subsidiary of NextEra, a utility holding company that has pledged to eliminate carbon emissions by 2045, FPL plans to build more than 15 gigawatts of clean energy by 2030. That’s only one-third of its existing fossil generation, the report notes, which is why the utility did not get an A grade. But FPL has upped its clean energy targets from last year, when its plan accounted for replacing only 16 percent of its fossil generation — a change it has credited to Inflation Reduction Act incentives that have made clean energy paired with batteries a third to nearly half as costly as they were before.
The Sierra Club report highlights other utilities taking this more aggressive — if still too slow — approach to cutting carbon, such as Xcel Energy, the eight-state utility with a large presence in Colorado and Minnesota that led the move toward voluntary utility decarbonization commitments in 2018.
But as the report points out, every utility — even those leading on clean energy — needs to do more, faster. Especially given the historic opportunity presented by the Inflation Reduction Act.