Southeastern customers pay for more power plants than other regions because there is inadequate regional reserve sharing. Climate change and data center growth are increasing the urgency for market reform.

In much of the rest of the country, regional markets help root out inefficiencies, identify reliability needs, and determine which transmission upgrades could increase reliability and lower consumer costs. But not in the Southeast. This article explores Duke Energy’s proposed long-term energy plan, and shows how the continuing resistance to market-based reforms in the Southeast imposes a multi-billion-dollar “reliability tax” on businesses and residential customers.

Read the Blog Series on Duke’s 2024 CPIRP

The Southeast Lacks a Regional Market

Nearly 20 million people across the Southeast are served by our region’s three major electric companies – Duke Energy, Southern Company, and the Tennessee Valley Authority (TVA). Each of these companies largely builds and operates their own power plants and transmission lines within their own geographic monopoly fiefdoms.

Unlike many parts of the United States, the Southeast has no regional power market to drive least-cost power investment among multiple utilities, to ensure reliability, and/or to jointly plan transmission lines to move power around the region when needed, as shown in this U.S. Wholesale Electricity Markets map by Clean Energy Buyers Institute:

In much of the rest of the country, regional markets have independent system operators that operate generation and transmission over multiple utility service territories on a least-cost basis. This independent planning and operations function helps root out inefficiency, identify reliability needs, and determine which transmission upgrades could increase reliability and lower consumer costs. Because the systems are operated over a wider footprint, fewer total reserves are needed, and thus the region can operate at least as reliably without the need for as many power plants. Regional markets also provide real-time, transparent power system data. In the Southeast, however, the lack of efficient regional coordination and transparent data ultimately means that consumers must pay their local electric companies to build more power plants than would otherwise be needed in order to meet local needs.

Extreme Weather and Projected Growth Drives Duke Energy’s Plan

Duke Energy’s proposed resource plan, called the Carbon Plan in North Carolina and Integrated Resource Plan (IRP) in South Carolina, paints a picture in which climate change-driven weather events and data center-driven electricity sales growth require a massive expansion of ratepayer-funded fossil gas power plants. When Winter Storm Elliott hit the Southeast during the major polar vortex on December 23-24, 2022, Duke had to cut power to hundreds of thousands of customers due largely to the failure of coal- and fossil gas-fueled power plants. While nearby regional markets also experienced similar power plant failures, they avoided customer outages during this storm.

In response to the extreme weather and a large projected growth in electricity demand, Duke now proposes to build more power plants to stand by “just in case” of future power plant failures or extreme load during major weather events. In the industry, these “just in case” power plants are called a “reserve margin.”

A Self Perpetuating Problem with a Billion Dollar Solution

Just the power plants that Duke proposes to build to meet the increases in its reserve margin, would cost customers well over a billion dollars, essentially imposing a localized “reliability tax” on customers that could be avoided with better regional coordination.

To be clear, the reserve plants are not the power plants that will directly serve the new, increased load, but instead are the extra power plants on top of those needed to serve the increased load, which Duke says are necessary as a backup if other plants fail. According to Dr. Jennifer Chen, who submitted testimony to the North Carolina Utilities Commission (NCUC) on behalf of a group of large businesses seeking renewable energy, Duke’s plan increases these reserves from 17% to 22% of peak demand. As Dr. Chen indicates (on page 5), each 1% increase in reserves is roughly equal to a new, medium-sized fossil-fueled power plant that would be paid for by ratepayers.

The increased reserve margins are part of a vicious cycle:  because fossil gas have been unreliable–particularly during recent winter storms–Duke argues that we need more fossil gas to make up for the unreliability.  This is akin to a doctor attempting to treat symptoms while ignoring the underlying disease causing those symptoms. Until the disease is treated, those symptoms will just keep coming back.

As Dr. Chen points out (pages 11-12 of her testimony), the December 2022 winter storm was the fifth such major disruption in the last decade, and, as utilities around the region build more and more fossil gas power plants to self-insure against winter storms, their customers are more and more exposed to the higher rate of power plant failure during extreme weather. She points out, for instance, that a large, baseload fossil gas plant is more than three times as likely to fail when a polar vortex drops the temperature to 5 below zero, than on a temperate, 50-degree day.  In addition, the higher reserves also are significantly driven by including weather patterns in the demand forecast that have not been seen since the early 1980’s, ignoring the subsequent impact of climate change on electricity demand.

This problematic scenario at Duke, in which extreme weather and higher power plant failure rates drive requests for higher reserve margins, is multiplied in similar plans throughout the Southeast.

Markets Help Manage Weather, Growth, and Renewables

The regional markets that are prevalent in most of the rest of the country are designed to reduce the amount of extra power plants that must be built for reliability reserves. As suggested by this report on an increase in southwest U.S. reserve margins from 12% to 15%, and by page 9 of this report from the mid-Atlantic to midwest region, large areas of the country with regional markets are keeping reserve margins down to the (historically still high) 17% range — even with more extreme weather – rather than the 20%+ range that we are now seeing in power company plans across the Southeast.

Lost in the arcane math is the circular conundrum that air pollution from power plants is driving the extreme weather, and the extreme weather makes the power plants more likely to fail, leading to even higher reserve margins.

When Power Plants Performs Better as a Group, Fewer Reserve Plants are Needed

Independently run regional markets seem to be more able to tackle this problem head-on than individual utilities. As Dr. Chen points out, within the largest U.S. regional market (PJM), power plant owners face financial penalties for non-performance that have helped to gradually improve reliability. When all power plants, as a group, perform better, fewer extra plants are needed to be held in reserve. And when a power plant is too unreliable, and the risk of penalties outweighs the benefits to the grid, it can push those power plants to retire instead of continuing to burden the system.

Duke also seeks to justify the extra fossil gas plants by claiming they are needed to backstop increasing renewable energy. This is another “problem” that regional markets can solve: the larger regional pool of resources better accommodates fluctuations in weather as well as low-cost, variable renewable energy, under rules that attempt to be neutral with regard to power generation technology or ownership.

Regional markets are far from perfect, and each has its own strengths and weaknesses. But the current Southeast crisis of crazy weather, load growth, major asset retirements, and renewable energy interconnection backlogs cries out for Southeast utility companies and regulators to take another look at regional, market-based solutions.

Customers should not be saddled with an extra, utility-by-utility “reliability tax” just because utility companies don’t want regional reserve sharing or cost competition.

Read the Blog Series on Duke’s 2024 CPIRP