Analysis

Utility’s Plan To Replace Coal With Solar Passes Regulatory Hurdle

Regulators advance it a step, but cost and reliability concerns remain

Consumers Energy’s plans to convert much of its generation capacity from fossil fuels and nuclear power plants to a grid comprised of dispersed solar arrays, plus some backup from natural gas, passed an early test from state regulators.

The Michigan Public Service Commission approved a pricing framework for prospective contracts with independent operators of small hydroelectric plants, an increasing number of solar arrays and other forms of electric generation.

But getting a favorable ruling from the commission, which regulates natural gas and electric utilities, is just one of the many challenges the Jackson-based company must overcome before moving to a larger role for solar power over the next 20 years.

The challenges include the scheduled 2022 phaseout of a large federal tax credit for solar energy. More fundamentally, questions remain about the reliability of an electric grid that depends more on intermittent renewable sources while having less capacity to generate power from fossil fuel, nuclear and hydro-powered sources.

Former MPSC Commissioner Steve Transeth, who has worked in the state’s energy industry for more than 30 years, called Consumers Energy’s plan a “dramatic change.”

“They’ve committed to eliminating coal, which has traditionally been the backbone of the grid — at one time, two-thirds of our power was generated with coal — and now they’re proposing to replacing it with solar,” Transeth said in a phone interview before the MPSC’s Oct. 5 action. “This is a very dynamic process and I assume that as it moves forward they will have to make modifications. ... [But] I suspect they are committed to getting a great deal of the plan approved as proposed.”

Natural gas-powered electricity is currently much cheaper in Michigan than power from solar arrays. For example, Consumers Energy has a natural gas plant in Zeeland that produces electricity at a cost of $29.82 per megawatt hour, while a DTE contract from 2016 priced solar generation at $113.52 per megawatt hour, according to the MPSC. Yet Consumers is betting that the price of solar will continue to drop at a rate similar to decreases in recent years, while the price of natural gas will continue to rise.

This view is not unusual within the industry, but such estimates are closely tied to Congress extending the federal tax credit for solar energy.

That credit is especially important for Consumers Energy, as the year 2022 is about when it plans to start building numerous solar arrays around the state, covering hundreds of acres. The project isn’t scheduled to be complete until 2040.

The cost-effectiveness of this alternative generation source is affected by the technical challenges of relying on photovoltaic collectors, which are expected to provide thousands of megawatts.

According to the MPSC, due to sunlight being intermittent solar arrays located in Michigan produce only 19.9 percent of their rated capacity. At some times the arrays produce more electricity than is needed, and companies are working to develop storage systems large enough to bank this surplus electricity for use when the sun is not shining.

Consumers Energy storage plans include big batteries and artificial water reservoirs behind turbine-equipped dams (called “pumped storage”). The capacity of such systems is limited, however. To a large extent, the company’s plans rely more on modifying behavior so customers use less electricity, rather than generating enough power to meet whatever the demand.

Demand response programs, for example, create incentives for customers to voluntarily ration their electricity use. For commercial and industrial users, especially, this could involve using less electricity during times of peak demand. The company also plans to fill in shortfalls in production with electricity purchases from other utilities and generators.

In a 2016 study, the Institute for Energy Research calculated that as natural gas-powered generation is displaced by solar arrays, the per-unit costs of building future natural gas generation facilities increase. That is because utilities will use those facilities less, leaving fewer megawatts over which they can spread their fixed costs.

John Freeman, executive director of the Great Lakes Renewable Energy Association, said in a phone interview that he has read that battery technology on the horizon would solve many of the issues associated with the intermittent nature of solar-powered electricity.

“With the large-scale production of batteries, the cost of storage is going down and because there is a growing market for batteries, I think there’s a fair amount of research going on in the area,” Freeman said. “I don’t think Consumers has blind faith [that advances in battery technology are] going to happen, so I’m sure they’re staying on top of this.”

Jonathan Lesser, an adjunct fellow at the Manhattan Institute who has more than 30 years of experience working for regulated utilities and government agencies, believes battery storage is an extremely costly way to address the inconsistency of solar.

“The need to backup or ‘firm up’ wind and solar make them more costly than fossil fuel generation, such as natural gas,” Lesser said in an email. “In my view, reliance on solar in a state like Michigan makes no economic sense. It will lead to much higher electric costs for customers and harm Michigan’s competitiveness.”

As it moves in this direction, Consumers Energy will have to demonstrate to the MPSC, every five years, that it will still be able to provide reliable electricity at a reasonable price. Unless the company changes course, that task will be inseparably connected to changes in the cost of solar-powered electricity.

“I would argue the cost of solar energy is going down. Relying on solar allows incremental additions on a yearly basis — which lets us leverage decreasing costs, adapt to changes and match supply with demand on a timely basis,” Consumers Energy spokesperson Katie Carey said in an email. “In addition, solar energy is most valuable to us during peak load days, which are usually in the middle of summer when it is hot and sunny. Therefore, solar is clean, lean and available to deliver the energy we need when we need it.”