Inflation Reduction Act Unlocks Savings for Utilities - and Consumers - that Choose Clean Energy Over Gas

Posted by Harry Godfrey and Sarah Steinberg on May 3, 2023 12:00:00 PM

Blog Federal funds a game-changer for utility resource planning

Last August, as rising inflation rattled the economy and sky-high electric bills landed in mailboxes across the country, Congress passed the Inflation Reduction Act to cut emissions, spur manufacturing, and – critically – reign in consumer costs by helping Americans shift to clean, reliable, and affordable energy. But those savings aren’t guaranteed to flow to customers. Utilities must update their energy resource plans to take advantage of the new market conditions, or else leave savings on the table.  

The benefits of the Inflation Reduction Act are being put to the test in real-time across the country as utilities continue planning to build new fossil fuel generation. To better understand these benefits, we focused a new analysis on four investor-owned utilities in Indiana, each planning to build a large new gas plant. We wanted to see if wind, solar, and energy storage, using IRA incentives, would win out against specific gas plant proposals. In all four cases, clean energy was able to provide the same energy and reliability needs at a lower cost. This means that Hoosiers – and likely other utility customers in other states – have the chance to save money on their electric bills, but only if state regulators compel Indiana utilities to change their ways, take advantage of the new federal incentives, and embrace clean resources like solar, wind, and energy storage. 

First, to understand how the Inflation Reduction Act can help utility customers reign in rising electric bills, it helps to understand two components of the law – the Investment Tax Credit (ITC) and the Production Tax Credit (PTC) – and how they’re changing which technologies we use to produce electricity and keep the lights on. 

While the ITC and PTC have been around for over a decade, the Inflation Reduction Act revitalized and revised them. These credits were originally designed as an incentive to spur the deployment of advanced energy resources, such as solar and wind. The ITC enables developers to reduce the upfront cost of advanced energy projects and, ultimately, reduce the cost of electricity from these projects. The Inflation Reduction Act restored the ITC to its full value (a 30% credit), extended the credit through 2032, and added stand-alone energy storage to the list of eligible projects. 

The Inflation Reduction Act also updated the PTC, extending the credit through 2032, and expanding it to include additional clean energy resources such as offshore wind and nuclear generation. The law even contains “stackable” bonus credits on the ITC and PTC: building an advanced energy project with American-made content or locating it in an “energy community” (generally a place where a coal mine or power plant has recently closed) adds 10% to the value of the credit. 

By reviving the ITC and PTC, and extending the former to stand-alone storage projects, federal lawmakers expanded the range of cost-effective technologies for grid reliability. To keep the lights on, grid operators must ensure that there’s enough energy and capacity (i.e. supply) available on the grid to meet demand at any given moment. Most of the time, demand can be met with a combination of baseload and variable resources. But when demand spikes – in the hottest hours of summer or coldest of winter, for instance – grid operators need to call up “peaking” resources that can quickly supply electricity to the grid for a few minutes or hours until demand decreases.  

Traditionally, this “peak” supply has come from natural gas “peakers.” Unlike other power plants, peakers are acutely expensive because they are used infrequently, so their costs aren’t spread across months and years of generation. Historically, grid operators had few, if any, cost-effective alternatives for keeping the lights on during periods of peak demand. The Inflation Reduction Act is changing that. By lowering the cost of storage with the ITC, the IRA has made grid-scale energy storage into a cost-effective alternative to new natural gas peakers, as new analysis in Indiana makes clear. 

In their 2020/21 Integrated Resource Plans, three Indiana utilities – Indiana Michigan Power (I&M), Northern Indiana Public Service Company (NIPSCO), and CenterPoint – each proposed to build new natural peakers, ranging in size between 300 MWs and 1,000 MWs, to address forecast growth in peak demand. Duke Energy Indiana proposed a 1,221 MW combined cycle gas turbine to serve energy at all hours of the day. We wondered, with passage of the IRA, whether those proposals were still the most cost-effective option. So Advanced Energy United partnered Strategen to consider an alternative approach. What if, instead of the proposed natural gas peakers, each utility built enough energy storage capacity to equal, or exceed, that of the peakers? In Duke’s case, could the utility serve the same energy and capacity with a mix of solar, wind and storage, instead of the baseload gas plant? Would these alternative proposals cost more, or save Hoosier’s money on their electric bills? 

To test the “peaker” proposals of I&M, NIPSCO, and CenterPoint, Strategen ran 13 different scenarios across the three different utilities to account for different natural gas prices and public policies. We found that, in 12 of the 13 scenarios, building energy storage rather than natural gas peakers would save Hoosiers money. On average, Indiana customers of NIPSCO would save $3.4 million, the first-year storage is deployed, CenterPoint customers would save $3.5 million, and I&M customers would save a (staggering) $66.2 million! In Duke’s case, Strategen’s analysis found that a clean energy portfolio consisting of solar, wind, and storage can provide equivalent energy and capacity at a lower cost than the proposed gas plant. The Inflation Reduction Act makes the clean portfolio significantly more economic than the proposed gas plant, resulting in customer savings of $68.5 million in 2027, the first year of deployment.  

Moreover, that may not even be the most cost-effective portfolio of advanced energy resources. To be safe, in this analysis, Strategen did a like-for-like trade – replacing natural gas capacity with that from energy storage, or energy storage plus renewables. A portfolio that invested in reliable, cost-effective energy efficiency technologies and demand response measures, which the Inflation Reduction Act also incentivizes, could reduce the need for new gas supply altogether, further reducing Indiana electric bills. Regardless of which advanced energy portfolio utilities choose, we expect these savings to grow. As more low-cost clean energy is built in the years ahead, high-cost gas plants will be utilized less and less, so savings should grow beyond the first year. 

The forecast future growth of savings from clean energy points to a larger “stranded asset” risk in new natural gas plants. As more utilities in the region build renewable generation, the marginal cost of electricity will fall, and the number of hours during which it is uneconomic to operate these gas plants will rise. At some point, these plants will become fundamentally uneconomic to continue operations. Most power plants are built to operate for 40 to 60 years, but if prices force them offline in 10 or 20 – a real possibility with the growth of low-cost renewables and storage – utility customers are left to pay for that “stranded asset” without seeing any benefit. 

Nor is that the only risk from building new natural gas plants. As recent events have shown, natural gas prices can be volatile. Energy storage, which draws electricity from the grid, and zero-marginal cost solar and wind, are insulated from this fossil fuel price risk. In the same vein, gas plants are traditionally thought of as being reliable, but recent events have proven otherwise. During Winter Storm Elliot in December 2022, the Midwestern grid operator (MISO) lost 23,000 megawatts of natural gas generation (21% of system peak load) to unplanned outages. The story in Texas was even graver, where Winter Storm Uri in 2021 froze natural gas supply lines and halted plant operations, leading to over 61,000 megawatts of forced outages. 

By deploying energy storage and renewable resources, rather than new natural gas plants, and utilizing the incentives in the Inflation Reduction Act, Indiana utilities can avoid these risks while also saving their customers millions (potentially billions) in the years ahead. Unfortunately, the utilities’ business model, which rewards them for investing in costly assets (e.g. power plants), is still nudging them in the wrong direction. It’s up to Indiana regulators, policymakers, and citizens to make clear the status quo is unacceptable. The Inflation Reduction Act has changed the energy landscape, its time Hoosiers reaped the economic rewards!

Read and download the newest report here.  

Read and download the Duke Energy Indiana report here.

Topics: State Policy, Federal Policy, Indiana



Advanced Energy Perspectives is Advanced Energy United's blog presenting news, analysis, and commentary on creating an advanced energy economy. Join the conversation!

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