Industry 101 | Participants and Roles in the Electricity Market: Electricity Generation

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The generation of electricity comes in many forms and from many participants in the electricity market. In the past, electricity was generated almost exclusively via the burning of coal and other fossil fuels. This process is still the most widely used, but has certainly evolved. Today, many other forms of generation exist that are renewable and/or more eco-friendly, such as hydropower, solar, wind, and nuclear. Practices and programs are being instituted that help relocate the points of electricity generation to be closer to their destinations, as well as adjust times of usage to alleviate demand spikes.

World Electricity Generation 2012

Coal has always been an important commodity in the United States due to its abundance. Over a quarter of the world’s known coal reserves are located in the U.S., which equates to about 270 billion tons. Coal has been consistently used as the primary source of electricity generation due to its excellent energy content-to-price ratio. When compared to other fossil fuels, one million BTUs of energy can be produced by coal for $1.60. Comparatively, natural gas would cost $7.30 and petroleum would cost $16.20. However, the use of coal for electricity has significant drawbacks. Coal produces the most CO2 emissions of any fossil fuel. On its own, it is responsible for one third of U.S. carbon dioxide emissions. Additionally, the process of mining coal has a significant impact on the landscape and cause sulfates, nitrates, and heavy metals to run off into nearby lakes and streams. These drawbacks are the causes of a major push to decommission and shut down coal burning plants across the United States, in favor of cleaner-burning substitutes.

The burning of natural gas emits almost half as much CO2 as coal. The table below demonstrates why natural gas is becoming more popular due to its lower impact on air quality.

Carbon Dioxide 117,000 164,000 208,000
Carbon Monoxide 40 33 208
Nitrogen Oxides 92 448 457
Sulfur Dioxide 1 1,122 2,591
Particulates 7 84 2,744
Mercury 0.0000 0.0007 0.016
Table 1. Pounds of Air Pollutants per Billion BTUs of Energy. This table portrays the comparison between fossil fuels and the pollutants they emit into the air when burned. Source: EIA – Natural Gas Issues and Trends 1998.

The rising popularity of natural gas is good news for the U.S., because it’s natural gas reserves are the fifth largest in the world. This has led to natural gas providing 24% of the energy in the U.S., with only 3% of it being imported. Still, the lower price of coal compared to natural gas makes the use of coal more prevalent. Price is not the only factor, however; natural gas is much more volatile than coal so transportation can be difficult and dangerous. The extraction process (called hydraulic fracturing, or “fracking”) is also extremely invasive, labor intensive, and expensive. It requires heavy use of natural resources. A single well can consume 2 to 7 million gallons of water, depending on the region. Up to twenty wells make up a “pad” and dozens of pads can be located at a drilling site. This can result in hundreds of millions of gallons of water being used in the fracking process. A benefit of natural gas extraction is that petroleum (fuel oil) reserves are found alongside the majority of natural gas deposits.

Petroleum is the most versatile of the three fossil fuels. While coal is used almost exclusively for generating electricity and natural gas is predominantly used for heating homes, fuel oil has the capability to do both and to power internal combustion engines. This versatility creates a high and increasing demand for petroleum. Even with the recent push for alternative modes of travel and more ecofriendly sources of fuel for cars, demand for oil is projected to increase by as much as 25% by 2030. In 2015, the U.S. used a daily average of 384 million gallons of gas, which nearly matched the record high of 390 million set back in 2007. Increasing global demand is putting even greater pressure on already scarce resources, making it imperative to adapt and find alternative means to meet the energy needs of the people, such as renewable sources of fuel.

The most widely-used source of renewable energy is hydropower. In this process, power is generated by running water past a turbine, causing it to rotate and produce electricity. This makes it an incredibly popular means of generation because the water cycle is endless, which theoretically enables the perpetual creation of electricity. As portrayed in the circular chart above, in 2012 hydropower accounted for 16.5% of the world’s electricity generation.  This is due in large part to the Three Gorges Dam in China, which has the capacity to generate 22,500 megawatts of electricity. Hydroelectricity is not without its drawbacks, however. While it produces no emissions of any kind, the construction of a dam can have far-reaching environmental impacts. Fish populations suffer immensely when they try to migrate back to familiar breeding areas only to be cut off by newly-built dams. Local people and animal populations are also impacted by being relocated so an area can be flooded to create a lake. These reasons, coupled with the immense cost of building hydropower facilities, has led to the exploration of other renewable energy sources.

Solar-windfarm hybrid energy farm photoThe two most well-known renewable energy generation methods are solar and wind. The technology for harnessing the Earth’s natural resources has been around for decades, but the recent surge in popularity has occurred for several reasons. First and foremost is the decrease in cost. Over the past forty years, the price for installing a photovoltaic system has decreased by 99%. What used to cost $74 per watt now costs less than $0.70. This has been such a drastic improvement that the number of solar arrays across the globe nearly doubled between 2012 and 2014.

Wind generation has seen improvements as well. In the past several years, energy capacity for wind turbines has grown by more than 20%. Advancements in technology such as this have allowed nine states in the U.S. to produce 12% of their electricity though wind alone. Iowa and South Dakota have had such great success with wind power that they were able to use it to generate approximately one quarter of their states’ electricity. Limitations on these renewable energy sources still exist, however. Both wind and solar technologies, based on current designs, have a maximum potential capacity. Neither solar panels nor wind turbines will be able to harness all of the energy with which they come in contact or be 100% efficient. Thankfully, they do not have to be perfectly efficient because sunlight and wind are perpetually available, but once their maximum efficiencies are achieved, alternative means of harnessing renewable power will have to be created. Another major issue is their inability to increase production to match increased demand. At certain points throughout the day, referred to as peak times, energy is used in larger amounts and utility companies must account for that. However, the amount of sunlight or the speed of the wind are not factors within our control. Until a sufficient method for storing renewable power or responding to increased demand using renewables is found, fossil fuels will continue to be necessary.

Demand response is an issue that is continuing to draw increased attention, and steps are being taken to help limit or minimize spikes in electricity demands. Simply put, the goal of demand response is to decrease usage during peak times. The emphasis is on large commercial or industrial facilities being rewarded for curbing their consumption when other buildings are using more. With a ruling from the Supreme Court, the Federal Energy Regulatory Commission (FERC) was able to pass Order 745 which grants commercial buildings and factories the right to be paid wholesale price for reductions in power during cost-efficient times. This order was highly controversial, as the U.S. Court of Appeals ruled that the FERC was overstepping their authority and impacting states’ rights. The reason for the Supreme Court intervention was a disagreement with the Court of Appeals. The Supreme Court stated the FERC was acting within the powers granted by the Federal Power Act. It was decided in a 6-2 vote that Order 745’s impact crossed state lines, affected electricity markets on a wholesale scale and did not intervene at a state level. For many, the decision was considered a tremendous step in the right direction, since properly managed demand response programs can alleviate the need for power plants that were built solely to handle excessive demand situations.

Power generation models illustrationsAnother alternative to traditional means of generation that helps minimize costs and environmental impacts is to distribute the points of generation down to a local scale. Distributed generation is the concept of power being generated at the same location it is consumed. This has many positive impacts such as cutting distribution costs, reducing interdependencies, simplifying transmission processes, and greatly increasing transmission efficiency due to shorter distance of travel. The benefits associated with distributed generation make personal power generators at the household-level, such as rooftop solar panels, an increasingly attractive option.

Public aversion to pollution in close proximity can be a difficulty in localizing power generation. The phrase “Not in My Back Yard” has become a popular term describing people who do not want new developments emitting smoke and other pollutants close to their homes, yet do not have objections to these new developments being located hundreds of miles away. Unfortunately, not every method of power generation would be safe to incorporate into a distributed generation plan. For example, nuclear power has the potential to be a serious safety hazard if the plants are built too close in proximity to communities.

Nuclear production energy graphWith events like Chernobyl, Three Mile Island, and more recently Fukushima, nuclear power has a negative reputation associated with it. With recent advances in technology, however, it is safer than ever and has great potential to be a leading form of power production. Currently there are over 400 nuclear reactors in use that provide 11% of the world’s electricity, almost 2,500 terawatt-hours (TWh).

The United States alone produces one third of the world’s nuclear energy and has managed to achieve a load factor efficiency of 81% as of 2012. This is a dramatic improvement over the 56% that was standard in 1980. Much of this increase in efficiency has come from refining the process of nuclear fission, the splitting of uranium isotopes to generate heat. Much like in a coal plant, the heat is then used to boil water to create steam, and the steam is then pressurized to rotate a turbine. Also like coal plants, nuclear power generation has some undesirable emissions, though not in the form of air pollution but instead in the form of hazardous nuclear waste. As the uranium atoms are split, they produce a radioactive waste that must be properly disposed of to avoid extremely harmful effects on anyone or anything exposed to it. Aside from the hazardous byproduct, nuclear fuel is inexpensive, easy to transport, and has a much smaller impact on the environment than many other methods used today.

Because of the pros and cons of each form of generation, a combination of many methods are used to power the grid. Existing infrastructure makes it costly to let go of the past, but refusing to move forward makes for a precarious future. With legislation being passed that promotes alternatives to generation, such as demand response, and more renewable practices being encouraged, new solutions to meeting energy demands are headed in a positive direction.


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Here is a list of relevant reading material our expert identified as sources for additional information:

Fuel Oil
Demand Response

Distributed Generation