Stranded Costs and Grid Decarbonization
48 Pages Posted: 15 Sep 2016 Last revised: 2 Nov 2017
Date Written: October 20, 2016
Over the past half century, energy law has endured many stranded cost experiments, each helping firms and customers adjust to a new normal. However, these past experiments have contributed to a myopic regulatory approach to past stranded cost recovery by: (1) endorsing a preference for addressing all stranded costs only after energy resource investment decisions have been made; and (2) fixating on the firm’s financial costs and protection of investors, rather than on the broader impacts of each on the energy system.
The current transition to decarbonization is already giving rise to stranded cost claims related to existing energy assets like coal-fired and nuclear power plants. New energy infrastructure investments — such as natural gas pipelines and natural gas-fired power plants — will also face stranded cost issues once they have provided the expected bridge to a clean energy future.
We see the transition to grid decarbonization as a propitious opportunity for energy law to improve its approach to stranded cost compensation for investor risks. Unlike with past energy industry changes, where stranded costs were routinely addressed after investment decisions were made, it is important for regulators to address stranded costs now, at the outset of the transition to a decarbonized grid. As in the past, stranded cost compensation will prove important, if not essential, to this impending energy transition. But it should be approached in a manner that helps to overcome the obstacles to a decarbonized grid, reassure investors in new infrastructure without distorting capital signals to favor legacy resources, and recognize important energy resource attributes that competitive markets fail to price.
Keywords: stranded costs, coal, nuclear, decarbonization, climate change, electricity, natural gas
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