In the Wake of IRA: Grid Stability, Permitting Reform, and the Case for Compromise

The passage of the Inflation Reduction Act (IRA) is set to accelerate the U.S. energy transition. The tax credits in the IRA cement the commercial prospects for a vast build out of wind and solar energy and thus boost the prospects for a decarbonized power sector. Meanwhile, rising energy costs and increasing grid-reliability concerns raise serious questions about maintaining a viable balance of energy security, sustainability, and affordability through the decarbonization process.  

Permitting reform is positioned to address these challenges and would help realize the full potential of the IRA. In Washington, the debate is over what types of projects should be covered by a package of reforms. Faster building of transmission infrastructure will be key to improving the grid and connecting new intermittent sources and there is plenty of evidence that these projects get tied up in permitting and siting contests. So do fossil fuel pipelines. Permitting reform may therefore require a bipartisan compromise over increased permitting for transmission lines in exchange for increased permitting for fossil fuel infrastructure.

This raises a key question over the role of natural gas in the U.S. energy system in the wake of the IRA. In the power sector, modeling from a range of nonpartisan teams shows a continued role for natural gas for decades to come. Furthermore, natural gas does not truly compete with carbon-free generation resources for dispatch in the power sector. Understood in this light, a potential compromise between pipeline permitting and transmission permitting may be exactly the sort of approach that is needed to build a clean, reliable, and affordable energy system over the coming decades.

Understanding the Stakes: Transmission Permitting Is Desperately Needed

It is well established that the path to decarbonization in the United States requires a vast amount of new transmission lines. A 2022 report from Princeton’s ZERO Lab found that “to unlock the full emissions reduction potential of the Inflation Reduction Act, the pace of transmission expansion must more than double the rate over the last decade to reach an average of ~2.3%/year.” New transmission allows electricity produced by wind and solar resources deployed in rural areas to reach the centers of demand in urban areas. These resources cannot be connected to the grid if transmission capacity does not exist to safely distribute their power. Limited transmission capacity is a massive bottleneck for energy transition. Furthermore, the study finds that a failure to ramp up transmission capacity may cause the IRA to result in increased emissions: “If electricity transmission cannot be expanded fast enough, power sector emissions and associated pollution and public health impacts could increase significantly as gas and coal-fired power plants produce more to meet growing demand from electric vehicles and other electrification spurred by IRA.”

Beyond emissions targets, expanded transmission capacity will also contribute immensely to grid reliability. New interregional transmission capacity represents an improved ability to share surplus generation capacity across regions, shipping it to where it is most needed. As it stands today, inadequate transmission capacity creates constraints and limits this sharing capacity. In the case of Winter Storm Elliott, analysis by RMI shows how multiple gigawatts of curtailed wind energy production would have been available to supply the capacity constrained southeast had sufficient transmission capacity existed. Elsewhere transmission capacity is already playing this crucial role. During the September 2022 heat wave, the California grid operator was able to import 6,500 megawatts of power from the broader western region which played a crucial role in averting blackouts. This sharing capacity needs to scale tremendously to maintain grid reliability through the decarbonization process.

Evaluating the Role of Natural Gas

There remains a role for natural gas in a post-IRA world. In a recent Resources for the Future (RFF) panel among national modeling teams (Environmental Protection Agency, the National Renewable Energy Lab, the Electric Power Research Institute, and RFF), every single model, across all scenarios, sees a significant role for natural gas in the power grid through 2035 and beyond. This balancing role, and natural gas fired generation utilization rates, will diminish over time as new carbon free resources are deployed. New natural gas pipelines cannot halt or slow this process, only a lack of transmission capacity can.

What then is the impact of new natural gas pipelines? The primary impact will be to alleviate constraints in the pipeline network in the same way as transmission alleviates constraints on the electrical grid. Regions on the receiving end of these pipelines will see a reduction in natural gas prices, a reduction in electricity prices, and a reduction of the frequency in which natural gas fired power plants are unable to run due to lack of fuel—a grid reliability benefit.

Crucially, a lower domestic natural gas price will not and cannot displace carbon-free electricity production. In the electricity market, resources are dispatched from low to high prices to meet demand, a process called economic dispatch. The carbon-free generation resources everyone is relying on to decarbonize the grid—wind, solar, nuclear—offer their electricity supply into the market on a price-taking basis because their marginal costs are zero, close to zero, or in the case of nuclear, roughly zero relative to the cost of coming offline. These resources are therefore always placed first in dispatch order ahead of natural gas-fired power plants. In reality, natural gas-fired power plants compete only among themselves and other fossil fuel burning resources, primarily coal, for dispatch. If new pipelines lower the cost of natural gas, it will only accelerate the displacement of those more emissions intensive units remaining in the resource mix—again, primarily coal—a clear win on the emissions and pollution front.

Another factor to consider is the relationship between natural gas prices and electricity prices. Today, natural gas-fired power plants act as the marginal resource in the electricity market in most cases. As the marginal resource in the dispatch order of electricity markets, the cost of natural gas-fired electricity production sets the price of electricity for all buyers in the market. Therefore, pipeline constraints which drive up natural gas prices also drive-up electricity prices. Europe has had a devastating experience with this phenomenon over the last several years as Russian gas supplies dwindled, driving an extreme volatility in both natural gas and electricity prices. An analysis by the think tank Bruegel estimates “€768 billion has been allocated and earmarked across European countries to shield consumers from the rising energy costs.” That level of spending dwarfs the predicted costs of the IRA. In the United States, the relationship between natural gas prices and electricity prices will only grow tighter in years to come as coal-fired generation retires, leaving natural gas as the only fuel shaping the dispatch curve.

The balancing role of natural gas fired generation must also be considered in the context of improved grid reliability. Often natural-gas fired plants cannot run when the power-grid is most stressed due to lack of fuel.  Perhaps the best example of this is in New England, where winter grid reliability grows increasingly tenuous because only a single pipeline connects the region to the broader U.S. natural gas system. During cold snaps, ISO-New England cannot use its natural gas generation because there is insufficient capacity on the pipeline for both heating and power generation. Instead, it relies on aging and emissions heavy oil-, diesel-, and coal-fired generation to keep the lights on. A new pipeline would bring significantly lower electricity prices to the region, dramatically improve grid-reliability, and drive a decrease in emissions in the region. All the while, a planned expansion of offshore wind capacity will steadily displace natural gas fired generation. This same phenomenon, albeit less acutely, holds true across the U.S. power sector every winter.

In the end, new pipeline capacity will serve to ensure that natural gas-fired generation’s role as balancing resource is priced as cheaply as possible in electricity markets. Reversing recent trends of increasing prices for electricity is good for individual households and the economy writ large. It is also crucial for climate goals, as lower electricity prices will benefit the electrification thrust of decarbonization efforts. It also is undeniably good for the politics of the transition; high energy prices are a surefire way to erode political support for decarbonization policy.

Conclusion

In the wake of the IRA, there is arguably no more critical policy objective for the energy transition than reforming and accelerating transmission permitting. Set against this critical objective is a potential compromise which upon closer inspection is hardly the climate setback some would suspect. A clear-eyed assessment of the role of natural gas infrastructure reveals a path forward that secures the path to a clean, reliable, and affordable domestic energy system.

Joseph Majkut is the director of the Energy Security and Climate Change Program at the Center for Strategic and International Studies in Washington, D.C. Cy McGeady is an associate fellow with the CSIS Energy Security and Climate Change Program.