The electricity sector at the start of 2019 is in the midst of fundamental change.

Renewable energy is increasingly competitive with fossil fuels. Distributed energy is upending the economics of the grid. Climate change is presenting new threats to power systems and their regulatory models.

As with any disruption, the reshaping of the electricity industry is multifaceted, with a litany of competing interests and narratives working to shape the direction of the transition. What will rise to the surface in the year to come? Here's what we expect:

A Trump bailout will continue to be a threat   

Throughout 2018, the threat of federal action to bail out coal and nuclear plants cast a pall over Washington energy policy.

The debate started late in 2017, when President Trump's Department of Energy proposed a financial support package for the large generators, which are challenged by cheaper natural gas and renewables, at the Federal Energy Regulatory Commission.

Regulators unanimously rejected that proposal in January, but in the spring, the White House responded by directing DOE — following public pushes from coal and nuclear generators — to find another way to save the ailing plants. In late May, a leaked administration memo revealed that officials were considering using DOE's emergency powers or wartime authorities dating back to the 1950s.

Those plans were reportedly shelved this fall after internal debate, but many of the companies that pushed the original bailout proposal are running out of time to save their plants from retirement, and the White House could move to use its emergency authorities at any time throughout the coming year.

If that happens, it will likely prompt a swift pushback from clean energy and environmental groups, as well as some utility companies themselves. Utility Dive's 2018 sector survey showed that most electric utility employees across the nation do not want to see the White House support uncompetitive generation.

FERC will remain focused on wholesale pricing issues, resilience and fuel security

When FERC rejected the DOE bailout plan, it opened a longer term regulatory proceeding on power grid resilience, or the ability of the system to bounce back from outages. That docket remains open, but FERC took a number of other actions in 2018 that will affect payments to the plants targeted by the DOE plan and others.

In June, FERC threw out the capacity market rules for the PJM Interconnection, the largest power market in the country, setting up a scramble to rewrite them for approval early this year. FERC also approved significant changes to the capacity auctions in ISO-New England, and moved that region closer to valuing "fuel security," or the ability for power plants to store fuel onsite.

In 2019, those fuel security and grid resilience debates are likely to intensify alongside continued discussion over the retirement of coal and nuclear plants. Large generators in Texas are pushing for market rule changes to boost payments to their plants, ISO-NE must file long term capacity plans at FERC by June, and PJM warned its stakeholders in December that it would ask FERC to invalidate its energy market rules if they could not come to consensus by early this year.

Those debates will move forward at FERC with a commission more friendly to coal and nuclear interests. In December, the Senate confirmed Commissioner Bernard McNamee to a seat at the agency. He helped craft the DOE's original coal and nuclear bailout in 2017.

The debates highlight a fundamental tension between the outcomes of wholesale power markets and states' desire for certain outcomes — like building more renewables or retaining money-losing nuclear plants. That conflict is unlikely to be resolved in the year to come, but at the beginning of last year was already contributing to industry anxieties about the future of the fuel mix. 
 

The federal environmental regulation rollback will continue  

Alongside electricity market upheavals, federal energy policy in 2018 was defined by environmental regulatory rollbacks.

In the last year, the Environmental Protection Agency announced moves to rescind Obama-era rules on carbon, mercury and other pollutants from power plants, regulations on the disposal of toxic coal ash, emission standards for automobiles and methane rules for oil and gas production, among others.

Those proposals are all up for comment and finalization in early 2019 and will almost certainly spark a string of legal challenges from environmental groups that could end up reaching the Supreme Court. If the Trump administration is successful in defending them, energy lawyers say the EPA's narrower interpretation of the Clean Air Act in its new carbon and mercury regulations could put limits on regulatory programs from future administrations.

The regulatory rollbacks are likely to be met with tepid support from the utility sector. In our 2018 survey, only a small portion of utility employees said they supported scaling back the Obama EPA's Clean Power Plan to a carbon regulation that only regulates emissions "inside the fence line" of individual plants — the foundation of the Trump EPA's replacement proposal. Even so, the utility sector lent support to the changes in comments filed with the EPA in November.

States will increasingly push clean energy and climate policies

In the face of looser federal environmental regulations, a number of state and local governments are pushing clean energy and climate policies, either aiming to keep low-carbon generation on the grid or build more of it in the future.

In 2018, California and New York boosted their renewable energy and storage targets, Massachusetts added a "clean peak" standard to incentivize batteries, New Jersey added storage and offshore wind targets and moved to subsidize in-state nuclear plants. More than 90 U.S. cities and towns have also committed to sourcing their electricity from 100% renewables.

In 2019, action on state clean energy policy is likely to intensify following Democrat gains in the midterm elections. Successful gubernatorial candidates in Illinois, Colorado, Nevada, New Mexico and Maine endorsed a 50% renewable energy target or higher. In each of those states, the newly elected governors will come into office with one-party rule — Democrats controlling both houses of the state legislatures — which may make it easier to enact their energy agendas.

Many of those conversations are likely to dovetail with discussions of a "Green New Deal" among progressive politicians in Washington and elsewhere. While Congressional Democrats are likely to make the program's renewable energy targets and jobs programs rhetorical issues on Capitol Hill, the greater opportunity for policy implementation in 2019 will come from the states.

Grid modernization and performance-based utility metrics will become commonplace

As states increasingly push clean energy policies, a number are also investigating how they can adapt their utility grids and business models for emerging resources.

Nearly every state took some regulatory or legislative action on broad grid modernization or utility business model reform in 2018, with 42 states acting in the second quarter on questions of advanced metering infrastructure, storage deployment, data access and revenue reforms, according to the North Carolina Clean Energy Technology center.

Highlights included the release of Ohio's PowerForward report, a regulatory roadmap to guide utility reform in the state. That initiative was significant because it represented the spread of utility reform from traditionally blue states like New York and California to the more conservative Midwest, the state's head regulator told Utility Dive.

In the year to come, many analysts expect that expansion to continue, with states taking a more comprehensive look at integrating new performance-based metrics into utility revenues, such as standards for energy efficiency, customer engagement or sustainability. Most utility employees expect that these efforts will result in hybrid revenue models, where their companies make some of their money from traditional cost-of-service investments, and the rest from newer performance-based metrics.

Gas generation will continue to dominate

Natural gas is the new dominant fuel in the U.S. power sector, surpassing coal for amount of electricity generated in 2016.

That status is largely due to historically low natural gas prices, brought on by advances in hydraulic fracturing and horizontal drilling, which have incentivized generators to switch from coal to gas. In October 2018, gas provided more than 38% of power generation in the U.S., according to the Energy Information Administration, while coal provided less than 27%.

That trend is expected to continue into 2019 as natural gas prices stay near or below their current levels. EIA expects Henry Hub gas prices this year to average $3.11/mmBtu, down six cents from the 2018 average.

Even if prices increase beyond that level, recent market reports suggest it may not be enough to push utilities back to burning coal. In late November, when gas spot prices peaked at $4/mmBtu, analysts said many generators refrained from switching back to coal due to higher demand for coal exports and less production capacity.

Those continued low fuel prices, along with lower fixed costs compared to coal and nuclear plants, are largely why EIA expects the U.S. grid to add more than 28 GW of gas-fired generation between 2018 and 2022.

Energy storage will have its biggest year yet

As utilities plan to decarbonize their systems, many see the current boom in natural gas generation as a "bridge" to a low-carbon future — providing dispatchable power to balance out intermittent renewables on their systems.

Continued advancements in battery technology, however, could make that bridge shorter than many anticipated.

In November, California regulators approved four battery projects for utility Pacific Gas & Electric to replace three gas plants that had sought ratepayer financial support. The batteries, including two of the world's largest planned projects, represented the first time that a utility and its regulators sought to directly replace multiple major power plants with battery storage.

California has ambitious environmental and battery storage targets, but large-scale storage is also spreading to states without those policies as battery prices decline. Last summer, generator Vistra announced plans for a 42 MWh storage facility connected to a solar farm in Texas, which would be the state's largest battery.

While smaller in scale, the recent growth in utility-size batteries has been outpaced by behind-the-meter installations, which analysis firm Wood Mackenzie says grew more than 300% in 2017 alone. Going forward, Bloomberg analysts expect lower prices and increasing market participation options for storage — like FERC's recently approved Order 841 — will beget more than 100 GWh of storage capacity in the U.S. alone by 2040.

Electrification will become a central power sector issue

As batteries become cheaper they hold promise for utilities not just as stationary sources of power, but mobile ones as well.

By 2050, the National Renewable Energy Laboratory says electric vehicles could increase U.S. power demand by up to 38%, providing an important source of power demand growth for utilities and opportunities to use the vehicles' batteries to meet grid needs.

In 2018, utilities began to realize this opportunity, ramping up their lobbying and public relations efforts around electric vehicles. In the third quarter alone, 32 states and D.C. took some action on electric vehicles, including the approval of utility EV charging programs in Massachusetts, Rhode Island and, earlier, in Nevada.

In the year to come, utilities across the nation are likely to intensify these efforts, pushing for approval to own EV charging stations, studying new rate designs to incentivize charging, and finding new ways to aggregate fleets of vehicles to modulate their charging for grid needs.

DERs will become trusted bulk power resources

As renewable energy and storage technologies become cheaper, increasing numbers of utility customers are installing them at their homes and businesses to cut power costs and meet environmental goals.

Utilities, keen to prevent load loss to rooftop solar and the like, initially tried to slow the trend with fees and rate designs that discouraged adoption of such resources. But increasingly — and after a series of lengthy state policy battles — they are beginning to recognize that DERs can also provide benefits to the grid.

Part of PG&E's battery proposal to replace its three gas plants, for instance, includes 10 MW of behind-the-meter batteries in its service area, and the three California investor-owned utilities must add 500 MW of customer-sited storage by 2030.

More opportunities could soon arise with the expected finalization of wholesale market rules for DER aggregations, the subject of a FERC technical conference in 2018. As those conversations develop, a key issue at the state level is expected to be over utility ownership of distributed resources — something sector employees say they want to keep as an option:

Renewable energy will increasingly replace coal

With federal environmental regulations on hold, the single most important driver of the U.S. clean energy transition in 2019 is likely to be the increasing competitiveness of wind and solar energy.

2018 represented a milestone for the renewable industry — the first year that, over large areas, its resources were able to challenge not just new fossil fuel generation, but the costs of existing coal and nuclear generators

U.S. onshore wind energy costs average between $26/MWh and $56/MWh without subsidies, while utility-scale solar averages between $36/MWh and $44/MWh, investment firm Lazard reported in November. That challenges the average cost for existing U.S. coal plants, which it estimated between $27/MWh and $45/MWh.

The trend began in the windy plains and upper Midwest, where Xcel Energy's utilities have announced plans to retire about half of their coal-fired capacity in the coming years and replace it largely with wind energy.

Recently, that competitiveness has spread to other regions. In October, the Northern Indiana Public Service Co. (NIPSCO) released analysis showing that it could save ratepayers $4 billion over 30 years by retiring two coal generators early and replacing them with nearly all wind and solar energy.

As renewable energy prices continue to decline, utilities are likely to increasingly retire their older, more expensive coal generators in favor of the cleaner energy sources throughout 2019 and beyond.