However, even states without California’s abundant sunshine can still produce low-cost solar power, thanks to declining solar-panel prices. The vast majority of sites in the study have sufficient buildable land to install solar projects.
Phadke added that building off-grid systems would give factories faster access to renewables, since grid-tied wind and solar farms have to wait in long interconnection queues, which can delay projects for years. Ditching the utility would also let manufacturers avoid paying steep grid-delivery charges and other expenses — and sidestep competition with data center operators for power from an increasingly strained grid.
The new site-level data “is really helpful for project developers and technology developers to know how to prioritize their efforts, in terms of where to go and pitch industries on,” said José Domínguez, the study’s lead author and a research affiliate at the Goldman School.
Making on-grid power cheaper
The fact remains, though, that many factories will continue to rely on the electric grid in the near term. To get these facilities to consider transitioning to cleaner heat, the cost of electricity needs to come down.
The concept of electricity rate reform is gaining traction among decarbonization advocates, state policymakers, and manufacturers like Eastman as a tool for narrowing the gap between electricity and natural gas prices.
In California, Senate Bill 943 would authorize the state’s Public Utilities Commission to fix utility rates and fees to make it more affordable for large industrial and commercial customers to switch from fossil fuels to electric heat. The bill passed the Senate in May and is now headed to the state Assembly’s Appropriations Committee.
In the Upper Midwest, the utility Otter Tail Power recently developed a novel electricity tariff that is designed to improve the bottom line of thermal energy systems and to ensure they benefit everyone on the grid. The first project to take advantage of this new rate is Antora Energy’s 5-gigawatt-hour battery in South Dakota, which turns cheap wind energy into clean industrial steam for Poet’s nearby ethanol-production plant.
“Reforming electric rates is a good way to improve the economics of electrification while taking advantage of our clean electricity generation,” said Lauren Kubiak, a senior scientist for the Natural Resources Defense Council who works on California climate and energy policy.
Kubiak led a new study analyzing how this strategy could improve the economics for industrial heat pumps in two major manufacturing states: California and Michigan. While heat pumps are significantly more energy-efficient than gas-fueled boilers, they’re typically not cost-effective to operate in either state, given current electricity prices.
The study examined what would happen if companies paid only “marginal” electricity costs, which reflect the actual cost of generating and transporting an additional unit of electricity. Today, ratepayers also pay “non-marginal” costs that help cover things like grid maintenance and infrastructure upgrades, net-metering programs for rooftop solar, and, in California, wildfire-prevention efforts.
“In California, [marginal-cost] rates enabled heat pumps to become pretty cost-competitive with gas boilers,” Kubiak said. That’s particularly true for major subsectors that require low-temperature heating.
For Michigan manufacturers, the impact is more muted, since the state’s electricity rates are lower than California’s and don’t include as many non-marginal costs. However, charging factories marginal rates would still reduce the size of the electricity-gas cost gap, enough that layering on other industrial policies — such as a tax credit that rewards low-carbon heat production — could bridge that divide almost entirely.
In the report, Kubiak and her co-authors suggest that utilities could offer marginal cost rates only to new heat pumps that displace fossil fuel–generated heat. These rates could also be set to encourage manufacturers to use electricity during times when solar projects are producing excess electricity, or when overall grid demand is low. That should help avoid saddling other ratepayers with the non-marginal costs that these new heat pumps won’t be paying.
“Electric rate reform is a tool in our toolbox that hasn’t been used to its fullest extent just yet,” Kubiak said.
