How non-economic dispatch by coal-fired power plants placed customers on the hook for an extra $3.8 billion in just three years.
Most people in the United States buy power from utilities operating in a wholesale energy market, meaning different electricity producers compete with each other to sell the power they produce to local utilities. Those local utilities then sell power to individual retail customers, like residential customers as well as commercial and industrial customers. In theory, the wholesale markets help control costs, because different electricity producers compete with each other to provide power that is both reliable and affordable. This system might even work to keep costs down....if utilities were operating on a level playing field. Unfortunately, as a new Sierra Club report shows, the playing field is anything but level, and some coal-owning power companies are just fine with that.
From 2015 to 2017, coal-fired power plants operated by regulated utilities in lost $3.8 billion in wholesale energy markets by choosing not to follow market signals--a practice that continues today. Or, to put it another way, these coal-owning regulated utilities that also operate in wholesale markets continued to burn coal for power when other, less expensive sources of electricity were available (operating “out-of-market”); and this practice ultimately cost retail ratepayers $3.8 billion--all because certain coal plants declined to operate competitively.
Sierra Club’s research confirms a prior finding that, across centralized energy markets, coal plants operate far more often than would be expected from the market price of energy. You might think that lower demand, increasing renewable energy, and low gas prices should be driving coal plants out of the market. You’d be right, if short term competition worked in the energy markets. ut it turns out that a number of those non-economic coal plants are generating power anyways, even when the wholesale power markets are not sending them enough revenue to pay for fuel or other costs.
How is it that a coal plant can take losses on the energy market and still stick around? Well, these non-economic coal plants are almost exclusively owned by rate-regulated utilities that have monopoly territories and whose energy prices are set by state public utility commissions. Further, wholesale market rules allow utilities the option to “self-commit” or “self-schedule” their units to run even when the units aren’t running cheaply enough to be called by market signals. By operating coal units out of the market, these utilities have imposed substantial operating and fuel costs on their captive customers, and may be making it harder for new clean energy as well as more efficient traditional generation and merchant competitors to enter the market.
So what’s the big deal here? These findings suggest that some operators are undermining a core market in the electricity sector, designed to make the trade of electricity more efficient. Before the era of centralized energy markets, utilities were charged with making electricity for their own customers. Some savvy utilities traded energy with their neighbors through boutique, or “bilateral” trades, angling to get the lowest-cost electricity for their customers. Then came along the construct of centralized energy markets. In an energy market, generators bid into a daily auction, and only the most competitive providers are supposed to be selected by the neutral market operators. Local electric utilities buy their electricity through that centralized market.
Almost all of the energy markets were designed with an opt-out feature for generators, to avoid the entire auction process. Instead of submitting an “economic” bid, generators could elect to “self-commit,” effectively deciding when to be on or off, regardless of market conditions. When a generator self-commits, it’s making a bet that market prices will be high enough to support its operations, rather than leaving that decision up to the market.
But our data shows that while private “merchant” generators have generally gotten that calculus about right, coal plants owned by regulated utilities are generally pretty bad at deciding when to self-commit. More often than not, coal plants owned by rate-regulated utilities elect to stay on, even when market prices are low, and often too low to cover the fuel and other costs to operate the coal plants. Unfortunately, it appears that state utility commissions are allowing the captive customers of those regulated utilities to cover the difference, in essence to pay more to keep those units running. Those customers are being denied the benefits of cheaper market energy.
How bad is the problem? We estimate that across four market regions, customers of rate-regulated utilities incurred $3.8 billion in net market losses from 2015 to 2017. Most of those losses were concentrated in the Midcontinent Independent System Operator (MISO) region, reaching from the Dakotas to Michigan, and down to Louisiana. But utilities in the smaller Southwest Power Pool (SPP), extending from North Dakota to Texas incurred systematic losses as well. Meanwhile PJM, covering the central eastern seaboard states, is almost all merchant generation. But there, too, coal units owned by rate-regulated utilities operated out of the market.
So why would a utility elect to operate a coal unit “out of merit”, above market costs? It’s all a question of regulatory risk, or what a utility thinks it can get away with. Utilities face a much lower regulatory risk operating a non-economic coal plant out of merit than admitting that a plant isn’t cost effective to run, and potentially facing stranded costs. And under the assumption that the markets drive competitive operation, public utility commissions have typically allowed utilities to recover operating costs with only perfunctory review, rather than scrutinizing the economic rationality of their dispatch choices
Why are we just seeing this phenomenon now? In 2015, we hit an important benchmark: for the first time, energy market prices from non-coal power sources were consistently below the running cost of coal. Merchant generators responded quickly: every megawatt-hour of non-economic burn is a loss if you’re depending only on market revenues. But vertically-integrated coal units owned by monopoly utilities saw a different calculus: burn and recover excess costs from ratepayers; stop burning and face tough questions about if a“baseload” plant is still worth paying for.
The disconnect between energy market revenues and the recovery of fuel costs from customers continues largely unabated today. For many utilities, fuel costs are recovered through so-called “adjustment” dockets, pro-forma proceedings where utilities simply update the commission on how much they spent on fuel. Commissions have generally been under the impression that utilities in market regions operate economically – or if not, that there’s probably a good reason underlying. But utilities have resisted reporting back on market competitiveness and, as we’ve shown in this report, the decision to operate out of market is has a deep impact on ratepayers.
It turns out that operating a large cohort of coal units out of merit also has a huge impact on market prices. In our next blogs, we explore how non-economic dispatch has hurt clean energy and merchant generators - and what regulators can do about it.
-Jeremy Fisher, Sierra Club Environmental Law Program