When should I retire? It’s a question a lot of people start asking themselves as they age. It’s also a question many owners of old power plants are asking themselves as newer, cleaner, and more affordable power comes online in Texas, and as new environmental standards take effect. But just like the personal decision to hang up your spurs, retiring is not always the owner’s decision to make. Or is it?
Technically, if an energy company decides to permanently shut down a power plant in Texas’s energy market, or take it offline for a long period of time, it can do so at its own discretion. However, since the electric grid has to match supply and demand of electricity at all times, it has to make sure it has enough power to replace the retiring power plant and that the retirement of the plant won’t lead to any local congestion or line overload problems. If the grid operator thinks the power supply will be in trouble if a certain power plant shuts down, it can intervene to say, essentially, “don’t retire. Here’s a bunch of money to stay open.”
Electric market insiders call these “reliability must run” or RMR contracts. ERCOT, the grid operator for most of Texas, offers these contracts to power plants if they determine they need to stay open to ensure Texas has enough power. These can be pretty lucrative contracts, especially to power plants that will close because they cannot compete with other power sources, such as wind farms.
How does ERCOT determine if a plant has to stay open? It does its own analysis.
So what? Isn’t this all good?
On one level it is very good that ERCOT performs this analysis and contracts these resources if needed. However, a lot of stakeholders are calling for reform. The Sierra Club, large industries, and even some energy companies are concerned that some companies could “game” the system by announcing a retirement and then getting a lucrative contract to stay open and make money.
Thankfully, ERCOT is listening.
With low natural gas prices and continued investments in new wind and solar energy, many old power plants are facing real market pressures, reportedly losing millions of dollars per year. As an example, a recent Institute for Energy Economics and Financial Analysis report found in its analysis that seven of the coal plants in Texas will likely bleed money over the next several years (download the report here).
In a recent analysis, ERCOT found that over the next 15 years, some 15,000 megawatts of older power plants -- including nearly 10,000 megawatts of coal -- are likely to retire. While it is good for Texas when dirty coal plants and older inefficient natural gas plants retire and are replaced by renewable energy, there are legitimate concerns about local reliability in the areas where plants retire, but also concerns that ERCOT could overreact and pay a bunch of old plants to stay open that really aren’t needed.
A Matter Of Faith
Should all power plant retirement announcements be taken at face value? It’s natural to assume so. The market is fundamentally shifting towards newer and cleaner energy resources, which means older dirty fossil fuel plants are bound to retire. However, squeezing the most possible profit out of an asset is also natural if you’re only concerned about the bottom line.
Recently, ERCOT approved a 25-month RMR contract with NRG Energy on an old natural gas power plant known as Green Bayou in the Houston area. ERCOT argued that the plant was needed to prevent overloading a local transmission line. Under the negotiated terms of the contract, NRG could earn up to $63 million over the two-year period for making a plant available that it said it wanted to retire. This in turn could also undermine the energy market by interfering with how energy prices are set if the plant actually is ordered to run.
Calpine just announced it plans to retire another power plant in the same area, and ERCOT initially indicated it was considering also offering this power plant a contract to stay open, at least for next summer. While these plants may cost millions of dollars, the real potential that large coal plants like Luminant’s Big Brown and Monticello would cost far more if they announced retirement and were given an RMR contract for potentially hundreds of millions of dollars.
Compounding the issue is the short amount of time ERCOT is given to assess the situation. A company only has to give 90 days notice before it closes its doors. If the planned retirement is legit, as it should be, it doesn’t give the grid operator much time to ensure no adverse effects will occur, and certainly not enough time to beef up transmission lines, or transformers, or add new generation.
ERCOT To Rescue Itself?
For the last six months, ERCOT and its stakeholders (including the Sierra Club) have begun a real discussion of RMR reforms, and three changes have already been approved by ERCOT’s Board of Directors.
1. A new protocol that requires any generator that receives an RMR contract to pay back any capital upgrade costs back to the market should they reverse their initial decision to retire. In other words, if the company that was going to close its power plant decides not to after it gets an RMR contract, it has to pay back the market for any improvements it made to its facility. This should help prevent companies from gaming the system (announcing retirement, getting a fat contract, and then getting back into the market when prices improve).
2. ERCOT will actually run RMR generators manually, only adding them into the grid at the “back of the line” so they don’t undercut electric market prices or run when they don't need to.
3. ERCOT will change the way it analyzes whether to issue an RMR contract by modifying its study process so it is not essentially assuming a worst-case scenario for RMR contracts. This change did receive some opposition from entities like Luminant that stand the most to gain from a worst-case analysis procedure.
These changes have already made an impact. ERCOT reversed its initial decision to issue a contract to Calpine based on these new criteria, and it has also announced that the NRG Green Bayou contract is likely to be shortened, since another plant in the Houston area will be coming online toward the end of 2017.
Other ideas are still floating around ERCOT, including how impacts that RMR contracts have on market prices could be adjusted, how to consider “alternatives” to RMR contracts, and perhaps most important of all is the question: Is 90 days long enough for the market to consider, analyze, and give a contract to a generator?
Don’t Forget: The PUC Pulls The Strings
ERCOT, the grid operator, is overseen by the Public Utility Commission, a state agency that is run by three commissioners appointed by the governor. Recently, they opened up a new rulemaking on the RMR process and released a draft rule for comment.
Among the proposed changes is lengthening the amount of time by which generators must give notice to ERCOT to 180 days, and giving ERCOT more flexibility to reject an RMR analysis by considering alternatives to a contract, such as transmission line upgrades or even load management programs to reduce local loads.
Many of the ideas contained in the PUC proposal are similar to suggestions made by the Sierra Club, and we will make more comments in the coming weeks.
Assuming the PUC adopts something similar to the draft rule, the RMR process could improve and make expensive RMR contracts less likely, which is good for all Texans.
That being said, significant work remains to be done in the Texas market to help usher in a smooth transition to more clean energy solutions. Sierra Club will be working with ERCOT and the PUC to make sure that new resources like energy storage, onsite solar energy, and demand response can participate in both energy markets and as solutions to reliability issues.
Look for more in the coming months!