Xcel Energy's Sherco Generating Station Coal Power Plant Photo: Tony Webster/Wikimedia Commons

The Billion-Dollar Coal Bailout Nobody Is Talking About: Self-Committing In Power Markets

, Senior Energy Analyst | June 3, 2019, 9:26 am EST
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This interview was first published on May 21, 2019, in Forbes

Nearly two-thirds of the United States’ power plants operate in competitive wholesale markets.  Market rules typically prescribe that only the cheapest set of resources may run—nowadays, those are often renewable energy resources. Despite a growing trend of coal losing on cost to renewables and natural gas, coal generation remains a dominant player in many of these markets.

New research by Union of Concerned Scientists Senior Energy Analyst Joe Daniel uncovered the fact that coal plants in “competitive” wholesale electricity markets were being run uneconomically, meaning they accrued significant losses for months at a time. This behavior defied economic logic, but could be explained by regulation. These plants are owned and operated by vertically-integrated utilities (companies that own their generation sources and directly serve retail customers in an area without alternative suppliers), who receive cost recovery for expenses related to these coal plants under regulatory approval outside of the market.

To investigate the size of the problem, Joe analyzed wholesale electricity market data to better understand what drives investment in fossil fuel and clean energy power plants in those markets. Much of this market distortion was happening for plants owned and operated by vertically-integrated utilities which are permitted to “self-commit” their coal plants, forcing them to run at above-market costs. In this way, regulation functions as a subsidy to keep coal plants running, and customers are on the hook.

Energy Innovation’s Director of Electricity Policy Mike O’Boyle interviewed Joe to learn why this is happening, the risks of this practice, and what it means for consumers and clean energy’s future in these markets.

Mike O’Boyle: Can you explain what you mean by coal self-committing?

Joe Daniel: Most people think the system operators that coordinate competitive power markets are centralized decision-makers for the electricity grid. That’s true, in theory. In practice, it’s a bit more complicated. Market rules give participants like utilities and power plant owners a great deal of decision-making authority. For instance, power plant owners can decide when to make their resources available, then offer those resources into the market for others to purchase.

Some owners allow the market to “commit” their resource by specifying what price and output level they are willing to operate at. Market committed resources allow market forces to drive increases or decreases output, or turn off units entirely. In aggregate, these economic bids provide the system operator with enough information to choose the power plants that minimize overall system costs.

However, market participants can bypass this process by self-committing the unit, essentially superseding the market operator’s decision of whether to run that plant. Instead, power plant owners can tell the market that the unit must remain on, which requires that it operate at some minimum level of output. Barring an emergency, the operator can’t tell the unit to turn off even if there’s cheaper energy available on the market.

MO: Please explain how you figured out that self-committing is happening.

JD: A few years back, I was working on a utility proceeding within the Southwest Power Pool (SPP) organized market with a lawyer who noticed that the utility’s coal plant, which previously operated at a high capacity factor, suddenly stopped running. The lawyer and I eventually discovered that the utility-owner had changed its operational paradigm from “self-commitment” to “market-commitment.”

So, I began researching self-commitment, market rules, and hourly coal plant operations across the country to understand why coal plant operators were running at seemingly illogical times, based on the low prices for solar, wind, and other sources in these markets. Originally, my focus was on SPP, but I quickly expanded my analysis to the Midcontinent-ISO (MISO), PJM Interconnection, and Electric Reliability Council of Texas (ERCOT) competitive energy markets, too.

MO: How many coal plants did you examine and where are they located?

JD: Most recently, I completed an analysis screening every coal-fired power plant that operates in PJM, MISO, ERCOT, or SPP, roughly two-thirds of all existing U.S. coal plants.

RTO/ISO markets in the United States

RTO/ISO markets in the United States

Roughly 100 gigawatts (GW) of coal, or nearly half of the coal in organized markets, received additional scrutiny that included analyzing hourly coal plant revenues. These coal plants operated at a loss for at least one month during the study periods; even worse, customers were footing those bills.

Compared to SPP and MISO, PJM and ERCOT had fewer, but still, some bad actors who engaged in self-committing to the detriment of their customer’s wallets.

MO: What has your research on self-committing shown?

JD: This opaque practice undertaken by coal plant owners hurts customers and contributes to climate change.  My analysis indicates that self-committing uneconomic coal costs consumers an estimated $1 billion dollars a year in the regions I evaluated. But I also found that not all coal plant owners engage in this inefficient practice. Rather, the worst offenders are vertically integrated utilities that can lose money in the competitive market and then recover those losses on the backs of retail customers, including those most economically vulnerable to higher electricity costs. Customers of vertically integrated utilities are “captive”—they have no choice but to accept these costs.

My research is ongoing, so it is hard to say with precision what the cumulative environmental impacts are of coal plants that operate like this, but it’s not good. Statistically, an uneconomic coal plant would be replaced by either (a) emissions-free wind energy; (b) a natural gas plant that, while not clean energy, has lower emissions rates than coal; or in a worst-case scenario, (c) a more efficient coal plant with marginally lower emissions rates.

MO: How does this practice affect renewables in wholesale electricity markets?

JD: Markets are supposed to ensure that all power plants are operated from lowest cost to most expensive. Self-committing allows expensive coal plants to cut in line, pushing out less expensive power generators such as wind, depriving those units from operating and generating revenue.

The practice of self-committing also reduces market revenues for all the generators that do get called. Wholesale electricity prices are set by the marginal cost of supplying one unit of energy – the most expensive power plant selected by the operator sets the price. In the absence of self-committing, this price for energy would increase, raising revenues for all selected power plants.

Coal plant self-committing reduces market revenue for all generators.

Coal plant self-committing reduces market revenue for all generators.

Properly functioning markets are predicated on properly functioning price signals. If the market prices are distorted, then what happens to the market? Nothing good.

MO: You’ve called self-committing coal a hidden coal bailout. What do you mean by this, and how does it compare to state subsidies for renewable energy?

JD: Self-committing is regressive, reducing the efficiency of our electricity grid, exploiting customers, and exacerbating emissions when coal plants run more. It also artificially distorts market prices to favor aging technology while limiting investments in low-priced renewables.

On the other hand, renewable subsidies are policy decisions that are proposed, scrutinized, and enacted by democratically-elected representatives. Consequently, the policies—whatever their strengths and weaknesses—are at least the product of a transparent, intentional process, and those who put them in place are accountable for the subsidies’ effects. But that’s not what we have with self-committing.

MO: Is self-committing coal happening in any states with clean energy goals?  If so, is it undermining the energy transition?

JD: Yes and yes. Minnesota, for instance, has set clean energy goals yet has uneconomic coal plants self-committing in the MISO market. This reduces grid flexibility and may force wind farms to curtail output because the electric grid is essentially zero-sum. If a coal plant is finagling the market to take the electricity it produces, it is preventing some other unit from providing that electricity. That might be a wind farm. It might be a gas plant. Regardless, it is hurting consumer pocketbooks and our health.

MO: What can be done about self-committing coal plants?

JD: Self-committing is a choice the utilities are proactively making. In some markets, this is as simple as selecting a different drop-down option. Power plant operators simply have to change their bidding behavior when offering their power plant into the market, which would allow the market operator to more efficiently run the whole system.

Alternatively, utilities could choose to seasonally operate the plants they own, similar to the strategy taken by owners of several coal plants in Texas and Louisiana. Just this past winter, Cleco and AEP subsidiary SWEPCO announced that Louisiana’s Dolet Hills coal facility will switch to operating only four months of the year. The utilities’ own estimations indicate this will save its customers $85 million by the end of 2020.

State regulators have tremendous influence over the utilities they oversee. They can’t assume the controls of power plants but can create incentives or penalties to ensure utilities behave better.  In some states like Washington, Oregon, and Montana, regulators have come up with a better mechanism to allow for cost/profit sharing that aligns price incentives. Alternately, a regulator can disallow the costs associated with running a power plant uneconomically, forcing investors to take a loss rather than forcing customers to bail out those plants.

Photo: Tony Webster/Wikimedia Commons Under Creative Commons Attribution-Share Alike 2.0 Generic License
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  • Paddyfan

    There may be more to this than is covered in the article. How much wind power is involved in the various control areas? In Ontario before the coal plants were shut down the owner was in cahoots with the system operator to have coal available when the volatile wind capacity suddenly dropped. Coal plants need a certain amount of time to build up (and retain) heat thats’s longer than the period in which wind capacity can fall. Wind capacity is nondispatchable in Ontario, which, from the article is not the case in many US control areas. Thus, the coal plants had to run, either as Operating reserve or just wasting steam. The fiddle was different, though. Instead of changing the unit commitment rules the system operator allowed negative bids to trick the dispatch algorithm. There was some collateral damage in the form of nuclear units dispatched off and hydro plants spilling water. The system operator invented “surplus baseload” as an explanation for the negative pricing, the rise in OR prices and water and nuclear being wasted. For more on the Ontario fiasco, see the book, Electric Vultures Selling Bottled Lightning, although this episode is not discussed, as too much ‘inside baseball” for the possible readership. The larger point is that so-called electricity “markets” are not markets but elaborate administrative auctions that can be and are gamed. Unfortunately it’s in no-one’s interest to blow the whistle on the whole sorry rent-seeking mess, since the hapless consumer foots the bill.

    • Jonathan Galt

      Also compare what the cost is to have wind stand idle vs having fossil fuel plants stand idle but ready, and the costs of startup and shut down. These guys are neither dumb nor evil, and they get incentive pay based on profitability.

      It’s not as simple as, “energy from wind is cheaper.” Until we have cheap universal grid storage, the pure price per KWh generated is secondary, not primary.

  • Scott Williams

    Last year I heard an anecdote from someone who interned at a Wisconsin utility that their company did not run a certain wind plant that they owned very often even though it was available and able to produce power. This boggled my mind, because in a competitive market this wind plant would likely be one of the lowest marginal cost resources (and thus one of the first) to run. After reading this article, I have a feeling that this self-committing phenomenon was going on and that they favored running some of their coal plants even if they were less economical. I only have anecdotal evidence of this, but would be curious to see if your analysis could back this up.

    • JDanielUCS

      This is a really interesting anecdote. There is some limited data available about when wind is being actively curtailed but little to no public data is available (that I’m aware of) could determine if a wind farm or wind turbine was available (i.e. wind was blowing within operational rages) but not being offered… Fascinating. Would you mind if I shared this anecdote with some folks in WI?

    • RJ

      You would think this should be popping up on the market monitor’s radar if they are withholding an economical plant.

    • Jonathan Galt

      Absent plentiful grid storage, using the “cheapest” source may be a fallacy when the ramp down / ramp up for the fossil plant costs exceed the potential savings. Nothing is free in life, that’s why German energy is so expensive at night – they simply outsourced their pollution to other countries who then charge exorbitant prices to maintain the necessary extra generating capacity only to produce in the dark hours.

  • RJ

    A subsidy is a subsidy. You can try to justify one because it is approved Congress but it’s still a subsidy that distorts the market. If you truly believe in the market all forms of generation should compete without subsidies of any kind.

    • JDanielUCS

      Not all subsidies distort the market, some help correct for existing market failures. Economists and policy experts have written at great lengths about what makes a good/bad subsidy, it usually gets distilled into: “Tax bad things, subsidize good things.” I tried to summarize this issue this report (pages 28 and 29): https://www.sierraclub.org/sites/www.sierraclub.org/files/Backdoor-Coal-Subsidies.pdf

      • Jonathan Galt

        Interesting piece. Generally speaking, however, there are rarely if ever “good things” to subsidize. Instead, subsidies generally are political grandstanding masquerading as “progress,” incentivising the purchase of immature and inferior products to signal the “virtue” of the politician at taxpayer expense. It is a horribly corrupt practice and should be forever banned.

        The exception would be when there is absolutely no other choice, nothing else will do or else we face extinction or similar calamity. In WW II the subsidization of nukes saved millions of lives, on both sides somewhat paradoxically, in a way that nothing else could. As I said, these situations are truly rare.

        The question then becomes, is Climate Change one of these exceptions? That comes down to whether or not the threat is real and whether or not we can move the dial with subsidies enough to tip the balance. With the stipulation that I accept the IPCC report as 100% accurate, and that I allow monies for basic research as NOT being “subsidies” (not picking winners and losers), the answer to both of these questions is clearly “no.”

        Why not? Because we are inventing our way out so fast that subsidies cannot possibly make a noticeable impact on the final outcome, good or bad. By 2028 the experts are coming to agree that solar plus sufficient grid storage to provide reliable power will be cheaper than energy from fossil fuels in most parts of the inhabited world. Six years later they will be half the cost, and the only thing slowing adoption will be how fast we can build factories. By 2050 the world will be CO2 neutral with respect to burning fossil fuels, and Global Greening will be mopping up the excess.

        We didn’t stop buying typewriters and steam engines because we ran out or because governments made us.

    • gkam
    • Jonathan Galt

      I absolutely agree with banning all government subsidies. These aren’t actual subsidies, however, but internal “total cost per hour” calculations.

      Remember that executives make their real money based on profitability. Wind farms sitting idle incur little or no idle cost, and not running them saves wear and tear. Fossil plants incur costs even sitting idle, perhaps as much as when operating at full capacity minus the fuel. Add in the spool up / ramp down costs, and suddenly the full cost of delivered energy may favor keeping the fossil plants running with only slow changes in output to keep them near best efficiency. When you spend a million to save five hundred thousand, you are losing.

  • Ben

    I found this article lacking because it doesn’t give any explanation as to *why* the utilities choose to do this. The implication, I guess, is that it is either (a) maliciousness, or (b) that they have a profit motive for burning coal that they don’t have for other power sources. But other explanations also seem possible. For example, perhaps shutting down a coal plant completely has associated costs when you want to restart it again, and/or a long restart time lag, and so it makes sense to keep it running at a minimum level rather than shutting it down. Or perhaps there are contractual obligations, that require the utility to run the plant for some number of hours per day in order to obtain the price that the plant has agreed to produce for. Or… I could think of lots more, I imagine. I don’t know which is true; but it would be nice to hear what reasons are actually causing this, rather than just assuming/implying that it is maliciousness or greed in all cases.

    • RJ

      Good questions. The cost of restarting a coal plant can be an issue. Depending on the plant it can be anywhere from 6-48 hours. Many utilities look at wind forecasts and use those to determine what market prices will be and the need to operate. The utilities also look at the expected costs (losses) to run at minimum loads for a period vs. the startup cost and decide whether to keep the plant online or not. Some utilities may look at it from an engineering view – coal plants are not designed to start and stop frequently and it is hard on equipment leading to costs related to breakdowns and maintenance. Some utilities might want the plant to be left online at minimum levels so they can ramp up to higher load levels to take advantage of opportunities in the real time market. As you noted a lot of potential reasons that could be playing a role. Also should note that nuclear plants are also playing a role in the self commitment issue.

      • JDanielUCS

        You are right, some utilities do that due-diligence but some don’t. If a power plant loses a $1 million in a single month then they either aren’t looking ahead or they are doing a bad job at it. And while coal plants aren’t designed to ramp up and down, they can shut down for a few months at a time (which my analysis suggests would save them money). Lots of coal plants are going that direction: https://blog.ucsusa.org/joseph-daniel/seasonal-shutdowns-how-coal-plants-that-operate-less-can-save-customers-money

      • RJ

        Agreed on the plants doing extended shutdowns which a good utility should be doing the analysis on. I wonder how many are doing that vs. how many are playing the shutdown for 3 days (or whatever it is) offsets the startup costs and then we can restart or we can lose money for 2 days at minimum because on day 3 we need to be back online.

      • Jonathan Galt

        While human error (“doing a bad job”) may play a part, it is far more likely you simply don’t have all of the data to you that they do. Execs get paid on profitability. Greed is your friend.