Consumers Energy is spinning up for its next long-term plan where it will propose which resources to retire and which resources to invest in. The utility has previously pledged to phase out its coal-fired power plants and replace them with clean energy resources such as solar and energy efficiency without building any new gas plants. However, the utility is looking to exploit a loophole in its promises to customers: instead of building a new gas plant, it is looking at buying an old gas plant.
Here is why that is a bad idea.
Other (better) options
Recently, Consumers issued what is known as a request for proposals (RFP). The utility has put forth a narrow set of parameters for energy developers to respond to. Consumers only wants to know about:
- Gas-fired power plants
- That are already operational
- Of a specific size
- In a specified location (MISO Local Resource Zone 7); and
- Willing to sell the asset to Consumers.
Will Kenworthy, Midwest Regulatory Director at Vote Solar, reviewed EIA data and could only find one gas plant that would even be eligible to respond.
That kind of limits Consumers’ options. And, if that respondent has no competition, then do we really expect the utility to get the best possible deal?
(No. No, we do not.)
There are far better options than the restrictive parameters Consumers’ proposes. Options that are more flexible, will probably cost less, and don’t saddle customers with the unnecessary risk associated with investing in gas-fired power plants.
Instead of putting out such a restrictive RFP, the utility should put out an all-source RFP, allowing any and all resources to be considered to meet the specific services the utility needs. It could achieve this by encouraging any and all resources that can provide the needed services to compete. By encouraging competition through an all-source RFP, the utility will be able to procure the actual services it needs at the lowest cost.
The truth is that the utility doesn’t need 1,600 MW of gas
The utility might need 1,600 MW of capacity that can deliver to a specific zone in some future year, and if so, that should be the goal of the RFP. But why limit it to resources that are already operational if the capacity need isn’t for some future year? Why limit it to a certain fuel type when other types of resources might be lower cost? If the utility can procure 1,600 MW of capacity from a diverse suite of smaller resources with a lower overall cost, why not do that?
In other states, when utilities have scraped RFPs for gas plants in exchange for all-source RFPs for specific services, utility customers have seen big savings. It also tends to result in more solar and less gas getting selected by utilities.
In the 2018 report, Soot-to-Solar, UCS used detailed reliability modeling to show how utilities can replace retiring fossil fuel plants in Illinois with a suite of local clean energy investments. Organizations like RMI have shown that these portfolios of clean resources can outperform gas plants across the country.
It is also hard to see a justifiable reason why the utility must own the generation asset. I mean, sure, monopolies are going to want to monopolize, but there are other ways to procure capacity.
Buying a gas plant exposes utility customers to all sorts of unnecessary risks (commodity price risk, market price risk, and regulatory risk). Bi-lateral contracts, on the other hand, can help limit customer exposure to some of those risks. And while signing long-term contracts that lock in customers to polluting resources is a bad idea, shorter-term contracts can be a reasonable course of action. Particularly when paired with ramping up renewables.
Ramping up on other resources will also allow the utility to simultaneously ramp down generation from coal-fired power plants, which means valuable reductions in pollution today.
The lowest cost, lowest risk, lowest emission, and most flexible option is probably some mix of ramping up renewables, building storage, investing in energy efficiency, procuring demand response, and maybe topping off with some short-term contracts for any remaining capacity needs. But the utility is not currently pursuing an all-source RFP that would produce those benefits.
Not a good deal for Consumer’s consumers
One of the purported justifications for buying a gas plant is the ability to control the dispatch. But the whole point of having a market is that utilities can pool resources and rely on the lowest cost resource that is available, as opposed to locking-in customers with the costs of a specific company-owned asset.
UCS and others have thoroughly documented how utilities operate coal-fired power plants even when cleaner and cheaper resources are available and there is nothing preventing them from doing the same with a gas plant.
Right now, any gas plant owned by an independent power producer is only going to run when prices justify it, but a monopoly utility might be tempted to run a rate-based gas plant regardless of price. This means the pollution from that plant might also go up. And, as the build-out of zero-marginal cost renewables continues in MISO, there will be fewer hours in the day that it is economic to run older gas plants. If the plant ends up getting self-committed, it is likely to increase costs and emissions.
UCS has previously warned state regulators about utility proposals to buy or build gas plants in MISO; for example, our experts have pointed out the dangers of monopoly utilities investing in gas plants in Minnesota and Michigan.
The bottom line, this is bad for the bottom line
But this is also a bad deal for the investors of Consumers Energy. Buying an old gas plant will require a little capital and a lot of operating costs (mainly fuel costs). But Consumers Energy doesn’t make a profit off fuel costs. If Consumers invests in lower-cost resources that are capital intensive (like wind, solar, and storage), it can deliver benefits to both customers and investors.
Now is the time to pass on gas
When it comes to decarbonizing the electric grid, there is nearly universal agreement: We need to build as much wind and solar as fast as possible; and, we need invest in a lot more transmission and distributed resources (like rooftop solar, energy efficiency, and demand response) that will help keep downward pressure on customer bills.
Studies might disagree on what technologies are needed for the last 10%-20% of decarbonization, but in the next 5 years, we need to deploy as much capital as we (as a society) can on wind, solar, storage, efficiency, flexible demand, demand response, and transmission.
If a homeowner has money sitting around and wants to put solar on their roof, let’s find a way to do it.
You don’t own a home? Let’s find a way to get access to community solar.
You are a corporation, not a person? Let’s make sure companies have access to markets to buy as much clean energy as they want.
And if a monopoly utility needs to spend capital on capacity, that capital should be investing in resources and technologies that facilitate the necessary transition off fossil fuels, not further entrench us.