Self-Scheduling: How Inflexible Coal is Breaking Energy Markets

April 24, 2019 | 3:05 pm
Wikimedia Commons
Joseph Daniel
Former Contributor

Over the past year, I have looked at the hourly operations of over one-third of the coal fleet in the US and have come to a startling conclusion: Each and every one of the coal units I have investigated have been uneconomic for at least one month. That is, the costs to operate them in a given month exceeded the revenues they earned in the energy market that same month.

Financially, most (if not all) of these coal plants would have been better off turning off.

By operating during periods of time when operating costs exceed revenues, coal-fired power plant owners are costing consumers a $1 billion a year in inflated utility bills.

Here is a simple way of looking at it: The fuel and variable costs associated with producing electricity (production costs) stay relatively flat over the course of a year. The market price, on the other hand, fluctuates. Most coal plants turn on and stay on for as long as they can. They might not run at full capacity all 8,760 hours of the year, but they will run at some minimum operating level, rather than incurring the expenses of turning off.  However, the losses incurred by staying on often far exceeds the expenses of turning off.

In this illustrative example, a power plant with $26/MWh productions costs that stays on all year it will lose money in the spring and fall. Maybe it can make up for those losses in the summer, but would it would be better off if its owners turned it off.

The competitive electricity markets in the United States weren’t designed to support this inefficient practice. However, in practice, utility companies have found a way to keep uneconomic coal plants operating by exploiting a market rule known as “self-scheduling.”

A better way

A coal plant might be able to recover its costs in the summertime but ends up taking a loss in the spring and fall. While the power plant might look solvent at the end of the year, power plant owners (and utility customers) would be better off financially if the power plant shut down seasonally.

Some utilities have chosen to shut down coal plants seasonally and only operate a few months of the year. SWEPCO and Cleco, two utilities that own and operate the Dolet Hill coal plant in Louisiana, found that they will save customers tens of millions of dollars by only operating the plant in the summer. They aren’t the only utility to figure this out. To read more about seasonal operations, feel free to read my blog on the subject, here.

Consumer impacts

This practice is costing consumers an estimated $1 billion dollars a year.

That research shows that not all owners of coal plants engage in this particular inefficient practice. Rather, it is disproportionately vertically integrated utilities, utilities that own generation and directly serve retail customers that have no choice or alternative suppliers. Those types of utilities can lose money in the competitive market and then recover those losses on the backs of captive retail customers, including those folks who are most economically vulnerable to higher energy costs.

Far-reaching implications

A billion-dollar-behind-the-scenes-bailout is bad enough. But, if you think about the far-reaching implications of this practice, it’s clear it undermines the underpinnings of competitive energy markets and results in wind, solar, and energy efficiency all being undervalued by utilities.

Wholesale market price

Where wholesale markets have been established, the market price for electricity is determined by a clearing price that all generators get paid (known as a locational marginal price, or LMP). The price is set by the most expensive unit that clears the energy auction at a given time. This has given rise to the general belief that the market price represents the most expensive unit on the system. However, it rarely works out so cleanly in real life.

Markets are supposed to make sure that power plants are operated in “merit-order” from lowest cost to operate, to most expensive to operate. Self-scheduling allows expensive coal plants to cut in line, pushing out less expensive power plants.

Properly functioning markets are predicated on properly functioning price signals. If the market prices are distorted, then what happens to the market?

Self-scheduling allows expensive coal plants to cut in line, pushing out less expensive power plants. High-cost coal plants (in yellow) push out lower-cost resources and deprive all resources that do operate out of some amount of revenue.

Deprives competitive generators of revenue

Self-scheduling artificially drives the market price down. This deprives competitive generators of revenue which reduces the incentive for more competition. Market prices have been low for several years now, putting a strain on competitive generators that operate coal, nuclear, and even gas. The economic woes of these generators could be linked in part to the self-serving practices of their monopoly brethren.

As consumers, we generally think of low wholesale prices as being good because those low prices should then flow to us. One reason why this practice is so nefarious is that the high costs of the coal plants are eventually passed along to consumers, depriving consumers of the benefits of low wholesale prices.

Stopping this practice might result in slightly higher wholesale prices of electricity in the short run but it would reduce the overall costs of running the system, and those overall savings should flow through to customers.

We also take a hit in the long run. The current costs to operate the system are supposed to be reflected in the wholesale prices, but they aren’t. Consequently, a distorted signal is being sent to developers that ought to build lower cost resources (including wind and solar) to enter the market.

Transmission planning

Artificially low market prices don’t just impact generation investment decisions; it also impacts transmission development. Planners and developers look at geographic price differentials to identify constraints that would make building a new transmission line economically rational.

A regional transmission operator like MISO has historically been restricted in the north/south direction with a notable constraint at the north/south divide. This is a physical constraint.

Some utilities that serve the southern states, most notably Entergy, have pointed to market prices as justification for not expanding north-south transmission. Many of the MISO south states have been flooded with self-scheduled coal, thereby pushing more affordable generators off the bid stack. Coal plants with productions costs of $30/MWh or even $40/MWh have been operating year-round, but the market-clearing price is rarely that high. The distorted market price has created a perception that there might not be a need for new transmission. In reality, new transmission would allow MISO south states to gain better access to the low-cost wind that is available in the rest of MISO.

Undermines how we value renewables

In many parts of the country, the calculation to value renewable energy and/or energy efficiency is through an esoteric process known as an “avoided cost study.” Avoided costs studies look at the costs avoided by investing in clean energy; these avoided costs are the benefits of clean energy. These benefits include avoided energy, avoided capacity, avoided emissions, and many more.

Avoided costs are used to calculate small scale renewables through a process set out in a law known as PURPA. You can read UCS’s primer on PURPA, here.

As noted by UCS, PURPA has been an incredibly effective measure in promoting renewable energy and one of the largest drivers for renewables in the US, along-side renewable portfolio standards, and renewable energy tax credits.

PURPA has done a lot to drive renewable energy.

In the case of PURPA, self-scheduling coal reduces market prices, which are often used to determine avoided energy costs. The avoided costs feed into a “PURPA rate”, the rate which small scale renewables are paid for producing electricity.

As a result of self-scheduling, many wind and solar facilities are being underpaid.

Similarly, energy efficiency and net metering are often evaluated using energy market prices as a proxy for the “value” those resources provide. When that happens, utilities can press pause on energy efficiency programs or even nix net metering.

Whether it is for PURPA, rooftop solar, or efficiency, many monopoly utilities ask regulators to approve avoided energy costs that are based on the market clearing prices and then turn around and run power plants whose costs are far above those market clearing prices.

How’s that for working the system in your favor?

Would eliminating self-scheduling fix the problem?

No. Self-scheduling is simply a loophole that many utilities are currently using to fleece customers. Close that one, they very well might find a new one. The trick to solving this problem is to address the problem directly and intentionally.

One of the most direct ways I can think of to address this problem is for state utility commissioners to disallow the costs associated with the above-market costs associated with running their fleet. But there are plenty of other ways.

A recent report that outlined ways to improve energy markets, that also noted the problems with self-scheduling. The report’s authors suggested that more transparent data and reporting on the practice might help serve as a disinfectant.

Maybe there are other good ideas out there. Maybe you have one? If so, share your thoughts with me on Twitter, where you can find me talking more about this and other esoteric energy issues.