Photo: Tikilucas/Wikimedia Commons

Seasonal Shutdowns: How Coal Plants That Operate Less Can Save Customers Money

, Senior Energy Analyst | December 20, 2018, 10:57 am EST
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There is a growing trend amongst coal plant operators: save customers money by switching to seasonal operation and operating less. Operators can secure those savings for customers because other resources (like wind, solar and other resources) are often available at lower cost. Reduced operations also translate to reduced emissions.

A growing trend

This was the strategy that owners of three coal plants in Texas took. The Martin Lake and Monticello coal plants, owned by Luminant went that route in 2015. The Gibbons Creek coal plant, owned by the Texas Municipal Power Agency and member utilities, followed suit in 2017.

Cleco and SWEPCO have joined in on the trend.

Cleco and AEP subsidiary SWEPCO are the primary owners of the Dolet Hills Power Plant in Louisiana.

The companies have announced that the Dolet Hills facility will switch to seasonal operation: it will only operate four months of the year between June and September when demand (and electricity prices) are highest primarily due to the need for air conditioning on hot summer afternoons.

The utilities’ own estimations indicate this will save customers $85 million by the end of 2020.

That opportunity to save money was the reason why several reports I authored in the past recommended that AEP and Cleco operate this coal plant less (if not shut it down altogether).

In October 2017, I wrote a report concluding that the owners of the Dolet Hills power plant in Louisiana (along with several other power plants throughout the region) were unnecessarily burdening customers. An AEP representative replied in the press that the company was “following market protocols” and that the conclusion was flawed, arguing that fuel costs were in fact fixed; that customers would not save money if the plant operated less.

A year later, I conducted another analysis that produced similar results and the same conclusion. You can read my previous blog post on that analysis here.

After the second report, AEP again insisted it was obeying market rules and asserted that reduced operations wouldn’t save customers money.

Now, months after denying it was possible, the company admits that turning off the plant 8 months of the year will save customers $85 million by the end of 2020.

How do seasonal shutdowns save customers money?

If it costs $25 to produce a unit of energy and the market price is $30 per unit then it makes sense to operate that power plant and take that $5 margin and use it to pay down debt or other fixed costs.

If market prices stay at $30 the power plant keeps operating as much as it can and begins to pay down the fixed costs and eventually the revenues go to building up a profit. If the market price drops down to $20 and the unit keeps operating, then the owner’s profits begin to erode. The longer the owner does this the more the profits erode. The money that they “save” by shutting down for part of the year can then be passed along to customers (or shareholders).

What’s next?

AEP owns several other coal plants that, if operated less, have the potential to save customers money. This includes Pirkey (located in Texas) and John Amos (located in West Virginia). AEP has committed to investing in renewables and reducing carbon pollution. Shutting down a coal plant for eight months of the year could reduce that plant’s emissions by up to 60%. Reducing the output of those power plants represent an opportunity to reduce carbon pollution and reduce customer bills at the same time.

Photo: Tikilucas/Wikimedia Commons

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  • Hachilio

    Between June and September … Can a coal power plant really compete against PV in their optimal months? Reducing marginal costs by installing PV will quickly erode that business case.

    • JDanielUCS

      A valid point but one that is predicated on the solar getting built. The state has been reticent to building out utility scale solar and policies, like net metering, that encourage distributed solar has been under attack for some time. This is why advocacy plays such an important role. Someone has to go into the utility rate cases and proceedings to show what a smart investment solar can be. Thanks for reading the blog and feel free to subscribe to my blog to get notifications when future posts come out.