By - Jim Vess

Utilities running inefficient coal plants in wholesale power markets cost ratepayers

Energize Weekly, October 30, 2019

Electric customers of regulated utilities in four of the biggest U.S. wholesale electric markets shouldered a $3.8 billion burden for inefficient coal plants between 2015 and 2017, according to a Sierra Club analysis.

The Sierra Club report focused on the “shelf-scheduling” of coal plants by regulated utilities in markets run by the Midcontinent Independent System Operator (MISO), Southwest Power Pool, Electric Reliability Council of Texas (ERCOT) and PJM Interconnection.

In these markets, wholesale electricity is traded and merchant power plants operate based on the market prices, but the Sierra Club concentrated on regulated utilities, with guaranteed rates, that can choose which of their plants to run and when.

The report found that utilities ran their coal plants even when there was cheaper electricity on the market, and their plants were more expensive to operate.

“Our analyses demonstrated that, in periods when energy market prices are low, coal plants owned by regulated, vertically integrated utilities are systematically operating coal plants out of merit, to an extent not seen in merchant-owned coal plants,” the report said.

The difference between the market electricity prices and the cost of the self-scheduled plants’ electricity added up to $3.5 billion for the period.

When the cost of fixed operations and maintenance and revenues from capacity markets in MISO and PJM are added, the Sierra Club calculated that the net revenue loss over the 2015-2017 period was $3.8 billion.

The majority of the losses – ranging annually from 79 percent to 87 percent – were made by coal plants owned by regulated utilities. Those losses, the report said, are likely made up in higher rates.

In addition, operating these out-of-market plants could be a damper on market prices. For example, in MISO, the Sierra Club modeling calculated that in 2017, the median hourly market price would have increased by about $7.70 a megawatt-hour (MWh), or 30 percent, if coal units had been run or not run based on market prices.

“Captive customers of vertically integrated utilities that are part of multi-state energy markets may be paying more for electricity generated by coal units owned by their utility than could reasonably be obtained through market energy and capacity, particularly during periods of sustained low market energy prices,” the report said.

The study offered Duke Energy Indiana’s Gibson 5 plant, a 665 MW coal unit, as a case study. In early 2014, electric prices ranged from $38 a MWh to $64 a MWh, well above the plant’s $32 MWh production cost.

In the second half of the year, however, the market prices dropped to the cost of producing electricity at the Gibson plant.

The utility began ramping the plant – in effect, turning it off and on – trying to avoid the market’s lowest cost hours. The plant was run nearly every day even when market prices were “substantially below the cost of operation,” the report said.

The analysis estimated that Gibson 5 generated almost no net market revenue in the second half of 2014.

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