The Unraveling of Cheap Gas-Fired Power Begins …

For years, gas has been touted as a cheap fuel and a cheap source of electricity. Maybe not so much in today’s world, but historically this has been the case. But not all gas-fired power plants are the same, and not all gas-fired power plants are as cheap to operate as proponents would have us believe.

A recent analysis by UCS examined how gas plants operated in regional wholesale electricity markets in the Midwest in 2019. This analysis looked at each week in 2019 when electricity providers operated gas plants in the regional markets MISO and SPP (covering 20 states across the central USA). It estimates how often electricity providers lost money at their gas plants on a weekly basis, creating losses that were often passed on to tied taxpayers – customers of vertically integrated investor-owned utilities, electricity cooperatives and municipal utilities – through their electricity prices.

During 2019, power providers in MISO and SPP lost taxpayers $ 117 million on operating gas plants uneconomically. Steam turbines (which are occasionally former coal-fired power plants that were converted to run on gas) and combustion turbines (which are generally used to accommodate peak loads) were responsible for the majority of these losses. Based on how regional markets are designed, this should not happen, especially during a year (2019) with low gas prices that would make it easier for electricity providers to generate cheap electricity and avoid losses. Unfortunately, there are ways for power providers to operate power plants uneconomically, and most often it is in the Midwest customers who are on the hook for the losses.

What power providers in these markets are supposed to do

Regional electricity markets (ISOs / RTOs) are designed to reduce costs for electricity providers and for customers. In these markets, electricity providers tell market operators how much electricity their power plants can generate and how much it costs to produce it. Market operators then select the cheapest resources to generate until the demand of the network is met. The power plants that run generate revenue from the market, which is intended to cover production costs (whose revenue exceeds that, electricity providers earn a profit that can be returned to taxpayers, shareholders or used to pay for other long-term costs of the plant). This process happens every hour of the year and helps ensure that the cheapest resources are used to meet the demand, benefiting both electricity providers and customers by minimizing the cost of producing electricity.

What’s really going on

Unfortunately, there are plenty of opportunities (and sometimes motivations) for power providers to skip the queue and manipulate the system. While market participants is intended to dictate when power plants are in operation (so that only the cheapest resources are used), electricity providers have the option of operating power plants when the choose no matter what the market operator dictates. The terminology for this behavior varies from market to market, but this phenomenon is generally referred to as self-planning and self-commitment and can lead to non-profit generation (where more expensive power plants operate instead of cheaper available resources). These terms are intended to be used sparingly, such as when a system is to be tested, if a system has a minimum of time, it must run before it can shut down, or if a system with a long start-up time along the way is needed for reliability reasons.

However, such terms can be exploited, causing power plants to operate uneconomically (by incurring losses), and lots of research has shown that this occurs among coal plants. One reason why electricity providers can operate uneconomically is to prove to regulators that their plants are still useful and to continue to have cost coverage for the plant’s costs. Another reason is to fulfill an electricity contract (whether that electricity contract is in the taxpayers’ best interest is another story).

Such designations may also apply to inflexible power plants. For example, self-planning allows a power plant that takes up to 12 hours or more to ramp up (as most do, including gas systems) to jump to the front of the line and run while ramping. This happens occasionally for reasons of reliability, but not exclusively. However, this often means that cheaper (and often cleaner) resources that will benefit customers stand still or are limited and miss out on market revenue. Or if the inflexible gas plant is finally screwed up and the market is no longer favorable, but the plant owner does not want to cycle it all the way down, it can partially ramp it down to keep it ready for future periods, creating customer losses by still in operation when market revenues do not support it.

And some power providers just do not take into account all the operating costs when they send their operating costs (through their market bids). If an electricity provider does not take proper account of its costs, its resources can be called to operate in the market when the real operating costs are higher than the market revenues it earns.

That’s a lot – but the point is, there are plenty of opportunities for power providers to operate their power plants in regional markets incorrectly, including at times when cheaper resources could be used instead. The answers may vary as to why this happens, but whatever the rhyme or reason when it happens and losses occur (especially in the Midwest), it is bound taxpayers who pay for it on their bills.

What we found and what to do about it

In 2019, electricity providers in MISO and SPP did not consistently run gas plants economically. Steam turbines and gas turbines were often operated for weeks at a loss, and customers paid for it. During the year, during weeks when operating costs exceeded market revenues (which constitute uneconomic operations), power providers generated $ 117 million in disproportionate costs, most of which were passed on to customers through their local utilities. electricity prices. The distribution of these losses can be seen in the accompanying figure and table.

We have a few recommendations for how this phenomenon can stop so that customers really pay for the cheapest power available:

  • Regulators can do more to monitor the operation of the gas plant. Just because a plant is running does not mean it is running economically. Performing hourly and weekly analyzes like this with data that is not available to the public can ensure that power providers operate their power plants in the best interests of taxpayers. So requiring electricity providers to justify their operations when they seem uneconomical, and not to allow costs associated with uneconomic operations, is imperative to protect taxpayers and ensure they are not on the hook for unnecessarily high bills.
  • Market operators can tighten up their monitoring of self-planning and self-commitment and report on how often this happens in their markets at a higher resolution. SPP reports on self-planning and self-commitment aggregated across the footprint, and MISO estimates monthly losses from uneconomic self-planning, but reports neither on an hourly or even weekly level nor by generator or owner. Doing so will help regulators enforce prudent operational decisions, provide customers with transparency in how their electricity providers operate power plants, and it would lead to a more efficient regional system.
  • Market operators and policy makers can do more to increase the flexibility of the network and ensure that financial resources are available in the future to meet the needs of the network. Adding more financial resources would, in theory, create additional supply to the grid, which would reduce the frequency of uneconomic gas operations. Both RTOs have an extensive backlog of resources waiting to be connected to the grid. Almost all of these resources are clean energy resources, which are cheaper and cleaner than gas. But many of these projects have been waiting months to years to be connected to the grid. Market operators and policy makers can find ways to reduce the barriers that cheap clean energy resources face when connected to the grid, while strengthening transmission so that clean energy is available. This will undoubtedly reduce the need for expensive gas power for operation in the future and create savings for taxpayers instead of the uneconomical costs that taxpayers pay for now.

In 2019, a year when gas prices were at a record low, we saw signs that gas plants were not operated in the best interests of taxpayers. And current projections suggest that gas prices will not fall anytime soon, putting even more pressure on the gas-fired economy. Politicians, regulators and grid operators need to do more to monitor uneconomic gas production and reduce the barriers that clean energy resources (which can replace uneconomic fossil resources) face in meeting the needs of the grid. Doing so would protect taxpayers and ensure that taxpayers do not pay more on their bills than they should.

By Ashtin Massie, Energy Analyst.

Originally published by Union of Concerned Scientists, The Equation.


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