For years, gas has been advertised as a cheap fuel and a cheap source of electricity. Maybe not so much in today’s world, but historically it 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 want us to believe.
A recent UCS analysis examined how gas-fired power plants operated in regional wholesale electricity markets in the Midwest in 2019. This analysis was conducted every week in 2019 when electricity suppliers operated gas plants in the MISO and SBA regional markets (covering 20 countries worldwide). central United States). It assesses how often electricity suppliers lose money on their gas plants on a weekly basis, generating losses that are often passed on to taxpayers – buyers of vertically integrated utility companies owned by investors, electricity cooperatives and municipal utilities – through their electricity prices.
During 2019, electricity suppliers in MISO and SPP lost $ 117 million in debtors due to uneconomical management of gas plants. Steam turbines (which are occasionally former coal-fired power plants converted to run on gas) and combustion turbines (which are generally used to meet peak demand) were responsible for most of these losses. Based on the way regional markets are designed, this should not happen, especially during the year (2019) with low gas prices that would make it easier for suppliers to produce cheap energy and avoid losses. Unfortunately, there are ways in which electricity suppliers can run power plants uneconomically, and it is most often in the Midwest that customers are at a loss.
What should electricity suppliers do in these markets?
Regional electricity markets (ISO / RTO) are designed to reduce costs for electricity suppliers and customers. In these markets, electricity suppliers tell market operators how much electricity their power plants can produce and how much it costs to produce. Market operators then choose the lowest-cost resources they will generate until network demand is met. Operating power plants generate income from the market, which should cover production costs (if income beyond that, electricity suppliers make a profit, which can be returned to taxpayers, shareholders or used to pay other long-term costs at the power plant). This process occurs every hour of the year and helps ensure that the cheapest resources are used to meet demand, which benefits both suppliers and customers by minimizing electricity generation costs.
What’s really going on
Unfortunately, there are many opportunities (and sometimes motivations) for electricity suppliers to skip the line and manipulate the system. While market operators aim to dictate when power plants operate (so that only the cheapest resources are used), electricity suppliers have the ability to start power plants when they choose, no matter what the market operator dictates. The terminology for this behavior varies depending on the market, but this phenomenon is generally called self-scheduling and self-commitment and can lead to off-the-shelf production (in which more expensive power plants operate instead of cheaper available resources). These markings are intended to be used sparingly, for example when a plant needs to be tested, if the plant has the minimum time it needs to operate before it can be closed, or if a plant with a long start-up time is required for reliability.
However, such labels can be used, causing uneconomical operation of power plants (causing losses), and many studies have shown that this happens among coal-fired power plants. One of the reasons why electricity suppliers can operate uneconomically is to prove to regulators that their plants are still useful and to continue to receive cost recovery for power plant costs. The second reason is the fulfillment of the contract on electricity supply (the second story is whether that contract on electricity is in the best interest of taxpayers).
Such markings can also be used for inflexible power plants. For example, self-scheduling allows a power plant that takes up to 12 hours or more to increase (as most do, including gas plants) to jump to the front of the line and operate while moving. This happens occasionally for reasons of reliability, but not exclusively. However, this often means that cheaper (and often cleaner) resources that would benefit customers are idle or have been reduced and are missing out on market revenue. Or if that inflexible gas power plant finally grows and the market is no longer favorable, but the plant owner does not want to shorten it to the end, he can partially reduce it to be ready for future periods, which creates customer losses still working when market revenues do not support it.
And some electricity suppliers simply do not take into account all labor costs when submitting their labor costs (through their market supply). If an electricity supplier does not calculate its costs properly, its resources may be called upon to operate in the market when the actual labor costs are greater than the market revenue it earns.
That’s a lot – but the point is that there are many opportunities for electricity suppliers to mismanage their power plants in regional markets, including times when cheaper resources could be used instead. The answers may be different about why this is happening, but regardless of the rhyme or the reason, when it happens and losses occur (especially in the Midwest), taxpayers pay for it in their accounts.
What we found and what to do about it
In 2019, electricity suppliers in MISO and SBA did not consistently operate gas plants economically. Steam turbines and gas turbines often operated for weeks at a loss, and customers paid for it. During the year, during weeks when labor costs were higher than market earnings (which is an uneconomical business), electricity suppliers generated excessive costs of $ 117 million, most of which was passed on to customers through their local utilities. electricity tariffs. The distribution of these losses can be seen in the attached figure and table.
We have a few recommendations on how this phenomenon can be stopped, so that customers really pay for the cheapest available energy:
- Regulators can do more to monitor the operation of the gas plant. Just because a factory works doesn’t mean it works economically. Conducting such analyzes by the hour and week, with data not available to the public, can ensure that electricity suppliers operate their power plants in the best interests of taxpayers. Then requiring electricity suppliers to justify their operations when they seem uneconomical, and banning costs associated with uneconomical operations, is imperative to protect taxpayers and ensure they are not on the hook for unnecessarily high bills.
- Market operators can tighten control over self-scheduling and self-commitment and report how often this happens in their markets in higher resolution. The SBA reports self-scheduling and self-commitment aggregated throughout the footprint, and MISO estimates monthly losses from uneconomical self-scheduling, but does not report on an hourly or even weekly basis either by manufacturer or owner. This would help regulators make sound operational decisions, provide transparency to customers as to how their electricity suppliers operate power plants, and lead to a more efficient regional system.
- Market operators and policy makers can do more to increase network flexibility and ensure that economic resources are available in the future to meet network needs. Adding more economic resources would in theory create an additional supply for the network that would reduce the frequency of uneconomic gas operations. Both RTOs have a large backlog of resources waiting to be connected to the network. Almost all of these resources are clean energy sources, which are cheaper and cleaner than gas. But many of these projects have been waiting for months or years to be connected to the network. Market operators and policy makers can find ways to reduce the barriers faced by cheaper clean energy resources when connected to the grid, while strengthening transmission to make clean energy available. This will undoubtedly reduce the need for expensive gas energy for future work and create savings for taxpayers, instead of the non-economic costs they pay for now.
In 2019, a year in which gas prices were at record lows, we saw evidence that gas plants did not operate in the best interests of taxpayers. And current projections show that gas prices will not fall soon, which will further affect the economy of electricity on gas. Policy makers, regulators and network operators need to do more to monitor uneconomical gas production and reduce the barriers that clean energy resources (which could replace uneconomical fossil resources) face to meet network needs. This would protect taxpayers and ensure that they do not pay more into their accounts than they should.
Author: Ashtin Massie, energy analyst.
Originally published by the Union of Concerned Scientists, The Equation.
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