Consumers across the heartland are paying about $60 million more a year than they should for electricity to power their homes, farms and businesses.
That is because of a practice employed by some coal-fired generators to the detriment of wind power producers. It’s long past time for the regional grid operator to put an end to this practice called “uneconomic self-commitment,” but, unfortunately, the Southwest Power Pool is deliberately downplaying the issue.
The Southwest Power Pool (SPP), one of the nation’s grid operators, has as its members the owners of more than 800 electric generation plants serving millions of customers in 14 states—Arkansas, Iowa, Kansas, Louisiana, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Oklahoma, South Dakota, Texas and Wyoming.
Their electricity is dispatched every day into a market designed—in theory—to deliver the lowest-cost power needed to serve customer demand and maintain a reliable electric grid.
In recent years, clean wind power has grown to the point where it provides 25 percent of the available generating capacity in SPP. Wind is often the cheapest power on the system, so it’s dispatched first. That’s because its fuel—wind—costs nothing, and fuel costs are the biggest component of the energy price.
But in SPP, the majority of generation is fossil-fueled, with 41 percent of capacity coming from gas and 26 percent from coal.
Even though wind is cheaper, coal stubbornly accounted for nearly 35 percent the actual electricity produced in SPP last year.
In part, that’s because of a practice known as self-commitment, which in the eyes of SPP’s Market Monitor and many others is a significant issue. Utilities in SPP are able to buy power from their own costlier fossil plants, suppressing prices for clean-energy producers and leaving customers paying more for power.
Customers Pay the Price
Who suffers from the end-run around the market? Customers, for one, who have to pay off the costs of more expensive and unnecessary power plants in the region when cheaper power is available.
Even though it’s clear that new rules are needed in SPP to curtail the practice, the grid operator is downplaying the problem, issuing a paper in late September—“Self-Commitment in SPP’s Day-Ahead Market”—that argues self-commitment is not a big problem.
SPP didn’t give stakeholders a chance to review or comment on its conclusions, adding to the perception that this wasn’t a fair review.
The white paper explained that “market participants may choose whether to offer a generating unit into the market or self-commit. Self-committed units are ‘price-takers’ that commit to run no matter the price at which the market compensates them for electricity sold.”
So, in practical terms, on a day where wind sets the market price, that means a coal-fired power plant or a nuclear plant that chooses to self-commit would be paid based on the price set by low-cost wind. These plants, in effect, get some payment instead of sitting idle and making no money.
The result can be uneconomic self-commitment where generators that operate “out of merit order” in SPP’s economic dispatch process may suppress market prices. While that might sound good for customers, it actually impedes the development of lower cost renewable energy in the market and keeps the costlier plants around longer than they otherwise would exist if they played by the market rules.
By contrast, were the market to operate only by rules that dispatch the most economic generating resources, efficient generators would likely realize increased revenues, while the costlier units would be more likely to retire or run less.
The data in the SPP White Paper makes it appear that a small number of generators operating uneconomically are depressing prices by 4%-14%, amounting to excess energy costs to consumers of about $60 million per year.
Time for a Change
It’s time for a fair market to give clean energy a chance to compete. Several concerned organizations, including Climate + Energy Project, Earthjustice, NRDC, Sierra Club, and the Sustainable FERC Project are now asking SPP’s Board of Directors, its Regional State Committee, the Market Monitor and SPP staff to examine market solutions that would minimize self-commitments and level the playing field for less expensive, clean energy resources.
As the SPP Market Monitor, SPP’s watchdog, found in its December 2019 report, while the volume of self-committed megawatts has declined over time, they remain in SPP nearly half of the total megawatt volume generated from 2014-2019. The SPP staff study found that, on average, 10 percent of self-committed generation in SPP in 2019-2020 would not have been chosen for commitment by the market on a least cost basis. In other words, an estimated 10 percent of self-committed generation in SPP is uneconomic.
While self-committed units “cannot be eliminated completely, the practice can likely be reduced substantially,” the monitor said. “By reducing self-commitment, prices and investment signals will likely be less distorted. A smaller distortion will likely help market participants make better short-run and long run decisions.” That’s a wonky way of saying that using uneconomic self-commitment to mask a plant’s true costs undermines one of the points of having a market by stifling innovation and increasing costs.
There is a pressing reason for SPP to right the ship when it comes to self-committing generating units.
Wind power has been coming on strong in SPP states, quickly replacing coal-fired power. Wind was the leading source of power in SPP in the first half of 2020, averaging 34 percent of the fuel mix while coal came in at 26.6 percent.
As SPP President and CEO Barbara Sugg said in a recent Platts podcast, “We have a lot of wind. We have a lot of wind coming in.” The grid operator added almost 750 MW of wind capacity in 2020 with another 5,300 MW in the scheduled to be operational in the next few years.
But SPP cannot allow its incumbent generators to distort the market to keep its older dirty power plants alive. It is in the public interest for SPP to take a serious look at taking all possible steps to minimize self-commitment.
To do so will take greater transparency into the workings of the SPP and a willingness by the grid operator to impose real limits on this practice. This should include more oversight by the market monitor, tighter guidelines on self-commitment and meaningful sanctions on operators that consistently ignore market signals. This would lead to a more efficient power market, lower costs for consumers and a cleaner generation mix in SPP.