After pleading with Congress for so many years, and then at last winning the requisite legislative authority to impose mandatory and enforceable standards for electric reliability, to replace its...
Coal's Raw Deal
The bias in RTO markets, and how FERC might fix it.
After years of voicing emotional complaints of little help in forging concrete improvements, ("Electricity is different." "You can't change physics!"), opponents of electric utility restructuring at last have begun to build the kind of logical, coherent and step-by-step arguments that sway regulators and resonate with laymen and politicians.
Recall that the Federal Energy Regulatory Commission (FERC) intends to revisit its decade-old Order 888 , and the pro forma Open Access Transmission Tariff (OATT)—and you begin to see a real counter-revolution.
For the missing link—the driving force, if you will—look no further than right under your nose. Look at coal, the fuel that still forms the hidden backbone of the electric utility industry, but which has remained sadly out of fashion for most of the past decade. Experts now say we need more coal-fired generation, despite the environmental concerns. However, they also believe that the basic regime now in place at the regional transmission organizations (RTOs), with its day-ahead energy markets, financial transmission rights (FTRs), locational marginal pricing (LMP), and a bid-based and security constrained dispatch, exerts a marked bias against coal-fired plants.
Since the industry’s very beginnings, utilities have tended to plan for the “long run”—the time frame in which “we’re all dead,” as the British economist John Maynard Keynes once said, famously. Utilities have done quite well with that. By contrast, the RTOs focus on the short term.
The Problem Illustrated
A 600-MW coal unit costs roughly $1 billion to construct. If we instead constructed 600 MW of gas-fired peaking capacity, it would cost us only about $300 million.
At today’s coal prices, the variable production cost from a base-load coal plant would be less than $20 per MWh. In comparison, variable production cost
from a gas-fired plant