Dive Brief:

Regulated utilities cost ratepayers over $3.5 billion from 2015 to 2017 through uneconomic coal practices, according to a report released Tuesday from the Sierra Club.

Vertically-integrated utilities consistently operated coal units based on their own scheduling rather than relying on market signals to determine when running that plant would be most economic, the report found. The practice, known as self-scheduling, became common when there were fewer cost-effective alternative resources, but now hinders the ability of other resources, wind and solar, to compete in power markets, research has previously found.

Without self-scheduling, coal-powered generation would have dropped 10% and the median market price would have risen 30% or $7.70/MWh in the Midcontinent Independent System Operator (MISO) from 2015 to 2017, according to modeling scenarios run for the report by Synapse Energy Economics.

Dive Insight:

Money is lost under self-scheduling when market prices drop below the cost of operations — meaning the cost to produce coal power is more expensive than the revenue the generated electricity would make. But self-scheduling is sometimes necessary to minimize the cost of completely powering off a facility.

Price fluctuations often happen seasonally. For example, Duke Energy's Gibson 5 unit in Indiana was operating just below market prices in the latter half of 2016, generating $8.6 million in net energy revenue over that time period. But in January through March as well as in May, market prices dropped below production prices and the unit lost an estimated $5.3 million in net energy revenue over those months, according to the report.

For other units, the practice is much more severe. Wisconsin Power and Light's Edgewater Unit 5 lost $8.3 million in net energy market revenues in 2016, according to the report, after its $26.2/MWh production costs remained above median market prices every month of that year. Wisconsin Power and Light was not immediately able to respond to Utility Dive's request for comment.

Wisconsin Power and Light's Edgewater Unit 5's operating costs were higher than even the 75th percentile of market prices every month except July, August and December, when those costs were still higher than the median market price. The unit operated at a 63% capacity factor that year, going offline only in April and May to be fitted with a new scrubber. Sierra Club

"The problem is almost exclusively contained within rate-regulated coal plants, and that becomes a problem when market prices sink," Jeremy Fisher senior strategy and technical advisor at Sierra Club's Environmental Law Program, and main author of the report, told Utility Dive. "When market prices are high, it's sort of an invisible issue."

The issue remained invisible to many regulators and was largely seen as a non-issue for utilities when coal was king, gas prices were high and renewables had a much smaller market share. During that time, plant operators were pretty much guaranteed to recover lost revenue, and the question was more whether companies should operate their plants at full or partial power.

But as natural gas and renewable costs have dropped, "market prices fall into the space where your level of uncertainty now as a coal operator is higher than it used to be," said Fisher.

Self-scheduling may still be beneficial to utilities when market prices are floating around the production cost, because it might make sense to take a financial hit during evening hours to capture high prices during the day, and in the process avoid the high costs of turning off the plant.

"The ability for Duke Energy to self-commit a generating unit is critical in avoidance of startup expense and operational risk incurred by cycling a unit off-line and then back on-line during short periods of uneconomic operation," Duke spokesperson Phil Sgro told Utility Dive in an email.

"An economic forecast is performed each business day for plants such as Gibson Unit 5 to inform" grid operators when the resource is available, he said. "This review projects expected operating margins from operation of each unit for the next 7-14 days based on unit operating parameters and expected market prices."

But the fact that merchant plants have largely been able to avoid uneconomic scheduling is evidence that it is possible for utilities to change their practices and operate coal economically, according to Fisher.

Merchant coal plants that compete in the market independently are incentivized to operate their plants economically because they don't have the rate-recovery flexibility of regulated utilities. As a result, they rarely power their plants at a loss, keeping an eye on market projections several days ahead of time and managing processes in line with those estimates.

Rate-regulated utilities have different profit incentives — when a coal plant has a higher capacity factor, on paper it looks like that plant is needed and should be kept online rather than retired early.

For these reasons, the issue of self-scheduling is beginning to get more attention from regulators. Minnesota and Missouri have opened an inquiry into utility self scheduling practices and MISO, which has a high penetration of regulated utilities, has taken steps as well.

The majority of coal plants in the MISO market are rate-regulated, with a significant number of them operating at a higher capacity factor than market prices would call for. The starred plant is Edgewater unit 5. Sierra Club

Inefficiencies caused by self-scheduling were "more noticeable due to significant penetration of renewable resources (primarily wind) that can change dramatically day-to-day," the grid operator said in its 2019 integrated road map. As a response, the market operator developed a multi-day operating margin forecast, which MISO believes "could guide more economic generation start and stop decisions," spokesperson Allison Bermudez told Utility Dive in an email.

Other markets, like PJM, also have inefficiencies but the grid operator "does not take a position that self-scheduling is a practice that requires action by stakeholders," spokesperson Jeff Shields told Utility Dive in an email.