Understanding Challenges Facing Power Plants On The Grid
“In the Biden administration’s “everything is judged by climate change” approach to governing, we are about to launch the next big spending plan, but to what avail, since China and India continue to build coal power plants? ”
We were recently pointed to commentary about the Great Texas Blackout by Meredith Angwin who spent the last 10 years studying the workings of electric grids. For four of those years, she served on the Coordinating Committee for the Consumer Liaison Group associated with Independent System Operator – New England (ISO-NE), her local grid operator, that helps advise it. She is a chemist by academic training and became one of the first women to become a project manager at the Electric Power Research Institute, where she led projects involved with renewable and nuclear energy. During her career, Mrs. Angwin headed projects that focused on reducing pollution and increasing reliability on the electric grid. She certainly has credentials for discussing the grid.
We read Mrs. Angwin’s comments about the Texas grid and its operator the Electric Reliability Council of Texas (ERCOT) with interest. Based on her background, we were also attracted to her knowledge of the workings of ISO-NE, which happens to be the operator of the power grid for the region where our summer home is located. Last fall, Mrs. Angwin authored a book, Shorting the Grid: The Hidden Fragility of Our Electric Grid, which we purchased and have been working our way through, as we write this article. There is much about how electric grids operate – both technically and commercially, including the politics of electricity – that we did not fully appreciate until now. We plan to delve into some of these topics in future Musings articles, but for now, we wanted to start with helping people to understand the basic economics of power plant operators who are competing to sell their output on the grid. Understanding this aspect of electricity and grid operations helps to explain some of the failings of ERCOT during the blackout, and, also, why the system has worked reasonably well up to now. More importantly, the failings with grids that she points out in her book highlight potential risks for the nation’s entire electricity grid as we pursue green energy policies.
Electricity purchased by grid systems is acquired through auctions – either for energy (kilowatt-hours) or capacity. As Mrs. Angwin points out, generating plants have different bidding strategies based on which type of auction they are competing in. She pointed out, and demonstrated, how the rules for auctions have become increasing more complex, forcing generators to devote more time to figuring out their bidding strategies than operating their plants. Her conclusion about the outcome of these auctions is: “In the long run, RTO [Regional Transmission Organization – grid operators] markets punish reliable plants and support unreliable plants.” Who would have thought that the people responsible for overseeing the operation of our power supplies, and importantly its stability, might wind up designing methods to acquire electricity that work against this mandate?
In 2015, nuclear power plant owner Entergy Corporation decided to shut down its Pilgrim nuclear plant, located in Plymouth, Massachusetts on Cape Cod, by 2019. The company cited “market conditions and increased costs” as reasons for the closure. It was reported that the plant needed to spend potentially tens of millions of dollars for safety upgrades, although there had not been a safety incident since 1968, and then under its prior owner. The plant in Plymouth was the only nuclear facility in Massachusetts and produced 14% of the state’s electricity. Its closing would certainly stress the state’s power system. As part of its explanation for why it was shutting the plant, Entergy prepared a chart showing the issue the plant was facing when competing against other power generation plants to sell its electricity.
The chart shows the source of revenue streams for various types of power plants operating on the ISO-NE grid. Nuclear and wind are straight forward. NG-CC is a natural gas-fired, combined cycle plant, which is another provider of baseload power generation. ST-Coal represents a steam-turbine plant powered by coal, which heats water to create steam to drive the turbine producing the electricity. NG/Oil ST is a dual-fuel plant (either natural gas or oil) that generates steam to drive the turbine. NG/Oil GT is a plant fueled by either natural gas or oil to drive a gas turbine (internal combustion with no steam produced) to produce electricity.
Exhibit 9 Power Plant Revenue Mix Impacts Price Competition SOURCE: Entergy Corporation
What the chart shows is that a nuclear plant receives about 90% of its revenue from selling kilowatt-hours (kWh), while gas plants get anywhere from 40% to 80% of their revenues from other sources, such as capacity payments and ancillary-services payments. If the gas plants had to subsist on the prices they received for selling kWhs to the grid, they would have a much harder time undercutting nuclear power pricing. Wind is a special category, as those plants rely heavily on power subsidies (Production Tax Credits and Renewable Energy Certificate payments) for their revenues.
As Mrs. Angwin outlines, each of these power plant types develops a bidding strategy going into auctions based on the type of auction – energy versus capacity. Because nuclear and coal power plants make lots of energy (kWhs), they live and die by energy prices. As a result, they need reasonably high prices on the grid to survive.
Gas-burning plants get much of their revenue from capacity payments, which supposedly guarantee that these plants will be available when their power output is needed by the grid. They generally do not operate continuously, therefore they earn less from selling energy. Given those conditions, they will fight any changes to the auction systems that threaten capacity payments.
Wind, just as with solar plants (though none existed in New England at the time of Entergy’s presentation), will fight to preserve the various power subsidies, as those are significant sources of income, and often the key to profitability. Interestingly, renewable plants often are seen pushing for higher capacity payments, which does put them somewhat at odds with the gas-fired plants.
What does the struggle between energy sales and capacity payments mean? We see that during 2008 to 2020 for ISO-NE, capacity payments are winning over selling energy, especially in the latter years. This is driven by two considerations. As shown in a second chart, the energy mix for the ISO-NE grid has also changed over this time-period with renewables and natural gas gaining share at the expense of nuclear, coal and oil. The decline in the contribution from coal and oil is significant because these power plants can, and do, maintain fuel supplies on site, which can be particularly important during winters when just-in-time natural gas supplies and renewable power are not readily available. We would note that both shortfalls were observed during the Texas Blackout.
Exhibit 10. Capacity Payments Are Winning Over Energy Sales SOURCE: Consumer Liaison Group, PPHB
The chart showing the percentage of energy production in New England by fuel type covers nearly a two-decade span, during which significant changes in the power market occurred. Energy imports to the region are not included in the chart, nor are fuel supplies behind the meter. The former consideration is notable since New England receives electricity generated from hydro sources in Canada. Renewables include landfill gas, biomass, other biomass gas, wind, grid-scale solar, municipal waste, and miscellaneous fuels. Because this chart ends in 2018, the impact on the region’s fuel mix has changed materially with the closure of the Pilgrim nuclear plant in 2019. The bottom line is that the more stable sources of power in the region have been phased out in favor of natural gas and other fuels, largely due to state renewable fuel mandates and competitive forces. Natural gas prices have been in decline throughout much of this entire period, but most notably during the past several years. With cheap energy, natural gas generators have opted to push for more capacity payments, since selling energy doesn’t earn much for these plants. In many cases, these gas generators have had to rely on liquefied natural gas shipped in from abroad due to the inability to tap domestic supply sources as there are no U.S.-flagged LNG tankers to move the fuel between states.
Exhibit 11. How New England’s Power Mix Has Changed SOURCE: ISO-NE
Once we gain a better understanding of the revenue sources of various generators attempting to sell power to the grid, it becomes easier to appreciate the disruptive impact of cheap natural gas, along with the perverse impact of renewable energy subsidies in further altering the energy pricing landscape. All power sources have a problem competing against renewable power plants that receive subsidies for the power they produce. These subsidies enable them to pay consumers to take surplus power at times, while still booking profits. It is impossible for thermal power plants to earn revenues during these periods of negative electricity prices. As a result, consumers are reluctant to pay high prices for thermal plant power, which helps them offset the cost differences during those times when market prices for electricity turn negative.
As we learned during the Texas Blackout, many generating plants were not winterized, along with most of the wind turbines. Given the nature of the price competition between power sources, it is not surprising that thermal generators are not looking to invest more money in their plants to winterize them, since they would have to charge more for their power or suffer lower profits. These plant operators are making business judgements that the lost revenue from being shut down for a few hours or even a day or two during a winter weather event will not exceed the cost of winterization. Because of the economics of power plants, we have constructed a grid that is at risk of more frequent blackouts. That possibility will increase as the Biden administration pushes for more subsidies for intermittent power, further reducing the stability of the grid during weather extremes. This increased grid vulnerability is worthy of serious debate before we embark on further actions that risk destabilizing the grid even more.