The Market for Electricity is Rigged

The Market for Electricity is Rigged

The preferential dispatch system used by many RTO/ISO grid operators favors wind and solar to the exclusion of critical baseload power from fossil fuel and nuclear power plants.

Preferential dispatching is destructive because it results in the closure of fossil fuel and nuclear power plants.

It could also be called discriminatory because it discriminates against baseload power.

The situation today is serious. It is calamitous because perfectly good nuclear power plants are being forced to close as the result of the preferential dispatch system.

A recent Hoover Institution Press publication Keeping the Lights On at America’s Nuclear Power Plants, framed the issue this way:

“The energy and reserves wholesale market structure itself represents a form of subsidy to renewable power generators with unreliable output.”
(Emphasis added.)

It also said:

“Low wholesale prices are good for consumers, but not if the market prices are lower than actual generation costs, which can occur if market participants are benefitting from out-of market revenue streams.”

[Emphasis added. Out-of-market, refers to production tax credits.]

Production tax credits have helped stimulate large investments in wind generation that has created an oversupply of electricity in many markets, which, in conjunction with preferential dispatching, has resulted in the displacement of traditional baseload power.

The Hoover publication pointed out, “Forty-nine of one hundred reactors now operate in deregulated states.” The other reactors are in regulated markets.

“Deregulated” markets use the lowest variable cost when selecting suppliers of electricity, where the lowest variable cost will virtually always be from wind or solar plants because they have no fuel costs. This results in wind and solar being selected over coal, natural gas or nuclear power plants whenever wind or solar generated electricity is available.

“Deregulated” markets have introduced a mechanism that virtually always selects wind and solar over coal, natural gas, or nuclear power.

Whether this was a deliberate effort to favor wind and solar to cut CO2 emissions to combat global warming is unknown, but the effect of preferential dispatching has been to close fossil fuel power plants, as well as nuclear plants.

The term “deregulated” markets is, for the most part,  synonymous with preferential dispatching.

Components of the grid: Transmission lines, substations, pole-mounted and pad-mounted distribution transformers delivering electricity to homes and businesses.
How electricity is dispatched to the grid is crucial to the long-term reliability of the grid.
Photos by D. Dears

 

The media has usually overlooked the effect of preferential dispatching when describing the threat to nuclear power plants. Instead, the media has pointed the finger at “low-cost natural gas.”

For example, here is a quotation from Turbomachinery Magazine:

“The carnage in competitive markets, where gas is the fuel to beat, has bloodied coal and nuclear heavy merchant providers.”

No mention of free fuel being the “fuel to beat.” No mention of preferential dispatching.

The market structure of preferential dispatching has become an issue not only in the United States, but also in Australia and Germany.

Here is a quotation from Network Death Spirals by Bryan Leyland, a New Zealand scientist:

“It seems to me that Australian power systems are heading toward a death spiral resulting from installing large amounts of expensive and unreliable wind and solar power.”

“A critical error in setting up the electricity market is that it does not reward generators that can guarantee to be available over peak demand periods over generators that cannot …. In a rational market generators that reliably provide electricity over peak demand periods should receive an additional payment for this essential service.”
(Emphasis added.)

The problem is not low-cost natural gas or greedy utilities.

The problem is “preferential dispatching” and it will destroy our electricity supply system if it isn’t eliminated. For additional information, See Controversial Fuel-Secure Rule  See also, Importance of Duck Curve

Preferential dispatching is an issue that must be resolved if we are to salvage our reliable and low-cost electric supply system from destruction.

Several suggestions have been made, including those by Bryan Leyland and Secretary Perry, for saving the grid system that has served Americans extremely well for over a century.

There are other solutions, such as return to the regulatory system used in the past, and still used by some states.

This article may be one of the first to identify the real threat to our grid.

No matter which solution is best, the “preferential dispatch” system must be eliminated.

. . .

6 Replies to “The Market for Electricity is Rigged”

    • The Energy Information Administration (EIA) 2015 report said the unsubsidized levelized cost of electricity (LCOE) for wind and solar in 2020 will be as shown below. Their costs today are obviously higher. Their 2016 report says they will continue to decrease, but at this point that’s pure conjecture.

      Wind, onshore: 7.1 cents per kWh
      Wind, Offshore: 19.1 cents per kWh
      Solar PV: 12.1 cents per kWh
      Solar Thermal: 23.4 cents per kWh

      For reference: Existing coal-fired LCOE averages 4 cents per kWh, while NGCC LCOE is less than 5 cents per kWH.

  1. Don, thank you for tackling this. I have found the rules in the supposedly “market” areas to be so complex and arcane that electricity is not a market, in any realistic sense. The rules are kludges on top of kludges.

    Do we have plants that only operate part time because they follow load? Well, we will pay them extra (capacity payments) to make sure they are available. Oh, we called on them to start and they said they couldn’t get gas? Gee, poor babies, we shouldn’t set the fine too high. Or maybe we should. Should the fine be more or less than their capacity payments? Let’s figure it out: how much should “not starting when called upon” cost them? It will take a formula…depends on the situation on the grid, and their situation and….

    In short, the “competitive market” is a series of kludges and approximations and special payments. It’s not a market.

    • You are 100% correct: The so-called competitive market is a set kludges that practically defy description.
      It’s extremely complicated, which is why I’m taking this one step at a time.
      It’s my intent to produce a series of articles that demonstrate how unfair and complex the rules are. The Duck Curve articles are the first. Today’s article is the second.
      I’ll tackle another area as soon as I am certain I can describe it accurately, and simply.
      Thanks for your comments.

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