In this episode
- Joe Daniel breaks down when and how coal plants are profitable
- We learn about the history of energy use in the US
- Tradition gets put under the microscope in favor of science
Timing and cues
- Opener (0:00-0:42)
- Intro (0:42-2:30)
- Interview part 1(2:30-12:24)
- Break (12:24-13:22)
- Interview part 2 (13:22-23:32)
- This Week in Science History Throw (23:32-23:38)
- This Week in Science History (23:38-27:57)
- Outro (27:57-28:58)
This Week in Science History: Katy Love
Editing and Music: Brian Middleton
Research and writing: Jiayu Liang and Pamela Worth
Executive producer: Rich Hayes
Host: Colleen MacDonald
Colleen: Joe, welcome to the podcast.
Joe: Thanks for having me.
Colleen: So, you're an energy analyst with a background in engineering, policy, economics, environmental science. And you've been kind of looking at the economics of energy markets, and specifically, sort of coal bailout strategies. But tell me, we were talking earlier, and you mentioned sort of a moment, four years ago, when something happened.
Joe: Yeah. So, about four years ago, during a utility proceeding in Oklahoma, an environmental lawyer for the Sierra Club asked the utility expert, why one of their coal plants had stopped operating a few months ago and had not begun to operate again. And the expert's response was something along the lines of “the utility has changed its operational paradigm from one of self-commitment to market commitment.” And nobody knew what that meant. We knew what those words were, but in that particular order, it didn't make sense to us.
So, they asked me to do some research into what this was. And it turned out that utilities in these competitive energy markets are essentially allowed to bypass the market decision-making process and engage in something called self-commitment, where the utility themself decides, "We're gonna operate this coal plant regardless of whether its objectively economic to operate or not." And thus began my more analytical and quantitative research into the hourly operations of nearly every coal plant in the U.S.
Colleen: So, when you started looking at the hourly operation, what did you find?
Joe: Well, it turns out that a lot of the coal plants in the U.S., essentially turn on and then stay on. And that's how they've operated since they were, you know, built. And they've never really changed that sort of operational paradigm. But markets have changed a lot in the last 40, 50 years. And market prices are no longer sufficiently high to justify running these coal plants all out year round. And it would be far more economically advantageous for the owners of these power plants to shut them down for a month or two months at a time when the market prices aren't sufficiently high.
Colleen: Explain that to me a little bit more because it seems like shutting something off would not be the way to make money.
Joe: Yeah. No, it's a little bit unintuitive. So, imagine if the energy market price was $30 and it costs you $25, to produce electricity. Well, then you produce electricity at $25, you get paid $30, you make $5, fantastic. And you keep doing that and you keep building up a war chest of earnings. But then the market prices drop down to $20 and it still costs you $25 to produce electricity. If you keep producing electricity, you're gonna be losing $5 which you had made earlier in the year and now you're gonna be losing that amount of money. And so, if you just shut down for that period of time, because market prices change over the course of a day, over the course of a year. They're highest in the summer when demand is high, and they're low in the spring and fall.
Colleen: So, why aren't utilities shutting down then?
Joe: Some of them are. In fact, this was, I think, one of the most illuminating findings of my research was there's fundamentally two or three types of utilities depending on how you wanna look at it. The first is a merchant utility or independent power provider. And independent power providers are entirely reliant on the markets for their revenue. So, they have to operate in an economically rational way. So, they wanna only operate their power plants when their cost is $25 and the market price is $30. And it turns out, they do that. They're relying on the markets and they operate exactly as the markets were designed.
Then there's two other groups. Public Power, which I'm not gonna talk about, and then, vertically integrated monopolies. And these are the utilities that own the power plants. But they also own the wires that deliver the electricity and they have captive customers, like you and me, that are in Kansas, or Michigan, or, you know, parts of the U.S. that haven't undergone something called restructuring. So, these utilities maintain that monopoly status and can essentially charge the customers whatever the costs are to operate their power plants, regardless of what the market prices are.
Colleen: So, is this where your plant that is losing $5, that $5 is being passed on to...
Joe: To customers.
Colleen: ...the customers.
Joe: So, what the utility does in that instance is say, "Well, it costs us $25 to operate this power plant, and the customers pay $25," even though the market price, the wholesale price that anybody can presumably buy electricity at, was less than that.
Colleen: Let's go back in time. How is the system originally set up?
Joe: If you wanna go back to the beginning, you have to go back to, like, 1879 and Edison inventing the light bulb.
Colleen: Take me there.
Joe: Okay. So, in the late 1800s, people like Andrew Carnegie and Rockefeller, and these monopolists, and industrialists, were kind of taking over the economy in the United States. And one of the most famous inventors of the time was Thomas Edison, who, by 1879, had invented the light bulb and had a dream to electrify the biggest cities in the world, including New York and Chicago. And in order to do that, he was gonna build power plants and electric transmission lines, and he was gonna, you know, design the entire system that was gonna operate on direct current electricity.
Then, Nikola Tesla immigrates to the United States and works for Edison, and advocates for alternating current. And Edison doesn't like the idea. He thinks it's dangerous. And they go their separate ways and begin this furious rivalry between the two of them. And J.P. Morgan ended up backing Edison. And George Westinghouse, he backed Tesla.
And these two groups of industrialists, one advocating for direct current, the other advocating for alternating current, engaged in what was now known as the current war, over which type of current would serve electricity. And by the late 1880s, what ended up happening is, there was such fierce free-market competition that prices got so low that companies went out of business. And then we got gobbled up. And they were consolidated and consolidated.
And by 1892, General Electric was formed by some subsidiaries of Thomas Edison's companies. And they controlled three quarters of all electricity in the United States. And the government stepped in and said, "All right, we're breaking up the monopolies. We're gonna regulate electricity.
So, for the first, you know, like 10, 15 years, it was like a real free market. But then, customers were not really getting great service, companies were going out of business. There was no certainty. And so, what the government said was, "We will give you a monopoly franchise in New York or in Chicago, in a given city. In exchange for that monopoly, meaning, nobody can come in and compete with you, we get to look at your financials and help set reasonable prices, something that is going to guarantee that you make enough money that you can then make investments, but not allow you to gouge customers." And that's how utility regulation worked for a very, very long time.
Colleen: So, was it working well?
Joe: It depends on who you ask. What had been happening was utilities were regularly overestimating how much demand there would be for their service, and so would build these big huge power plants that were not always necessarily needed or they didn't have good project managers and the overruns for these power plants would go through the roof, which is still a problem today.
And economists and leading thinkers started to question this. And the story goes that Ronald Reagan asked some economists at MIT to think through what it would look like to deregulate the electricity industry.
And in 1984, they wrote "Markets for power." And they laid out, essentially, an industry business model for divesting ownership in generation, so that the utilities that serve customers like you and me, on the distribution side, would no longer own power plants. And they would simply buy the cheapest electricity off an open market. But the problem was there was no open market. There was no way to calculate the price of that, you know, electricity cost.
And so, a different professor at MIT, a couple of years later, wrote an algorithm to calculate what the market price of electricity should be. And it was called locational marginal pricing. And it's the price that we use today to calculate electricity.
Colleen: So, tell me. Why does coal need a bailout?
Joe: Well, the current economic realities are that coal is no longer competitive to other sources of electricity. And in the current market structure, even without a price on carbon, most coal plants are losing money. And so, the only way they can stay afloat is if customers like you and me, essentially, bail them out through existing market rules or through utility regulation.
Colleen: What bailout strategies have you looked at and do you think are promising?
Joe: The way... You know, I describe this phenomenon as a bailout, as a way of bringing attention to regulators and to people that are involved in the industry, that the traditional way that utilities are charging customers, needs additional oversight because we often presume that the industry is run purely on economics. And that's not entirely the case. There are other things that are influencing utility decision-making processes.
And so, regulators, state utility regulators, have an opportunity. In fact, they're uniquely positioned to provide oversight in how these utilities operate. And if they just allow these utilities to recover costs without scrutiny, they're essentially bailing out on economic power plants like these coal plants.
Colleen: So, when you started looking at the hourly operation of many of the coal plants across the country, you discovered that most of them had been operating at times when it was uneconomic. Meaning, that it was costing consumers ultimately, in their utility bills. So, tell me about the seasonal shutdown and how that can work for consumers.
Joe: Yeah. So, like I mentioned, there is one type of utility that doesn't seem to engage in this practice, and that's the merchant coal plants. And what many of them are doing in Texas is... The first place I observed this phenomenon was in Texas, where the merchant utilities would say, "The market prices are so low in the spring and in the fall that we aren't gonna operate our power plants during those seasons at all." And that was what they said was in their best interests. And they rely on those markets for the revenue, so they're not gonna operate at a loss.
So, I took that market idea and started recommending it to vertically integrated utilities who have started to adopt a couple of utilities, have started to adopt that same paradigm. Essentially, the market prices for electricity vary based on how much demand there is. And they tend to be high and very spiky in the summertime, when AC load is highest. And they tend to be lowest during the mild seasons, fall and spring.
So, essentially, the analysis that I do looks at just the costs to operate a coal plant in terms of the cost of the fuel to burn it, versus the energy prices that they get. So, it ignores all of the fixed costs, the debt, paying your employees, all those costs are irrelevant in my analysis.
So, when I say a power plant could shut down for a month and essentially not lose money, as opposed to operating and losing money, what I'm saying is the power plant employees can all come in and sit around all day, play Solitaire on their computer and not burn coal, and it would cost the utility less money because they wouldn't be losing money in the market.
Colleen: But if it saves them money, why aren't they doing it?
Joe: And that's the question. And I think one of the reasons is inertia.
Colleen: This is how it's always been done.
Joe: Yeah. And recent changes in gas prices, increasing renewable energy, the market has fundamentally changed in the past 5 years, let alone the past 10. So, a lot of them were just kind of caught flat-footed. Like, the very first utility that I ever discovered, that was doing this practice, was doing it and stopped before I ever found out about it. But other utilities are a little bit slower.
And investigating this issue has revealed some really honest reasons and some reasons that don't make a lot of sense.
Colleen: So, when you looked at the cost to consumers, how granular can you get with that?
Joe: In theory, very granular. And that's what we're working on. What I was able to do thus far was look at the... There's four energy markets in the U.S. that are still very reliant on coal-fired power. There's the Southwest Power Pool, which stretches from North Dakota down to Oklahoma, and to part of Louisiana. There's the Midcontinent Independent System Operator, which covers Minnesota to Michigan, and then down into Louisiana.
There's ERCOT, which is the Electric Reliability Council of Texas, which is unsurprisingly, in Texas. And then PJM, which used to stand for Pennsylvania, New Jersey, Maryland, but now stretches all the way to Illinois, and into Kentucky, and Virginia. So, it's gotten quite a bit bigger. And it's actually the largest in terms of number of customers and the amount of people that it serves, it's the largest utility or largest electricity market.
And in these four markets, on any given year, it changes year-to-year, but roughly, there's a billion dollars in economic losses from these coal plants. That is, if they had turned off for a month at a time, they would have saved customers a billion dollars.
Colleen: Right. So, that's being passed on to...
Joe: And that's being passed on to customers.
Joe: Yeah, exactly. And that’s... about half of the United States is covered by those four markets. So, it's a big problem. And I only had the data readily available to me because these markets publish the data. So, in the southeast, and in the West, there aren't these market structures where the data is available. But there's very little indication that those utilities are not also just turning on their coal plants and letting them run until they have to shut down.
Colleen: How do we change this system? What can we do?
Joe: Yeah, it's a challenge because these things are incredibly opaque. And some would say, by design, the good news is utility regulators have started to take notice. And, you know, most of these Midwestern states are not hostile to coal-fired power. If it's affordable, they'll take it. But the flip side of that is, if it's no longer affordable, they don't want it.
And so, regulators in states like Arkansas, and Louisiana, and Missouri, and Minnesota, have all started to look at this issue. And it's not gonna be something that's just a flip of a switch. But it is something that, as it gets attention of regulators, then the operators take notice. These are well-staffed, very wealthy billion-dollar corporations, with brilliant minds that work there. They'll find a solution. But you have to have an impetus.
And in cases like Minnesota, you have a commission that opened up an investigation into this issue, very plainly stating, "Does this practice cost customers money?" Same thing in Missouri, they opened up a docket. And in Missouri, it was a very fast turnaround. They opened it up, did a quick investigation and basically decided that in all future rate cases, and anytime a utility in Missouri wants to recover these fuel costs, they have to provide information about market prices, about self-scheduling and self-committing, which is sort of the jargon term for how they get around the market rules.
And if they don't provide that information, they aren't allowed to recover costs. And if they do provide that information, you better believe that the Commission staff is gonna look at it and see, "Oh, you operated this $35 a megawatt hour coal-fired power plant and the market price was $19. That doesn't seem prudent." And that is the magic word in the utility regulatory world is prudency. If a utility acts imprudently, they don't get to make money. It's almost as simple as that.
Colleen: Will they be refused recouping that money?
Joe: Essentially, it's called a disallowance. Utilities are allowed to recover certain costs. A disallowance says, "No, we're gonna take that pool of money that you're supposed to be able to recover and we're gonna take some of it and remove it."
Colleen: Well, it's interesting that that will happen without people fighting for it and...
Joe: I mean, you have to go in and fight for it. This is what UCS does, you know, along with many of our allies. We go into these utility proceedings. You know, we have legal representation. There are litigated proceedings. We serve as expert witnesses and we dig into the data. And we make our argument that, "Hey, look at the numbers. We've lined everything up. This utility could have done this and cost customers less money, but they chose to do this. It cost customers more money and you should not allow that."
Colleen: Great. Well, Joe, thanks for joining me. I look forward to seeing the analysis once you've looked at it and gotten down to a little bit more granular level.
Colleen: Thank you.
Joe: Thank you.