Decoding Coal Dispatch with RMI
Joe Daniel is a Principal on the Carbon-Free Electricity Team at RMI.
Our topic today is coal, specifically the "non-economic dispatch" of coal. This phenomenon occurs when coal-fired power plants deliver power to electricity grids even when their electricity is not the most cost-effective option, thereby disrupting the "merit order" of electricity dispatch. This complex topic is explored with Joe's help, as he provides insights into this intricate issue. The US electric grid is notoriously difficult to understand, and there may be moments when the conversation becomes challenging. However, Joe and Cody consistently strive to make the concepts clear and accessible.
The complexity of the system contributes to the problems Joe highlights. Information asymmetry creates economic friction, which disadvantages renewables, despite their general economic superiority. Joe's work at RMI involves developing and deploying quantitative tools, such as RMI's Economic Dispatch Hub, which he will discuss. These tools aim to accelerate affordable and equitable utility de-carbonization pathways.
Episode recorded on July 18, 2024 (Published on Aug 4, 2024)
In this episode, we cover:
[2:42] Joe's background and work at RMI
[4:25] Seasonality and cyclical trends in coal usage
[6:20] Operation and flexibility of coal plants
[10:05] Merit order and prioritizing resources based on cost
[12:25] Types of resources and their cost ranking
[16:01] Dispatching resources and electricity sources
[21:03] Non-economic dispatch of coal and cost impacts
[25:02] Public utility commissions' role in regulation
[29:23] Need for transparency and market price signals
[33:31] Smooth energy transition and coal's future role
[39:09] RMI's role in providing expertise and assistance
[40:30] Cost implications and solutions for non-economic dispatch
[43:49] Public engagement in utility commission hearings
[46:16] Policy and local engagement in clean energy adoption
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Cody Simms (00:00):
Today on My Climate Journey, our guest is Joe Daniel, who is a Principal on the Carbon-Free Electricity Team at RMI.
(00:08):
Our topic today is coal, and in particular, we're digging into what's called the "non-economic dispatch" of coal, which is a phenomenon where coal-fired power plants jump the line and deliver power to electricity grids even at times when the electricity that they generate is not the most cost-effective option that the grid could leverage, thereby breaking the "merit order" of electricity dispatch. This is an incredibly complex topic. I'm grateful to Joe for coming on and helping me try to navigate the complexity. And fair warning, the US electric grid is something that I still don't have my head entirely around, and so if there are times when the conversation gets hard to follow, hang in there as Joe and I continually try to bring it back to understandable concepts.
(01:00):
Also, the complexity of our system is actually part of the reason for the problems that Joe highlights. Information asymmetry creates economic friction, which actually hurts renewables because on purely economic terms, renewables now generally win. And this comes back to the work Joe does at RMI, leading the development and deployment of quantitative tools like RMI's Economic Dispatch Hub, which he'll share more about, that help accelerate affordable and equitable utility de-carbonization pathways. But before we start, I'm Cody Simms.
Yin Lu (01:38):
I'm Yin Lu.
Jason Jacobs (01:39):
And I'm Jason Jacobs, and welcome to My Climate Journey.
Yin Lu (01:45):
This show is a growing body of knowledge focused on climate change and potential solutions.
Cody Simms (01:50):
In this podcast, we traverse disciplines, industries, and opinions, to better understand and make sense of the formidable problem of climate change and all the ways people like you and I can help.
(02:04):
Joe, welcome to the show.
Joe Daniel (02:05):
Thanks for having me.
Cody Simms (02:06):
Joe, I'm excited to learn from you today about a lot of things to do with coal. It's such an important topic when it comes to emissions and frankly, one we haven't talked about enough I don't think, on this show. And so maybe let's start first introduce yourself, share a little bit about the work you do, and then we're going to dive into understanding how coal is used in our electricity grid today, and also some of the economics behind how and why coal is still used across various needs, from base load to peak power.
Joe Daniel (02:42):
I'm a Principal at RMI. We work to facilitate a equitable energy transition. We work with pretty much every possible stakeholder within the energy space, and we really see our role as being multifaceted, so we work in a couple of different modalities, and one of them is facilitating difficult conversations with different stakeholders. Another is conducting really robust, cutting edge analytical work, and another is directly engaging with policymakers and providing technical assistance so that they can make the best, most informed decision when they're faced with them.
Cody Simms (03:25):
You're to some extent then, sitting in between our various electric utilities and our various policymakers and regulatory bodies who work together with those utilities, to ultimately help us construct the future of what our electricity grid and overall energy model in the United States should look like. Is that the right way to think about it?
Joe Daniel (03:46):
Yeah, I think that's a great way to think about it.
Cody Simms (03:49):
Well, I am really excited to learn from you today. Contrary to what most people might think, coal is still a very significant chunk of power in the United States, electric power in particular. I'm guessing it's also a significant chunk of industrial power, though I'm eager to hear and learn from you a little bit about that. But particularly on the electricity power side of things, it's gone down from a very significant chunk, I think mostly due to the advent of both the growth of renewables, but also probably natural gas and fracking, is my guess. But walk us through that trend maybe over the last 20, 25 years.
Joe Daniel (04:25):
The saying was, coal is king, and for a long time, for many decades throughout the '80s and '90s and early 2000s, that was the case. It was well over 50% of the share. But starting in 2005, 2009, that time frame, coal began a pretty rapid drop in its share of electricity. There was a number of factors to that. One being natural gas prices, federal regulations for the National Air Ambient Quality standards to make sure that pollution is not killing people, put it very briefly and directly, and at the same time you had the Beyond Coal campaign really picking up. So you had organized advocacy effort, you had federal regulations, and you had economics, all working in one direction. There was a major milestone in 2016 when natural gas finally surpassed coal, and then just in April we had the very first month where wind and solar surpassed... Oh no, no, sorry, let me fix that. In April, wind alone surpassed coal as an energy source.
Cody Simms (05:35):
Yep, and that's hovering somewhere in the, what, 16, 17, 18, 19% range? Somewhere therein?
Joe Daniel (05:42):
20%, plus or minus. There's always been a natural cyclical element to coal on a seasonal basis. Coal has always dropped down in the fall and spring, and this is not a recent trend, this has been a long trend because demand is less in spring and fall. So resources that can turn down, turn down. So you'll have these monthly changes, but then there's the overall annual number. So the annual number right now for the latest data, it's under 20%.
Cody Simms (06:10):
You mentioned the seasonality to it, which I assume means turning coal plants on and off, or is there a time when you can run a coal plant on low power mode?
Joe Daniel (06:20):
It's generally called cycling. Coal plants are designed to run between their physical minimum operating level and their maximum, their nameplate capacity. That physical minimum operating level is generally thought of to be 50%, but most coal plants can actually operate lower than that, and when utilities test this they... In Germany, they've been doing this for well over a decade, they'll get down to 30 or even 20%. Much less common in the United States but there are coal plants that run at that level. And then they stay on overnight, and then they ramp back up when they're needed, and then they ramp down. What we're seeing in the United States though, is that for weeks and months on end, that those coal plants could turn off, but they stay on, and I think we'll talk about some of the repercussions of that later on.
Cody Simms (07:07):
And let me understand this a little bit as it relates particularly to natural gas. I think with renewables it's fairly understandable how intermittent they are, when they work, when they don't. With gas, I think about it just in terms of, this is such a bad analogy probably, but a barbecue. Natural gas barbecue, you push a button and boom, it's on and it's at almost full temperature within a few seconds. Charcoal barbecue, it's going to take 20, 30 minutes to kind of get up to speed, get up to temperature, and be able to cook your food. Our power plants have a similar dynamic, is that a terrible analogy?
Joe Daniel (07:40):
It's not terrible. There's a similar, but obviously your standard backyard barbecue. I mean, I grew up in Kansas where barbecue was a big deal and even-
Cody Simms (07:48):
I'm from Kansas. Where are you from?
Joe Daniel (07:50):
I'm from just outside of Kansas City. I grew up in Leeward, Kansas.
Cody Simms (07:53):
I'm from Wichita, so there we go.
Joe Daniel (07:54):
Oh, excellent. All right. So even the biggest barbecues still dwarfed in size, so it's not seconds or minutes, it's still minutes to hours for a gas plant to get up and it could be as much as three days to do what's called a cold start. So that's when the coal plant is turned off, has been off for months and has to start from zero, start from room temperature.
Cody Simms (08:17):
With gas plants I hear the phrase, gas peaker plants, which I think means they're turned on at times of total peak power demand and that may be the only times they're running. Is that the right way to think about that?
Joe Daniel (08:29):
Well, that's what peaker plants are designed to do, they're designed to be the fastest responding of the fuel-based resources, but some only operate for peak. Some also operate because they're in a load pocket. It might not be the system peak, it might be a local peak demand or an emergency situation where they have to turn on, or they have to turn on for very specific grid benefits so that the grid can be stable, and those are the resources that we're seeing batteries compete with, because whereas even those gas plants take minutes or even an hour to get started up, batteries are truly, we're talking seconds and sometimes even milliseconds for them to turn on and discharge and charge. So all of the resources, all of the great benefits that a gas peaker can provide, a battery could provide and in many circumstances can do it more efficiently, faster, better in every way.
Cody Simms (09:24):
Which I assume makes a big difference if you're talking about all of a sudden it's 4:00 P.M. and middle of the summer and heat is becoming extreme in a way that maybe forecasts didn't even see that morning, and all of a sudden all these air conditioners are turning on and you need to back up your power supply very quickly.
Joe Daniel (09:42):
Yeah. One of the places where we know that happens is Texas, and where we are seeing batteries provide the jargon term would be ancillary services, but I think that does those services a disservice because those are what keeps the grid stable. These grid stabilizing services are being provided by batteries in a grid that's heavily stressed.
Cody Simms (10:05):
Okay, so now talk about how the prioritization of resources is supposed to work at a utility and this I guess, merit order mechanism, is the terminology here.
Joe Daniel (10:18):
There's nothing that the electric sector likes more than creating a term of our, sometimes two or three to mean the same thing. So merit order is the idea that the merit of a resource is how low cost is it. We're supposed to optimize around costs, so low cost resources have higher merit and so get called on first and higher cost resources have less merit and get called on last. Pending all sorts of, it's not a copper sheet, you have constraints on the transmission lines, but by and large we want lowest cost resources operating whenever they are available.
Cody Simms (10:51):
Cost by what measure? Cost at the moment or amortized annual costs, or, cost is a very word that could mean many things, I think?
Joe Daniel (11:01):
Yeah, to throw some more jargon to your listeners, it's short run marginal cost or essentially, the cost to produce the next megawatt of electricity. And for a coal plant or gas, it's the cost to burn the fuel and if they have environmental controls, the cost to run those environmental controls. For wind and solar, there's no fuel cost, it's zero. It's a zero marginal cost.
Cody Simms (11:25):
So this is different than a levelized cost of electricity because it's not factoring in the CapEx of creating the power plant in the first place, it's truly an operational cost. And does it assume these kind of heavy... You talked about variability in the startup costs of some of these plants, that some of them just take longer than others. Coal being the longest, gas being short, but still longer than a battery, for example. Does it factor those things in as well?
Joe Daniel (11:53):
In the sort of idealized concept of merit order, not really, but when you actually, where the grid operators are actually running their highly detailed quantitative algorithms to determine which resources get called, yes, all of those constraints get factored in. And even the costs of those constraints can get factored in, in somewhat cases.
Cody Simms (12:16):
You talked about to produce the next megawatt hour and you're not factoring in the initial CapEx of building the plants out. How do different resources generally stack rank today?
Joe Daniel (12:26):
The lowest cost resources are the fuel-free resources. Hydro is generally thought of as zero marginal cost, wind, solar. Then you have the most efficient, well then you have nuclear, right? It's got some fuel costs, but very low. Then you have the most efficient gas plants, so those are the combined cycle gas plants.
Cody Simms (12:47):
Combined cycle meaning they're using some of the steam that they generate from the heat that they produce to-
Joe Daniel (12:53):
Reclaim it and then-
Cody Simms (12:54):
Create more power, right?
Joe Daniel (12:55):
Yeah, so it's a much more efficient system, but it takes longer to get up and running. Then you have the steam units, the coal and the gas steam units, and depending on the gas price, coal can either be in front of the gas steam but behind the gas CC or it could be in front of all of them or it could be behind all of them. So those three resources are kind of fighting to be the lowest cost. And then you have the gas CTs, the peakers, and then the oil, which is in most states zero, but there are still places that in really cold winters in New England, they still get called on.
Cody Simms (13:34):
Okay, so you have this sort of matrix of resources. You're looking a week ahead in some cases, of power demand assumptions. Who is pulling levers and turning things on and off and deciding where the next set of electrons are coming from?
Joe Daniel (13:50):
Well, this is where the industry likes to keep us on our toes, because everyone is a little bit different. You have the fully restructured states that also operate in RTOs or regional transmission organizations. So this is New England, parts of the mid-Atlantic, New York, Texas. The power plant owners do not have electric utility retail customers, so they're all competing for their share of the wholesale market. There's a centralized grid operator that runs an auction to determine who gets called and then the utilities that distribute that electricity to retail customers buys it and distributes it.
(14:32):
Then you have on the other end of the spectrum, like in the Southeast and in the west, vertically integrated utilities, where there is no central dispatch except for by the utilities who own the power plants, in most cases they own the transmission lines and they own, they're the distribution company that charges you and me an electric bill every month.
(14:57):
And then in between, you have states that are in the Midwest from North Dakota to Oklahoma to Michigan. These are the states that have vertically integrated utilities, but they are also are competitive power plants that don't have retail customers and there is centralized, there's an independent system operator who is supposed to be centralized dispatching those resources, or calling which resources get called to operate and which ones don't.
Cody Simms (15:23):
We certainly don't make things easy here in the US on this stuff.
Joe Daniel (15:26):
I joke that it keeps me employed, gives me job security, but I would happily trade a little bit of job security for a little bit more uniformity.
Cody Simms (15:33):
Okay, so let me make sure I understand this. So you talk about a coal plant needing potentially a week or more to get up to speed, being able to deliver electricity at its highest capacity. Someone is needing to make a phone call into that plant and saying, "Hey, turn up the jets here." How does that work?
Joe Daniel (15:53):
It used to be phone calls. Luckily, we have evolved from that and the centralized operator sends electronic messages to the different power plant operators and say, "We're expecting this much load, so we need you to move up to this point by this hour. They do this on the day ahead, they do this in real time, and because there's a mix of resources, there's a lot of different levers that they can pull. Electricity is kind of awesome, in that if I turn on my lights, you don't need to move a power plant up or down at all. It literally just starts spinning at a slightly different speed and balances. We can get into all sorts of wonky technical power, electronics and electrical engineering that probably don't need to on this episode. The generators need to follow the bulk load, right? The megawatts, not the kilowatts.
Cody Simms (16:43):
You mentioned these varying governing bodies based on geographical alignment that's happened in how the electricity grids work, whether it's an RTO managed grid or whether it's a non ISO or non RTO area of power, and then you mentioned there's some kind of almost like hybrid ones. Where are there requirements about this merit order sort of cost mechanism to determine that lower cost resources get used first, which as I understood it would be prioritizing renewables, nuclear and combined cycle gas, over heavier fuel oriented power plants?
Joe Daniel (17:22):
Strictly speaking, everywhere. All utilities, whether you're vertically integrated and don't operate with a central dispatch, central independent system operator, or you are, it's supposed to be merit order. The biggest difference is in the place where there are wholesale markets or more accurately, liquid wholesale markets, where there's a lot of trading going on. There is a very transparent price signal being set, because the markets, these independent system operators publish the prices at every single point on the grid for every 15 minute interval. So as a power plant operator, you have access to all of that historical data, you can project out in the future. Load is relatively predictable, we know when it's going to peak and we might have some small variability, but you can generally predict what the price is going to be. And so you then determine, all right, does it make sense for my power plants to be on or be off?
Cody Simms (18:23):
Is it fair for me to define those as deregulated energy markets? Is that the right term?
Joe Daniel (18:29):
I don't like the term deregulated because all of those power plants are still heavily regulated by EPA. The operations are regulated by FERC. There's a market monitor, there's plenty of regulation, there's not a dearth of regulation for any-
Cody Simms (18:43):
Right, it's not just a crazy wild west.
Joe Daniel (18:46):
Yeah, and I think the term deregulation either carries with it a pejorative or favorable term, depending on what your priors are. So I prefer restructured and competitive markets. So there are states that have competitive markets.
Cody Simms (18:59):
But it's where the active power generation is separate from the act of selling electricity as a consumer utility to the consumer.
Joe Daniel (19:07):
And those are fully restructured states like Texas, and Texas for what it's worth, what we see is, Texas has two things going for it. One is that restructure and two, really strong antitrust laws when it comes to, and antitrust enforcement when it comes to the electric grid and who owns how much of the power. And as a result, they have highly competitive auctions and those auctions operate really efficiently.
Cody Simms (19:32):
Anyone who wants to really dive into Texas, we have a great episode in the archives all about ERCOT. Google, My Climate Journey and ERCOT or go to our website and you can find that one. It's a fun one, there may also be barbecue references in that one too, which by the way Joe, I didn't even ask you. What's your favorite KC barbecue joint?
Joe Daniel (19:48):
Oh man, Stella Smokehouse was where I went to all the time growing up, it was definitely my favorite. I've been told that it's burnt down several times since I last ate there.
Cody Simms (19:59):
Oh my goodness.
Joe Daniel (19:59):
So I don't know if it's still running. I was a big fan of Kansas City Joe's.
Cody Simms (20:03):
Yeah, that's a good one.
Joe Daniel (20:04):
What was Oklahoma Joe's when I was there. I like all of it. There's Bryant's is fantastic, of course. How about you? What's your favorite?
Cody Simms (20:11):
I love Bryant's sauce and I love Kansas City Joe's pulled pork, for sure.
Joe Daniel (20:16):
Man, I'm burnt ends guy myself, I have to admit.
Cody Simms (20:20):
Well, anyone who wants to dive into Kansas City barbecue, it sounds like hit me or Joe up, we are happy to chat about it.
(20:25):
But as I understand it then, so I live now in California, so California being what I would have referred to, though you don't like the term, as a regulated utility market where I don't get to choose who my electricity comes from, it's where I live is the utility I have. It sounds like in those markets there's less pricing transparency over the different sources of power generation, which maybe creates some of the problem that I think we're going to talk mostly about for the rest of the episode, which is this idea of non-economic dispatch of coal. Can you verify what I said is correct, and then maybe dig into the problem a little bit with us?
Joe Daniel (21:03):
Well, California does have an independent system operator, the CISO, California Independent System Operator, and so they do hold an auction in the day ahead and in real time. There's also the California Energy Imbalance Market, which is about to expand to the day ahead imbalance market, and by the time this podcast gets released, maybe that's already been implemented. And so power plant operators do have that transparency, that price transparency. And so we actually use, in some of our analysis, we'll use the California Independent System Operator data to calculate whether or not coal plants are operating economically or uneconomically.
Cody Simms (21:43):
Anyone listening to this who works in the utility sector or the energy sector in California, and I have just slandered you for no reason. I apologize, I was incorrect in my understanding of that. So I will now turn it over to the expert Joe. Explain more about where this problem actually is realized.
Joe Daniel (21:58):
So the problem is realized pretty much everywhere where there's coal. It's just that it's much easier to find in the states that have an independent system operator. Now, California doesn't have any coal in-state, but you do occasionally import coal and you do rely on several coal plants to keep your imports and exports balanced. And so we're able to use the California data to determine when those coal plants are really economic and when they're not.
(22:29):
Similarly, we can do that for all of the Midwest. There's the Mid-Continent Independent System Operator that operates between Minnesota and Louisiana. There's the Southwest Power Pool, which is not really in the Southwest, it's North Dakota to Oklahoma. Then there's also PJM, which at one point stood for Pennsylvania, Jersey, Maryland, but now it's the single largest grid in the world and spans between New Jersey to Illinois down into Virginia, and lots of residential and industrial load in that region. And so in those places we can actually use, we can do retrospective analyses and say this coal plant in this state ran, its fuel costs worth $35 a megawatt hour, and the average price on the market was $20 a megawatt hour. And that coal plant ran in those conditions for two months straight and the coal plant could have turned off for two months, purchased energy off of the open market, and sent savings to their customers.
Cody Simms (23:38):
And why is that happening?
Joe Daniel (23:39):
Oh, now this is the rest of your podcast.
Cody Simms (23:41):
All right, let's do it.
Joe Daniel (23:42):
So there's a lot of reasons why this is happening. The utilities that operate these coal plants will point to any number of factors. They only have a day ahead price signal and they're hedging future prices. They'll say there are reliability issues at play. They'll say that they already purchased the coal on a coal contract and so it doesn't cost them anything to burn it because they've already paid for it, the coal is a sunk cost. Some of those reasons have validity, some of them have less validity.
(24:14):
But the statistic that I want to share with you before we dive in any more, is that coal plants that have fuel cost recovery that can go back to the regulator and get recovery for all of their costs, they make up roughly 75% of the coal fleet. They represent 96% of uneconomic coal operations. The coal plants that don't have fuel cost recovery, they make up 25% of the coal fleet but only 5% of the operational losses. And there's nothing special about the engineering of those coal plants. There's no less importance of reliability for those coal plants. They just have the right incentive to operate as economically efficiently as possible, whereas these other coal plants can get cost recovery.
Cody Simms (25:00):
What does that mean and how are they able to get it?
Joe Daniel (25:02):
Okay, so these vertically integrated utilities that are regulated at state commissions, at state utility commissions, they own the power plant and they sell directly to the customers. And part of that arrangement, part of the monopoly utility arrangement, is that it depends from state to state, but every three months, every six months, they take their fuel receipts, go to the regulator and say, "This was how much we spent on fuel. We want to recover those fuel costs." Ever since pretty much World War II, that has been the policy, that utilities are allowed to pass 100% of their fuel costs onto ratepayers.
Yin Lu (25:41):
Hey everyone, I'm Yin, a partner at MCJ Collective, here to take a quick minute to tell you about our MCJ membership community, which was born out of a collective thirst for peer-to-peer learning and doing that goes beyond just listening to the podcast. We started in 2019 and have grown to thousands of members globally. Each week we're inspired by people who join with different backgrounds and points of view.
(26:01):
What we all share is a deep curiosity to learn and a bias to action around ways to accelerate solutions to climate change. Some awesome initiatives have come out of the community. A number of founding teams have met, several nonprofits have been established, and a bunch of hiring has been done. Many early stage investments have been made, as well as ongoing events and programming, like monthly Women in Climate meetups, idea jam sessions for early stage founders, climate book club, art workshops and more. Whether you've been in the climate space for a while or just embarking on your journey, having a community to support you is important. If you want to learn more, head over to MCJcollective.com and click on the members tab at the top. Thanks, and enjoy the rest of the show.
Cody Simms (26:42):
You end up where if you are able to produce electricity at a certain price but you are not ultimately liable for the cost of that fuel, the fully loaded cost of these coal plants isn't properly factored into the equation. Going back to our discussion on merit order, I suppose. Is that the right way to think about it?
Joe Daniel (27:06):
I mean, that's definitely what happens some of the times. Some of the times the utilities just, they've operated these coal plants for 50, 60, 70 years. They turn them on, they leave them on, that's their paradigm of how they're supposed to operate. I don't know how much of the history of the term base load you want to go into, but base load was never meant to be a term related to reliability. It was an economics term designed to think about, all right, what resources are low operational costs, and therefore should be operating the most? The low merit cost resources, and those should be serving base load. Today if you say, what's a high capital cost, low operating cost resource? You think of renewables, you don't think of coal. So the market prices have changed, the market conditions have changed, but the way these coal plants are operated has largely stayed the same.
Cody Simms (27:57):
But you can understand for the coal plant operator, ultimately the cost of the fuel is free to them, then it is still, "a low cost reliable system." Like if I'm putting their hat on, is that the right way to think about it?
Joe Daniel (28:14):
Some of them do see it that way, they literally say that the fuel is bought and paid for, so it's a sunk cost. But I think the way we want them to think about it is that hour to hour, there's some validity to what they're saying, but over the long run, they're accumulating these losses and those costs get passed onto customers. And so it's not free and I don't think they're... I don't want to impugn any sort of malicious intent onto the operators of these power plants, it's I think more about inertia and incentives. There's no incentive for them to operate as efficiently as a possible, there's actually some incentives for them to not.
(28:53):
I was talking to a grid operator or a power plant operator in the Midwest and he told me that the engineering team's annual bonuses are attached to operating costs. And so if they blow through their operating and maintenance budget, then they don't get a bonus. But if they turn off this coal plant, they might increase maintenance costs. What the utility is doing is it's minimizing the cost of a single power plant, rather than minimizing the total cost to operate the grid.
Cody Simms (29:23):
I've seen in your research you said that there's a couple billion dollars a year potentially, in overall just pure dollar savings that could be realized if these decisions were made in a different way. Can you articulate that a bit more?
Joe Daniel (29:37):
On a typical year, it's usually between one and two billion. There's been a couple of years where it was less than that, but there's also been a couple of years where there's been a lot more. So if we look at 2020 for example, at the beginning of the pandemic, losses reached almost $3 billion. And just last year, 2023, our preliminary numbers for 2023 were close to $1 billion. What's most disturbing is that in the first two months, January and February of this year, it's already been $1 billion.
Cody Simms (30:13):
What's causing the jump?
Joe Daniel (30:14):
A couple of things. One is market prices in a few select coal heavy regions have dropped precipitously. It was a relatively mild winter in those same locations, so it concentrated, for example, the first couple of months of this year, it was really concentrated in the Rust Belt. Michigan, Indiana, Ohio and West Virginia coal plants were particularly uneconomic to operate, but most of them operated the same way they did last winter.
Cody Simms (30:42):
So what needs to change to affect this dynamic?
Joe Daniel (30:46):
There's a couple of different levers that we can pull on. Two things that I want to highlight first are recent developments in the RTOs. The regional transmission organizations have tariffs and rules and procedures that all of the power plant operators have to abide by. And we have a sort of a Tale of Two Cities situation in the Midwest, where the Southwest Power Pool wants to develop a multi-day market. So, rather than just a day ahead market and real-time market, let's have these liquid markets multiple days in advance, so that way these long lead time, inflexible coal plants can better participate in the market. In MISO, the Independent Market Monitor identified that these coal plants staying on is causing most of the congestion on the transmission line, and that congestion leads to wind curtailment. The estimated cost of congestion in MISO is roughly $1.8 billion a year in additional transmission costs.
Cody Simms (31:49):
Congestion meaning there's power going through the transmission lines that ultimately is not price competitive with the wind, but because it's there and the coal plants are continuing to produce at this sort of base load, 50% utilization that you mentioned, you can shut off a wind plant with the snap of your fingers. So the wind plants end up getting turned off. Is that accurate?
Joe Daniel (32:12):
The coal plants are essentially taking up capacity on these transmission lines and since they're inflexible and wind farms are flexible, wind gets curtailed. And what the Market Monitor wants to do is to de-commit, have the market de-commit the uneconomic resources that are self committing. That's the technical term for saying we're going to operate on the grid regardless of price. The Market Monitor believes that that will have millions of dollars in benefit before accounting for the avoided production costs. So just in transmission cost savings, incredibly cost-effective.
Cody Simms (32:52):
You started out the episode by mentioning that coal has a bit of a seasonality to it. Obviously, those of us who pay a lot of attention to clean energy believe we can get to a world where we're not using fossil fuels to power our electricity sector, but it's a long transition, there's changes that take place over time, there's equipment that's amortized over 20, 30 years, etc, etc. Not everybody, but a lot of people who are working toward it, it's just it's a transition, it's why it's called the energy transition. But in your ideal view, while there is still need for coal in some cases on the grid to meet demand, do you see there being times of year when it's best to use it versus not?
Joe Daniel (33:31):
I would say that there are times where some coal plants are more likely to be economic than others. The summer and winter prices are higher and more of the coal fleet is economic. Not all of it. I mean, there's been winters where the entire coal fleet lost more money than value it provided. So it's not every winter all coal suddenly becomes economic. There's a spectrum, but winter, summertime [inaudible 00:33:57]-
Cody Simms (33:58):
People are going to say, hey Joe, you're not talking about emissions and intangible factors and externalities and all that in those equations. I will say, we are not, we are talking purely on loaded dollar economics.
Joe Daniel (34:10):
Yeah, the marginal cost to generate the resource versus the marginal price that the resource gets paid in the market as the market rules currently stand, and as environmental regulations currently stand. All of those dynamics are changing over time, but just historically. Fall and spring have generally been when most coal plants and in some years every coal plant is uneconomic. And so you've actually seen in Minnesota, Xcel Energy several years ago said, we're moving all of our coal plants to seasonal, and they're going to shut them off for three months at a time during the low load seasons. And they calculated this would save customers a lot of money.
Cody Simms (34:52):
And I assume it also helps you with all the things you were talking about around forecasting fuel costs, etc, as well, because you know when you need to buy the fuel. Yes?
Joe Daniel (35:00):
Yes, and that's the time of year when wind curtailment was highest. They had all of this surplus wind that they were throwing away and this allowed them to actually use it, which for the utility was great because then they could monetize the production tax credit, so it was great for the utility. It was great for customers because it reduced fuel costs and they were able to lower costs to the customers. And I think really importantly, if we want to get to a grid where there's no fossil fuels, wherever we're at now to then, there's going to be a month period, right?
Cody Simms (35:36):
We're at 60% fossil fuel grid today. Just to make sure all of our listeners fully understand that. I mean, there's a lot of work to be done.
Joe Daniel (35:44):
There's a lot of work to be done, but somewhere in between we're going to have to have our first month where there was no coal, and then one month with no coal is going to turn into three months, it's going to turn into seven months, right? And so if we just keep on turning the coal plants off and going from running them 12 months a year to running them zero months a year, it's going to be a lot harder for the grid operator to figure out how to balance the grid. But if we start turning down coal plants more frequently, turning them off more frequently, it's going to give us a ramp. It's going to be a smooth energy transition, rather than a bumpy or lumpy transition.
Cody Simms (36:19):
We talked at the start of the episode about how coal has gone from coal itself, roughly 60% of the electricity grid, 20, 25 years ago, to call it 19, 20% today in the U.S. Has most of that transition been from wholly decommissioning and shutting off plants, or has it been from rebalancing utilization in plants that exist?
Joe Daniel (36:43):
It's a mix. There was a coal plant in Louisiana called Dolet Hills. It was for the longest time the single most uneconomic coal plant in the country by my calculations, and by the calculations of many other analysts. And in its last two years of operating, rather than operate less and less each year, it decided to burn all of its coal reserves and just basically run full throttle till its end.
Cody Simms (37:11):
Literally went out in flames.
Joe Daniel (37:14):
I mean, and it costs customers something like 130 million, no, $160 million in excess costs. And so what the Louisiana Public Service Commission had to do is it had to try to claw back some of that money. And through intense litigation, they were able to claw back roughly 125 of it. But my point is, wouldn't it be better if they never did that in the first place? You can't claw back the emissions. So if we get the utilities to dial down the resources and then turn off the resources and then retire the resources, and ideally, build replacement resources beforehand so you have something there to replace that capacity and energy, it's going to be a much more affordable energy transition. We'll be able to do it faster and it'll just be literally easier for grid operators to figure out how to manage the grid.
Cody Simms (38:07):
For listeners who are motivated to dive in on this topic more and get involved and do more, obviously they can support your work, Joe, at RMI, but it sounds like trying to plug into maybe your state utility commission and get involved in utility commission hearings and things like that. Is that the path, or what does it look like for people?
Joe Daniel (38:27):
Important private legislation gets passed at the federal level and the state level, but almost all of it gets implemented at state public utility commissions, particularly if it's electric related. These are the entities that are actually in charge of implementing this policy. And so they can do it well in a way that is affordable and equitable, or not. And the way they make those decisions is what is in the record in front of them. So you have to be, to some extent, to pull the Hamilton quote, you have to be in the room where it happens.
Cody Simms (38:59):
You have been amassing all these resources for folks. Where would you like to point people? What are areas people can go to dive in significantly more deeply than we've tried to do on this episode?
Joe Daniel (39:09):
Well, there is a wealth of analysis out there. I mean, I am obviously very fond of a tool that RMI has built called the Dispatch Dashboard, that allows people to pull it up and track not quite in real time, but with a short delay, the economic operations of coal plants in all of the 48 contiguous states. It's updated every three months with the latest available data that we pull from all the public sources. We clean it, we analyze it, we compare monthly revenues to monthly costs, and tell you how economical a coal plant is.
Cody Simms (39:51):
Which states currently are operating the least economically?
Joe Daniel (39:55):
The latest data really does not paint a good picture for the Rust Belt. There's been some pretty massive struggles in states like Indiana, Ohio, West Virginia, but let's not ignore some of the other areas. The Four Corners plant in the Southwest that regularly operates not particularly economically. Coal plants in the Southeast where there is not a transparent market, it's a little bit harder for the grid operators that tell exactly when a coal plant is and isn't going to be economic, and even more challenging for the regulators to determine. But our analysis shows that states like Georgia and North Carolina and South Carolina, this is a persistent problem.
Cody Simms (40:39):
And if I were to show up at my public utility commission hearing and advocate for this, for, hey, we need to have better controls over non-economic dispatch of coal in where I live, what are the talking points of pushback I would likely hear?
Joe Daniel (40:55):
The first one will be for reliability, and the response to that is that prices go up when there's a reliability event. During the summer when we have frequent reliability events, we see prices go up, same thing in the winter. And so it's almost never the case that a coal plant is uneconomic during a reliability event, if it's operating. So the reliability really doesn't hold a lot of weight, in my opinion.
(41:20):
The second is, oh, well, we've already paid for the fuel, so it's a sunk cost, which we kind of talked about, but I understand that on an hour to hour basis. But if you're continuing to throw money into a pit, you can't say, well, I've already paid for it. Well, then when you renew that contract, maybe you should think about this a little bit more intensely. We've seen commissions, because of advocates going into these states and providing expert testimony and providing data and bringing the receipts, we've seen commissions in states like Michigan tell their utilities that they can't operate that way anymore, that they have to-
Cody Simms (41:55):
Well, yeah, it seems like the answer there should be, we're going to reduce, based on all the data we have, we want to reduce the amount we're buying from your power plant next year, so you should adjust your coal purchasing forecasts accordingly, right?
Joe Daniel (42:06):
Exactly, and that's essentially what the Michigan commission did. There was a utility that was buying coal not from a plant that they owned, but a plant that their parent company owned, so an affiliate relationship, and at way above market prices. And the commission said, "You can't do that. If you come in and ask for cost recovery, we're going to deny it." And the utility came in and asked for cost recovery and they denied it. If commissions don't want to deny it right away, they should be telling their utilities, we're not going to stand for this anymore. We have the data, it's now very transparent this is a problem, please stop. And then give them the fair warning and then it's on the utility to change.
Cody Simms (42:48):
Any other big points that folks should be aware of that will get thrown their way?
Joe Daniel (42:52):
Oh, I mean, there's just a lot of utilities will say... For example, one of my favorite arguments is that our data is not the utility's confidential data, but then when you get access to the utility's confidential data, it's 10% different than ours and doesn't change the actual conclusions. You get a lot of hand waving about the specific numbers, and if you're losing $100 million a month or $90 million a month, either way, you're still losing money and that's I think the important part. The Market Monitors have identified this as a problem, and they had access to the confidential information. The Sierra Club, Unit of Concerned Scientists, NRDC, RMI, tons of... Brattle Group. Deloitte came out with a report that said that the ability to self commit coal plants was the only thing preventing the inevitable decline of coal. It's well recognized that this is what's propping up coal plants.
Cody Simms (43:49):
I am sure there are folks listening that are motivated, that are action oriented, that want to go do something, but the idea of like, do I live in a state that's an ISO or an RTO, or where does my public utility commission meet, and am I going to go in and feel like an idiot if I try to say something? Is very daunting and very real and very hard. How should a motivated, activist oriented person who has not spent 20 years of their career going deep on how energy commissions work, how should they get involved? How should they get active here?
Joe Daniel (44:26):
The Unit of Concerned Scientists actually just came out with a whole toolkit on how to engage in utility commissions, so I recommend looking at that. Your local consumer advocate and environmental advocate groups often are involved in these proceedings. There's some exceptions, but most states have somebody who's representing the consumer in these PUC proceedings, in these public utility commission proceedings. Engage with them directly, so you don't have to be the party that's paying for a lawyer and intervening. You can support those groups, you can support the local environmental groups.
(44:59):
And one of the reasons I think the tide has begun to turn a little bit is that there's a lot more recognition by the funding community, by funders through fund these advocacy organizations, that this is an important issue. There's an organization called Horizon Climate Imperative, that their sole goal is to get folks interested in this one topic to address it. And they're being very thoughtful in and strategic in allocating resources and advocating for collaboration to work on this one issue.
Cody Simms (45:33):
Underscoring my takeaway on the importance of all of this is, many of us who work in the clean energy space have been saying for many years, we can't have a green premium product. You need to get to a point where clean energy isn't just wins on cost, and once it wins on cost, the markets will follow. And I'm hearing a message from you, which is that actually, clean energy does win on cost, and still there are these barriers that prevent pure economics from winning out. Some of it's inertia based and some of it is based on essentially just a legacy way of doing things. It still requires people to go in and push for change to happen.
Joe Daniel (46:16):
Yeah, and it's important to know that the Inflation Reduction Act was this monumental piece of legislation that was passed that really codified the economics of clean energy. RMI has done an analysis that says there's literally hundreds of gigawatts of renewable energy that could replace coal and gas steam plants, as well as some other, even some CCs, even some of those really efficient gas plants, could replace those on a cost basis alone. Again, on a marginal cost. Just thinking about the fuel costs could be replaced, and there's all these new financing mechanisms and all the... The reason why those were necessary, the reason why the loan program office, EIR and all these other complicated acronyms are necessary is because one of the things that prevents a free market is barriers to exit, barriers to entry, information asymmetry, right? The electric system is not a free market. It is not a perfectly... The electricity sector definitely has some friction, it's not a frictionless market. And so working in the regulatory space, working on finance helps reduce that friction and allows for economics to push the way it needs to.
Cody Simms (47:27):
But what a great place to be in now where you can say, hey, if you just want to go purely on what's going to win economically, renewables win. That was not the case a decade ago, right?
Joe Daniel (47:37):
No, no.
Cody Simms (47:37):
Or 15 years ago.
Joe Daniel (47:38):
When I started working on writing testimony in these utility proceedings. It was very rare when wind would pencil out, it was in Kansas and Nebraska, that's where it started. And then the cost came down, we pulled the low hanging fruit, and then the next year more low hanging fruit grew and we just keep on pulling that low hanging fruit, bringing the cost down, and more low hanging fruit keeps growing.
Cody Simms (48:02):
Well, it underscores the importance of policy, it underscores the importance of state and local policy, and obviously, the federal government doing a ton right now to try to push change in adoption, but getting involved locally and understanding how your location operates, which clearly I got some work to do on my own, but digging in there is an important step that any one of us can take.
Joe Daniel (48:23):
It's incredibly confusing and complex, some would say intentionally, gives the incumbents a lot of advantage, but there are tools out there that allow citizens, there are tools out there that allow everyday people to engage. And if you have the financial resources to donate, you can donate to these organizations. I would be remiss if I didn't say, you can donate to RMI. We are a nonprofit, we operate based off of donations from people who are willing to give us money so that we can go out there and be the expert and help talk with regulators and provide the educational and technical assistance that they need.
Cody Simms (48:58):
Joe, anything else we should cover?
Joe Daniel (49:00):
Oh, this was fantastic. Thank you, Cody. I really appreciate it. This was a lot of fun and we'll have to nerd out over KC barbecue again in person sometime.
Cody Simms (49:08):
I love it. Well, thanks for joining us. It's a complicated topic for sure. Thanks for the work that you're doing to try to make it less complicated, or at least, if not make it less complicated, help people navigate the complexity. I guess, maybe that's probably the better way to describe it, but I appreciate you taking the time to join us today and shine some light on all of this.
Joe Daniel (49:28):
I mean, the one thing to simplify it, I've been told that this analogy kind of helps explain what these coal plants are doing, is you have the merit order line and essentially these coal plants are cutting in line. And we all sort of know from elementary school that cutting in line is not right, and so the question is, how much is this costing people and how can we stop it?
Cody Simms (49:49):
Awesome. Joe, thank you so much, this was super helpful.
Joe Daniel (49:52):
All right, thanks, Cody.
Jason Jacobs (49:53):
Thanks again for joining us on My Climate Journey podcast.
Cody Simms (49:57):
At MCJ Collective, we're all about powering collective innovation for climate solutions by breaking down silos and unleashing problem solving capacity.
Jason Jacobs (50:06):
If you'd like to learn more about MCJ Collective, visit us at MCJCollective.com, and if you have a guest suggestion, let us know that via Twitter @MCJPod
Yin Lu (50:20):
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Cody Simms (50:29):
Thanks, and see you next episode.
