Up in Smoke: Seven Gigawatts of Coal Retrenches from PJM

Ade Dosunmu | Aug 05, 2011

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At the most recent annual auction for electric capacity in PJM, the Base Residual Auction (BRA) for delivery year 2014/15 electric capacity cleared with lower volumes versus the prior year due to lower demand. Prices were lower than previous years in the Mid Atlantic Area Council (MAAC) region and higher than previous years in the rest of the Regional Transmission Organization (RTO). These intra-PJM price variations were anticipated due to the impact of new west-to-east transmission facilities, the economic downturn and the effect of recent EPA rulings on generator retirements.

Some of these effects were surprising including the contribution of demand response into the dynamics. Prior to the auction, analysts expected some amount of old or otherwise dirty coal-fired generation to exit the market altogether and for others to bid high prices to recover environmental capital expenditures to comply with EPA requirements under it's Clean Air Transport (CATR) rule of June 2010 and it's National Emissions Standards for Hazardous Air Pollution (NESHAP MACT) rule of March 2011.

Both of these expectations were realized. Compared to the prior auction, about 1,900 megawatts less of coal generation, enough to power more than 600,000 homes, were withdrawn from the market. It did not stop there. By the time the auction was over almost seven gigawatts less of coal generation from the prior year, or enough coal capacity to power more than 2.2 million homes, was out of the market because prices at which they bid -- as a result of environmental capital expenditure requirements -- were higher than where the market cleared.

While the jettisoning of these coal plants undoubtedly resulted in higher capacity prices than if the plants did not exit, it led to significant environmental benefits. If these plants share the same characteristics of a typical PJM region coal plant, according to EPA's eGrid database they would have operated just under 60% of the time in the delivery year, and produced approximately 36 million tons of carbon dioxide equivalents. In global warming terms, eliminating this amount of CO2e pollutant is the same as removing about 7 million passenger vehicles from the U.S. vehicle fleet. In addition, the plants would have produced 228 thousand tons of sulfur dioxide and 59 thousand tons of nitrogen oxides -- both precursors to acid rain and contributors to a host of pulmonary and other health problems.

Using the market to generate the replacement sources for the withdrawn coal capacity resulted in significant economic benefits. As coal plants were removed from the supply stack, the new resources replacing them -- most significantly demand response -- held market prices in check. Demand response contributed an additional 4,800MW of cleared capacity above the prior auction year. Indeed, PJM has reported that demand response mitigated unconstrained region-clearing price increases by 10 to 20 percent, and contributed 30 percent to the price reductions in the constrained region. These percentage savings translated to about $1.2 billion in direct payments to capacity providers.

Demand response is an outgrowth of smart grid technology and market based constructs for providing energy. Operating under these constructs, demand response providers search for economic megawatts available for curtailment and build networks of response sites to generate "negawatts," which represent the ability of end users to reduce or eliminate energy consumption in response to signals. By making negawatts available at costs that are generally below those required to build and maintain generation plants, demand response lowers capacity costs in energy markets and offsets new build capacity. According to FERC, there are currently about 37,000 megawatts of demand response capacity available in the United States. FERC further estimates that given the right market constructs, this capacity could grow to between 80,000 MW and 108,000MW by 2030, permanently eliminating the need to build power plants to serve that demand. PJM, with demand response registrations of 9,200 MW in 2010/11 and cleared demand response of 14,100 MW by 2014/15, is the largest demand response market.

In addition to providing capacity costs that are lower than traditional fossil based generation, such as coal plants in the 2014/15 BRA , demand response provided additional benefits to electricity consumers in the PJM region. Demand response provides payments directly to end consumers who agree to curtail their energy use. While varying widely depending on technical and market factors, these payments or "customer splits" average 50 percent or more of the gross revenues provided by the PJM capacity market. This means demand response providers will pay back more than $300 million to end-use customers in the PJM region in 2014/15, on top of the $1.2 billion already saved by all consumers who ultimately pay the capacity charges.

The benefits don't end there. Customers receiving payments from demand response providers often use them as leverage for capital expenditures in energy management and other energy efficiency projects, which generate "green collar" jobs. Further, as these customers eliminate or reduce consumption when called upon for real-time grid events, their action has a concomitant effect on wholesale energy prices, further lowering costs and reducing peak time pollution by peaking plants.

The success of consumer side participation in the PJM capacity markets opens a path to success in the long sought trifecta of winning policy as it relates to the environment, energy and economics.

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Comments

Overall, I like the direction PJM is going, as described here. I would just note that my limited experience with "demand response" negawatts in Ontario is with a large isolated office complex business headquarters, where the "response" amounted to switching the entire office off the grid for the entire day requested (so as not to disturbe the computer workstations which were not battery backed during the transition) onto the 2 MW diesel emergency generator.

I just hope that the payments involved accounted for a) the additional CO2 and sulphur emissions resulting from the inefficient power source vs. eg. Nat gas turbines b) the use of imported (on the margins in N America) oil rather than locally sourced natural gas. However, I'm betting that such a system would be too much to expect from such a simple market model.

This article says that the withdrawal of some amount of coal-fired generation from the relevant market led to higher prices (except in one intra-market region). The fact that these higher prices also occurred in a period of suppressed demand due to general economic conditions confirms the role of coal as a reliable provider of low-cost electricity.

To "put a dress on a pig" -- and that's the only way to really describe the situation of higher energy prices due to apparent coal withdrawals -- the author suggests two offsetting "benefits": (1) environmental, and (2) green jobs associated with payments to demand respond providers.

As to the former (alleged environmental benefits), EPA's overstatements regarding coal impacts are well documented and ignore the benefits of electrification. They also fail to consider: (a) negative health impacts of higher energy costs, and (b) higher lifecycle GHG emissions of alternatives, such as shale gas. No free lunch.

As to the latter (alleged green jobs), America continues to await their arrival. Current unemployment data tell a different story. And of course, job creation in this context is a zero-sum game -- indeed, it even could have negative multipler effects -- as job losses in the fossil industry must also be considered. Robbing Peter to pay Paul, even through a market mechanism, is neither a stimulus program nor job-creation pathway.

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