Comments of Independent Ratepayer Advocates 

Before the Federal Energy Regulatory Commission—
Modernizing Wholesale Electricity, Docket No. AD21-10-000

We offer comments here primarily to the Commission’s April 21, 2022 Order Directing Reports because the Order appears to focus on seeking supply solutions to the expensive and avoidable supply side problems of Variable Energy Resources (VERs) instead of focusing on the interests of consumers by leveling and broadening the venues in which generating resources compete and cooperate. …

We wish to emphasize the importance of resource cooperation. Requiring resource cooperation as a prerequisite to interconnection and energy market participation allows resources to fall into natural and well-coordinated stratum fulfilling the load curve from the bottom up without disrupting the load shape the balance of cleared resources must meet within the market period and over years. As an example, lowest marginal cost resources become base load resources by default and higher marginal cost resources follow load or provide peaking capacity. That works very well when the lowest marginal cost resources are full time, steady-state resources offering as much energy at peak load hours as any other hour of the year.

The capital cost recovery and profit of resources fulfilling these strata are supported by the duty cycles and cumulative gross margins they earn in LMP [locational marginal price] energy markets. The LMP system worked harmoniously and efficiently when nearly all resources possessed a 90%+ capacity value (expressed as a percentage of nameplate capacity). In the past, progressively large gross margins paid to lower marginal cost suppliers in single clearing price auctions helped to direct new investment toward the demonstrated most profitable kinds of power plants, all of which were capacity resources. Since all power plants offered nearly identical capacity values as percent of nameplate rating, said gross margins served as efficient de facto capacity payments as a reward for low marginal cost and, by default, for that all-important firm capacity.

We contend that there has been a decline in the efficiency of wholesale energy markets because much of their inherent capacity payment “pool” is now being paid to low capacity value resources in inverse proportion to capacity offered. Decision makers have chosen to treat VERs [variable energy resources] as “equals” to up/down dispatchable or baseload resources by a narrow and dysfunctional definition of equal – that is, by dispatching based on unit marginal cost and remunerating on unit marginal cost delta to clearing price (i.e., gross margin) for each successive auction period. To make matters worse, decision makers and market designers have mislabeled energy markets as such without recognizing they provide a strong incentive for capital projects that should be prioritized toward capacity resources (as was always the case prior to the 21st century proliferation of renewable energy subsidies).

We argue VERs’ presence at the base of the dispatch order adds to system-wide costs because the net load curves they create are more expensive for the dispatchable fleet to meet than if a baseload or load-following resource had been dispatched first. Therefore, paying them under the single clearing price auction design is unfair to dispatchable resources and ultimately to ratepayers. Put another way, we believe allowing the lowest marginal cost resources to collect high gross margin percentages in some hours while simultaneously making it harder for the balance of resources to match and follow the net load curve in future hours is an unjust practice that leads to unreasonable rates.

We believe that to protect consumers and ensure just and reasonable LMP energy markets, a cost that a resource imposes on other resources must be borne by the causing resource and should then be reflected in that resource’s marginal costs (and energy market bids).

To accomplish that, we recommend the Commission consider three mechanisms:

1. For new resources, the Commission should establish minimum standards of cooperation with the balance of the generating fleet.
2. For existing resources, the Commission should:
1. Establish a mechanism to estimate the imposed costs of VERs and allocate them to VERs on a watt-hour of generation basis, or
2. Phase in a requirement for on-site (ahead of the step-up transformer) upgrades to existing VER resources to meet recommended facility minimum cooperation capability standards for new resources.

We observe that there has been a decline in the efficiency of wholesale energy markets not because the markets have increased costs per unit of energy, but rather because they have treated VERS as “equals” to up/down dispatchable or baseload resources by a shortsighted definition of equal – that is, by dispatching solely on marginal cost for the next hour, causing costs to elevate elsewhere. We reiterate that VERs are cost-additive at the base of the dispatch order because the net load curves that result are more expensive for the dispatchable fleet to meet than if a baseload or load-following resource had been dispatched first.

VERs plainly do not behave as equals in the most important “energy” role of all: cooperation to efficiently meet gross load curves and peak loads over time at lowest system cost. The industry’s history of ignoring this persistent performance shortfall in energy markets is the very reason for this docket.

We find absent in this docket the idea of cost causation, which we contend is vital to ensuring just and reasonable rates and fair compensation to resources based on their attributes and contributions. We also note that many of the ideas presented in this docket to accommodate high VER market penetrations appear to add cost and complexity to the market system and balancing requirements while increasingly testing the limits of system adequacy.

We believe there are straightforward and fair ways to avoid adding to system cost in the first place:

• Ensuring existing VER energy market bids include their imposed costs through imposed cost tariffs. Only when VERs include their hidden imposed costs in their energy market bids can markets help support the capacity incentive inherent in energy market single clearing price auction design.
• Minimum cooperation standards for interconnection rights for new VERs by requiring they be combined with a dispatchable resource or storage on site.

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APPENDIX: The Levelized Cost of Electricity from Existing Generation Resources (June 2019)

In this report, we analyze publicly available data to estimate the average levelized cost of electricity from existing generation resources (LCOE-Existing), as compared to the levelized cost of electricity from new generation resources (LCOE-New) that might replace them. The additional information provided by LCOE-Existing presents a more complete picture of the generation choices available to the electric utility industry, policymakers, regulators and consumers.

What is the levelized cost of electricity? The Energy Information Administration (EIA) defines it as “the cost (in real dollars) of building and operating a generating plant over an assumed financial life and duty cycle.” But EIA’s Annual Energy Outlook and similar LCOE reports focus only on new generation resources, while ignoring the cost of electricity from existing generation resources. If the economic lives of all generation resources matched their assumed financial lives, and no resource ever closed before the end of its economic life, then EIA’s approach would provide enough information to compare the costs of the available options.

Contrary to that assumption, the economic lives of existing generation resources exceed EIA’s assumed 30-year financial life. And environmental regulations on conventional generators—combined with the wholesale price suppression effect of mandates and subsidies for wind and solar resources and persistent low fuel prices for natural gas—have indeed forced existing coal and nuclear plants to close early. About 70 gigawatts of coal and nuclear generation capacity that could have been called upon on demand have retired since 2011.

Our report has two principal findings:

First: that, on average, continuing to operate existing natural gas, coal, nuclear and hydroelectric resources is far less costly than building and operating new plants to replace them. Existing coal-fired power plants, for example, can generate electricity at an average LCOE of $41 per megawatt-hour, whereas we project the LCOE of a new coal plant operating at a similar duty cycle to be $71 per MWh. Similarly, we estimate existing combined- cycle (CC) gas power plants can generate electricity at an average LCOE of $36 per MWh, whereas we project the LCOE of a new CC gas plant to be $50 per MWh.

Second: is a calculation of the costs that non-dispatchable wind and solar generation resources impose on the dispatchable generation resources which are required to remain in service but are forced to generate less in combination with them. Non-dispatchable means that the level of output from wind and solar resources depends on factors beyond our control and cannot be relied upon to follow load fluctuations nor consistently perform during peak loads. Wind and solar resources increase the LCOE of dispatchable resources they cannot replace by reducing their utilization rates without reducing their fixed costs, resulting in a levelized fixed cost increase.

Our calculations estimate that the “imposed cost” of wind generation is about $24 per MWh (of wind generation) when we model the cost against new CC gas generation it might displace, and the imposed cost of solar generation is about $21 per MWh (of solar generation) when we model the CC and combustion turbine (CT) gas generation it might displace. The average LCOEs from existing coal ($41), CC gas ($36), nuclear ($33) and hydro ($38) resources are less than half the cost of new wind resources ($90) or new PV solar resources ($88.7) with imposed costs included.

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