Four Academics from Texas Give Us the Lowdown on Energy Markets

The Conversation May 22, 2017

A double exposure taken in Nicola Tesla's Colorado Springs, Colo. laboratory around 1900. Tesla (among many other scientific achievements) developed the alternating current— a system of electrical transmission the world still uses today. The man sitting in the chair wasn't present when the electricity was discharged.

(Ed. Note: The fol­low­ing analy­sis focus­es on indus­try trends, elec­tric­i­ty prices and grid reli­a­bil­i­ty, but not on the eco­log­i­cal con­se­quences of increased nat­ur­al gas pro­duc­tion. With­out get­ting into the man made earth­quakes, flam­ma­ble faucets or rou­tine poi­son­ing of local water sup­plies, the arti­cle does a good job of explain­ing how the Unit­ed States is keep­ing its lights on these days and the degree to which wind and solar are help­ing. The authors, and each of their finan­cial dis­clo­sures, are list­ed at the end.) 

U.S. Sec­re­tary of Ener­gy Rick Per­ry in April request­ed a study to assess the effect of renew­able ener­gy poli­cies on nuclear and coal-fired pow­er plants. 

Some ener­gy ana­lysts respond­ed with con­fu­sion, as the sub­ject has been exten­sive­ly stud­ied by grid oper­a­tors and the Depart­ment of Energy’s own nation­al labs. Oth­ers were more crit­i­cal, say­ing the intent of the review is to favor the use of nuclear and coal over renew­able sources. 

So, are wind and solar killing coal and nuclear? Yes, but not by them­selves and not for the rea­sons most peo­ple think. Are wind and solar killing grid reli­a­bil­i­ty? No, not where the grid’s tech­nol­o­gy and reg­u­la­tions have been mod­ern­ized. In those places, over­all grid oper­a­tion has improved, not worsened.

To under­stand why, we need to trace the path of elec­trons from the wall sock­et back to pow­er gen­er­a­tors and the mar­kets and poli­cies that dic­tate that flow. As ener­gy schol­ars based in Texas — the nation­al leader in wind — we’ve seen these dynam­ics play out over the past decade, includ­ing when Per­ry was governor.

Wrong ques­tion

There has been a lot of ink spilled on why coal is in trou­ble. A quick recap: Nat­ur­al gas is plen­ti­ful and cheap. Our coal fleet is old and depre­ci­at­ed. Ener­gy use in the U.S. has flat­lined, so there’s less finan­cial incen­tive to build big new pow­er plants. 

Part of Perry’s review is aimed at estab­lish­ing how wind and solar, which are vari­able sources of pow­er, are affect­ing so-called base­load sources—the pow­er plants that pro­vide the steady flow of elec­tric­i­ty need­ed to meet the min­i­mum demand. 

Pos­ing the ques­tion whether wind and solar are killing base­load gen­er­a­tors, includ­ing coal plants, reveals an anti­quat­ed mind­set about pow­er mar­kets that hasn’t been rel­e­vant in many places for at least a decade. It would be sim­i­lar to ask­ing in the late 1990s whether email was killing fax machines and snail mail. The answer would have been an unequiv­o­cal yes” fol­lowed by cheers of hal­lelu­jah” and it’s about time” because both had bumped into the lim­its of their util­i­ty. How quick­ly 1990s con­sumers leaped to some­thing faster, less impact­ful and cheap­er than the old­er approach was a sign that they were ready for it. 

Some­thing sim­i­lar is hap­pen­ing in today’s pow­er mar­kets, as cus­tomers again choose faster, less impact­ful, cheap­er options — name­ly wind, solar and nat­ur­al gas plants that quick­ly boost or cut their out­put — as opposed to cling­ing to the out­dat­ed, lum­ber­ing options devel­oped decades before. Even the Depart­ment of Energy’s own analy­sis states that many of the old par­a­digms that gov­ern the (elec­tric­i­ty) sec­tor are also evolv­ing.”

Wind and solar are mak­ing old­er gen­er­a­tors less viable because their low, sta­ble prices and emis­sions-free oper­a­tion are desir­able. And they aren’t hurt­ing grid reli­a­bil­i­ty the way crit­ics had assumed because oth­er inno­va­tions have hap­pened simultaneously.

Texas pio­neer

Let’s use the case study of Texas to illus­trate. Since Texas has its own grid, known as the Elec­tric­i­ty Reli­a­bil­i­ty Coun­cil of Texas or ERCOT, and has installed more wind capac­i­ty than the next three wind-lead­ing states com­bined, the Texas expe­ri­ence shows what vari­able renew­ables like wind pow­er do to the grid.

In com­pet­i­tive mar­kets like ERCOT, com­pa­nies that run pow­er plants place bids into an auc­tion to pro­vide elec­tric­i­ty at a cer­tain time for a cer­tain price. A bid stack is jar­gon for a stack of bids” — or the col­lec­tion of all these bids lined up in order by price — in auc­tion-based mar­kets (such as Texas). 

Mar­kets use bid stacks to make sure that the low­est-cost pow­er plants are dis­patched first and the most expen­sive pow­er plants are dis­patched last. This mar­ket-based sys­tem is designed to deliv­er the low­est-cost elec­tric­i­ty to con­sumers while also keep­ing pow­er plant own­ers from oper­at­ing at a loss. Through­out the day, the mar­ket price for elec­tric­i­ty (in $/Megawatt-hour) changes as demand changes.

An illus­tra­tion of the elec­tric­i­ty mar­ket bid stack for the ERCOT grid in Texas. Gen­er­a­tors line up left to right from the low­est cost to high­est cost every five min­utes. As demand changes through­out the day, the mar­gin­al gen­er­a­tor,’ or the last pow­er plant called to pro­vide pow­er, sets the price that every plant pro­vid­ing pow­er (left of the ver­ti­cal black line) is paid. Pow­er plants to the right of the line are not dis­patched and thus do not receive pay­ment in an ener­gy-only mar­ket, (NG CC = Nat­ur­al Gas Com­bined Cycle; NG Oth­er = NG boil­ers and com­bus­tion tur­bines). (Info­graph­ic: Uni­ver­si­ty of Texas at Austin)

The cost of nat­ur­al gas also affects the price of elec­tric­i­ty. As the price of nat­ur­al gas drops, each of the nat­ur­al gas pow­er plants drop in price. That’s no sur­prise: When it costs less for them to oper­ate, they can bid a low­er price into the mar­ket and move ear­li­er in the line. 

When gas drops into to the range of US$3 to $3.50 (per mil­lion BTU) and low­er, it begins to dis­place coal as a less expen­sive source of elec­tric­i­ty. This sce­nario reflects today’s real­i­ty: gas is cheap so grids are using it for more of our elec­tric­i­ty than coal.

An illus­tra­tion of a bid stack with a fixed load and declin­ing prices for nat­ur­al gas, result­ing in coal being forced to the right side of the bid stack. Mov­ing to the right of the stack means that the pow­er plant is not dis­patched because there are oth­er more eco­nom­i­cal options for pro­duc­ing elec­tric­i­ty, in this case, NG CC. (NG CC = Nat­ur­al Gas Com­bined Cycle; NG Oth­er = NG boil­ers and com­bus­tion tur­bines). (Info­graph­ic: Uni­ver­si­ty of Texas at Austin)

How do renew­ables affect the bid stack? Renew­able sources such as wind, solar and hydro have no fuel costs — sun­light, wind and flow­ing water are free. That means their mar­gin­al oper­a­tional cost is near zero; the cost is essen­tial­ly the same to oper­ate one megawatt of wind as com­pared to the cost of oper­at­ing 10 megawatts of wind since gen­er­a­tors don’t need to buy fuel. That means as more wind and solar farms are installed, more capac­i­ty is insert­ed at the cheap­est end of the bid stack. 

This inser­tion push­es out oth­er gen­er­a­tors such as nuclear, nat­ur­al gas and coal, caus­ing some of them to no longer be dis­patched into the grid — that is, they don’t sup­ply pow­er into the grid (or get paid). So as more renew­ables are installed, pow­er mar­kets dis­patch few­er con­ven­tion­al options. And, because the mar­gin­al cost of these new sources is almost free, they sub­stan­tial­ly low­er the cost for elec­tric­i­ty. This is great news for con­sumers (all of us) as our bills decrease, but bad news for com­peti­tors (such as coal plant own­ers) who oper­ate their plants less often and are paid less when the plants do operate.

Increas­ing the installed capac­i­ty of renew­able ener­gy (e.g., wind and solar) on the bid stack shifts gen­er­a­tors with con­ven­tion­al fuels such as nuclear, coal and nat­ur­al gas to the right. Since renew­able sources have near-zero mar­gin­al costs since there is no cost for fuels, they are dis­patched first and reduce the mar­ket price for elec­tric­i­ty, (NG CC = Nat­ur­al Gas Com­bined Cycle; NG Oth­er = NG boil­ers and com­bus­tion tur­bines). (Info­graph­ic: Uni­ver­si­ty of Texas at Austin)

What does all this mean? Nat­ur­al gas and renew­ables are affect­ing coal in two ways. Nat­ur­al gas is a direct com­peti­tor with coal because both can be dis­patched — turned on — when a grid oper­a­tor needs more pow­er. That is help­ful for grid reli­a­bil­i­ty. But, as the cost of nat­ur­al gas has fall­en, coal has become less com­pet­i­tive because it is cheap­er to oper­ate a nat­ur­al gas pow­er plant. 

The effect of renew­ables is slight­ly dif­fer­ent: Wind and solar pow­er are not dis­patch­able, so they can­not be turned on at a moment’s notice. But, when they do turn on, dur­ing windy evenings or sun­ny days in Texas, they oper­ate at very low mar­gin­al cost and thus oper­ate very competitively. 

Research at Uni­ver­si­ty of Texas Austin shows that while installing sig­nif­i­cant amounts of solar pow­er would increase annu­al grid man­age­ment costs by $10 mil­lion in ERCOT, it would reduce annu­al whole­sale elec­tric­i­ty costs by $900 mil­lion. The result of all this is that renew­ables com­pete with con­ven­tion­al sources of pow­er, but they do not dis­place near­ly as much coal as cheap nat­ur­al gas. In fact, cheap gas dis­places, on aver­age, more than twice as much coal than renew­ables have in ERCOT.

What about nuclear?

Nuclear’s prob­lems are large­ly self-inflict­ed. In short: The price to build nuclear is high, so we don’t build many nuclear plants these days. Since we don’t build, we don’t have the man­u­fac­tur­ing capa­bil­i­ty. Since we don’t have the man­u­fac­tur­ing capa­bil­i­ty, the price to build nuclear is high. Since the price to build nuclear is high, we don’t build nuclear these days…so on and so forth. 

Today, cheap gas, hav­ing already beat­en up on coal, is a threat to new nuclear pow­er plants and less effi­cient, old­er plants. New nat­ur­al gas com­bined cycle pow­er plants can be built for about one-sixth the cost of a new nuclear plant, is almost twice as effi­cient and you can build them in small­er incre­ments, mak­ing them eas­i­er to finance.

Mar­ket inno­va­tion and IT can fix reliability

Because wind ener­gy comes and goes with the weath­er, it makes grid oper­a­tors ner­vous. But wind fore­cast­ing has improved dra­mat­i­cal­ly, giv­ing more con­fi­dence to those who need to keep the lights on. 

And, inter­est­ing­ly enough, the require­ments for reserve capac­i­ty (back­up pow­er for when wind pow­er dips) to man­age the grid smooth­ly went down, not up, over the past few years in Texas, despite rapid growth in wind dur­ing Gov­er­nor Perry’s tenure. That is, the costs for man­ag­ing vari­abil­i­ty in the grid decreased. 

Why has there been lit­tle dis­rup­tion to the reli­a­bil­i­ty of the Texas grid? Because along­side rapid growth in wind instal­la­tions was a mar­ket trans­for­ma­tion in ERCOT. While Sec­re­tary Per­ry was gov­er­nor, the Texas mar­ket went from a coarse, slow mar­ket to a fine-tuned, fast mar­ket. Inno­vat­ing the mar­ket to one that is dynam­ic and ful­ly func­tion­ing made it easy to include more wind into the sys­tem. It’s also a sign of how advanced tech­nolo­gies enable us to rein­vent the grid toward one that is cheap­er, clean­er and more reliable.

Fig­ure show­ing increas­ing wind in ERCOT and decreas­ing reg­u­la­tion require­ments. The drop in require­ments is due to mar­ket oper­a­tional changes. There does not appear to be any cor­re­la­tion with increas­ing wind and reg­u­la­tion pro­cure­ments. (Info­graph­ic: Juan Andrade, Yingzhang Dong, Ross Baldick)

But there is still more to do — infor­ma­tion tech­nol­o­gy cou­pled with inte­grat­ed hard­ware can help. Con­sid­er this: There are 7.7 mil­lion smart meters in Texas, most of them res­i­den­tial. We’ve esti­mat­ed that installing 7 mil­lion con­trol­lable ther­mostats for just the house­holds in Texas would cost $2 bil­lion. Res­i­den­tial air con­di­tion­ing is respon­si­ble for about 50 per­cent of peak demand in Texas in the sum­mer. That means about 30 gigawatts of peak demand in Texas is just from res­i­den­tial air conditioners. 

By dynam­i­cal­ly man­ag­ing our air con­di­tion­ing loads — that is, adjust­ing ther­mostats to low­er over­all demand with­out impact­ing people’s com­fort — we could reduce peak demand by 10 to 15 GW. That means we might not need $10 bil­lion to $15 bil­lion worth of pow­er plants. Spend­ing $2 bil­lion to avoid $15 bil­lion is a good deal for con­sumers. In fact, you could give the ther­mo­stat away for free and pay each house­hold $700 for their trou­ble and it would still be cheap­er than any pow­er plant we can build.

In the end, Sec­re­tary Per­ry has posed good ques­tions. Thank­ful­ly, because of lessons learned while he was gov­er­nor of Texas, we already have answers: despite con­cerns to the con­trary, incor­po­rat­ing wind and solar into the grid along with fast-ramp­ing nat­ur­al gas, smart mar­ket designs and inte­grat­ed load con­trol sys­tems will lead to a clean­er, cheap­er, more reli­able grid.

Are solar and wind real­ly killing coal, nuclear and grid reli­a­bil­i­ty?was orig­i­nal­ly pub­lished on The Con­ver­sa­tion under a Cre­ative Com­mons license. 

About the authors:

Joshua D. Rhodes: Post­doc­tor­al Researcher of Ener­gy, Uni­ver­si­ty of Texas at Austin

Michael E. Web­ber: Pro­fes­sor of Mechan­i­cal Engi­neer­ing and Deputy Direc­tor of the Ener­gy Insti­tute, Uni­ver­si­ty of Texas at Austin

Thomas Deet­jen: Grad­u­ate Research Assis­tant, Uni­ver­si­ty of Texas at Austin

Todd David­son: Research Asso­ciate, Ener­gy Insti­tute, Uni­ver­si­ty of Texas at Austin

Dis­clo­sure statements:

Joshua Rhodes abides by the dis­clo­sure poli­cies of the Uni­ver­si­ty of Texas at Austin. The Uni­ver­si­ty of Texas at Austin is com­mit­ted to trans­paren­cy and dis­clo­sure of all poten­tial con­flicts of inter­est. He has filed all required finan­cial dis­clo­sure forms with the uni­ver­si­ty. Joshua Rhodes has not received any research fund­ing that would cre­ate a con­flict of inter­est or the appear­ance of such a con­flict. In addi­tion to research work on top­ics gen­er­al­ly relat­ed to ener­gy sys­tems at the Uni­ver­si­ty of Texas at Austin, Joshua Rhodes is an equi­ty part­ner in Idea­Smiths LLC, which con­sults on top­ics in the same areas of inter­ests. The terms of this arrange­ment have been reviewed and approved by the Uni­ver­si­ty of Texas at Austin in accor­dance with its pol­i­cy on objec­tiv­i­ty in research.

Michael E. Web­ber receives fund­ing from many research part­ners and spon­sors, includ­ing the U.S. Depart­ment of Ener­gy, Texas State Ener­gy Con­ser­va­tion Office, ERCOT, the Cyn­thia and George Mitchell Foun­da­tion, the Alfred P. Sloan Foun­da­tion and many oth­ers. A com­plete list­ing of fun­ders for his research at UT Austin can be found at www​.web​beren​er​gy​group​.com. Michael E. Web­ber abides by the dis­clo­sure poli­cies of the Uni­ver­si­ty of Texas at Austin. The Uni­ver­si­ty of Texas at Austin is com­mit­ted to trans­paren­cy and dis­clo­sure of all poten­tial con­flicts of inter­est. He has filed all required finan­cial dis­clo­sure forms with the uni­ver­si­ty. In addi­tion to research work on top­ics gen­er­al­ly relat­ed to ener­gy sys­tems at the Uni­ver­si­ty of Texas at Austin, Web­ber is an equi­ty part­ner in Idea­Smiths LLC, which con­sults on top­ics in the same areas of inter­ests. The terms of this arrange­ment have been reviewed and approved by the Uni­ver­si­ty of Texas at Austin in accor­dance with its pol­i­cy on objec­tiv­i­ty in research.

Thomas A. Deet­jen abides by the dis­clo­sure poli­cies of the Uni­ver­si­ty of Texas at Austin. He receives fund­ing from the Elec­tric Reli­a­bil­i­ty Coun­cil of Texas and has con­tributed to research projects fund­ed by ExxonMobil.

F. Todd David­son does not work or con­sult for any com­pa­ny that would ben­e­fit from the con­tent of this arti­cle. Todd has received fund­ing from oil and gas com­pa­nies, such as Sta­toil. Todd per­son­al­ly owns shares in Kinder Mor­gan, Gen­er­al Elec­tric, and Apache. Todd abides by the dis­clo­sure poli­cies of the Uni­ver­si­ty of Texas at Austin and has filed all required finan­cial dis­clo­sure forms with the uni­ver­si­ty. Todd has no rel­e­vant affil­i­a­tions beyond his aca­d­e­m­ic posi­tions with the Uni­ver­si­ty of Texas at Austin.

The Con­ver­sa­tion is an inde­pen­dent source of news and views from the aca­d­e­m­ic and research com­mu­ni­ty — deliv­ered direct­ly to the pub­lic through Cre­ative Com­mons repub­li­ca­tion. Aim­ing to rebuild pub­lic trust in jour­nal­ism, the orga­ni­za­tion believes Access to inde­pen­dent, high qual­i­ty, authen­ti­cat­ed, explana­to­ry jour­nal­ism under­pins a func­tion­ing democracy.”
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