A question of priority

At the heart of one provision in the Energy Policy Act of 2005 (EP Act) lies one vital question: which method for scheduling and prioritising the demands for electricity will result in the lowest costs for customers? The existing approach, which takes place at the regional and local level, or a new federal 'one-size-fits-all' plan? To find out, EP Act assigned the US Department of Energy (DoE) and the Federal Energy Regulatory Commission (Ferc) to study this issue of economic dispatch.

At present, the decision is made in one of two ways. Within regional power markets, regional transmission organisations (RTOs) and independent system operators (ISOs) dispatch plants according to procedures that are approved by Ferc. These procedures are tailored to optimise the mix of energy resources available in the respective markets. Outside of RTOs/ISOs, state public utility commissions regulate how power is dispatched.

Although we believe it is prudent to periodically review and assess existing procedures, the proposals by the EP Act raise serious practical and policy concerns. To maintain reliability and to achieve the highest value for consumers, the federal government should respect the existing regional methods for dispatching electricity. They work and have been approved by the relevant regulatory agencies.

DoE findings

The first of the studies was completed by the DoE in November 2005. It analysed the procedures utility companies use to dispatch power. The DoE concluded that the power industry's existing methods do help to minimise costs. In addition, they are also flexible enough to achieve such policy goals as promoting fuel diversity and increasing natural gas savings. The DoE was also tasked with studying the potential benefits of changing the current methods for dispatching electricity. This was so that improvements to non-utility generators could sufficiently increase their output. In 2004, these generators accounted for 42% of total US generation capacity and 36% of actual electricity production.

This mission stemmed in part from recent Congressional debates on a topic related to economic dispatch, but one that is more narrowly focused - efficient dispatch. Unlike economic dispatch, which looks at the broad question of how to meet demand reliably and at the lowest possible cost, efficient dispatch looks only at generating electricity using the least amount of natural gas. A majority of the plants owned by the non-utility generators are high-efficiency natural gas plants. The DoE found that despite its interest in achieving greater natural gas savings in power generation, it remains sceptical about efficient dispatch proposals. It's viewpoint on efficient dispatch was based on three findings:

- pursuing efficient dispatch would conflict with the primary purpose of economic dispatch - to reduce consumers' total electricity costs;

- the dispatching of power is at best a complex process, and modifications to it must be made with care in order to minimise unanticipated consequences. Modifying it to achieve short-term non-economic policy objectives should be considered only as a last resort;

- a better alternative would be to examine the practice of power dispatch of, and by itself, to determine whether modifications would better achieve its traditional objectives, which could by itself lead to the more efficient use of natural gas.

We agree with the DoE's findings on efficient dispatch. It is not possible to decide which natural gas power plant is the cheapest to operate, solely by looking at thermal efficiency. For example, utilities use their less-efficient single-cycle gas turbine power plants at times of peak demand because these single-cycle plants have the ability to start up very quickly, are operationally very flexible and are used for reliability purposes. In addition, older steam turbine plants are generally fully depreciated.

Also, their fuel is often supplied under stable, long-term contracts that serve to mitigate the price volatility found in the natural gas spot markets.

Efficient dispatch proposals that encouraged only high-efficiency natural gas plants could also create a number of unintended consequences. One outcome is that they would discourage the construction of integrated gasification combined cycle and other clean coal plants, as well as the next generation of nuclear facilities. These power plants have high initial capital costs. If their owners could not be assured of a high place in the dispatch queue, they may not decide to build the plants. As a result, the country's generating fleet would become more dependent on one fuel, natural gas, which would further aggravate today's already high natural gas prices.

Efficient dispatch proposals also could have negative ramifications for hydropower. The very low operating and fuel costs of hydropower would always require it to be dispatched first. However, using up all of a region's hydropower resources in the first few months may have serious ramifications for meeting electricity demand later in the year. Under this proposal, owners of hydropower resources would not have the flexibility to reserve some hydropower to help stabilise electricity rates and meet future demand.

To maintain reliability and meet state, regional and federal policy requirements, there are many transmission system limitations and constraints on utility operations that need to be considered and incorporated into dispatch decisions as well. For example, running a more efficient plant in one part of the grid, instead of a less-efficient plant elsewhere, can increase transmission congestion and create a situation where some consumers on the 'downstream' side of the congestion point actually pay more.

Reliability issues

Economic dispatch is about generating low-cost, reliable electricity. Including the high-efficiency natural gas plants of a non-utility generator in the dispatch queue could raise reliabilty concerns unless certain precautions are taken. The first is that a non-utility generator should be obligated to provide energy to a utility for a specified period of time, even if at that point in time it could get a better price from another buyer. Every day utilities forecast what will be the demand during each hour of the next day. They then determine the optimum mix of generating units that will produce the lowest energy cost in each of those hours. A non-utility generator that can come and go according to market prices poses a risk for the utility in meeting its demand.

All non-utility generators should also be subject to contractual performance standards, with penalties for failure to deliver. Conceptually, the inclusion of a generator as a supply source in a utility's economic dispatch queue is identical to having the utility enter into a short-term purchased power agreement with that supplier. To the extent that a supplier generator included in a utility's dispatch queue fails to deliver when dispatched by the utility, that supplier should be subject to a contractual non-performance penalty set at a minimum equal to the cost of the replacement power incurred by the utility.

Ferc focus

EP Act also requires Ferc to study the economic dispatch issue by convening joint boards with the states on a regional basis. Ferc has concluded its regional board meetings. The joint boards must make their recommendations to Ferc by May 2, so that Ferc can submit the report to Congress by its August 8 deadline.

As Ferc prepares its recommendations, we are cautioning that it consider the potential for creating a serious conflict with established RTO/ISO or state-approved dispatch processes. For example, the RTOs and ISOs are bid-based markets in which generating facilities are dispatched according to Ferc-approved real-time and day-ahead energy market guidelines. It is important to note that these factors are not considered by the RTO in dispatching generation - it only looks at bids. In addition, the dispatch process used by the RTO also considers potential transmission limitations and constraints of the respective system. Such constraints include control voltage and stability issues, line and transformer loadings, and operating reserve requirements.

Outside of the RTOs/ISOs, state public utility commissions actively oversee the dispatch process used by electric utilities under their jurisdiction. The state regulators have a strong incentive to dispatch power in a way that keeps electricity costs as low as possible for consumers. They also ensure that environmental and other objectives are met, such as maintaining reliability, long-term rate stability, fuel diversity, and the promotion of renewable resources.

In addition to utilities generating power daily on an economic dispatch basis, they also seek out alternative, non-utility sources of energy that may offer lower cost power. This routine inclusion of non-utility generation in their economic dispatch process enables utilities to provide energy to their customers at an even lower cost than if they relied exclusively on their own generation portfolio.

Any study undertaken must recognise the role of the states and not undermine the jurisdictional authority that mandates state commissions to ensure that retail customers are served by low-cost, efficient, and reliable sources of energy from a diversity of sources. At its annual meeting last November, the National Association of Regulatory Utility Commissioners (Naruc) adopted a resolution supporting the continuing need for flexibility in using economic dispatch without preference to specific generators or fuel usage.

Electric utilities remain dedicated to providing their customers with a low cost, reliable power supply. We welcome efforts to improve the process that furthers this result. However, the goal has to be a better system, one that takes into consideration not only how to achieve the lowest possible price today, but also how to ensure a fuel diverse, reliable, technically-advanced, and environmentally-sensitive power supply tomorrow.

Richard McMahon is executive director of the Alliance of Energy Suppliers, a division at the Edison Electric Institute. Email: rmcmahon@eei.org.

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