Early Retirement: More Challenging Than It Sounds

May 16, 2017

As our energy mix becomes increasingly decarbonized, regulators and grid operators face new challenges from many directions. A growing concern in regions with high penetration of renewables is the risk of uneconomic retirement of flexible capacity, such as natural gas-fired power plants.

Many agree that natural gas will continue to play a critical role in providing flexible power that can easily ramp up or down to accommodate the intermittency of wind and solar. However, as renewables make up a larger portion of our energy portfolio they depress wholesale energy prices due to their lack of variable costs (at times even pushing prices into the negative), straining gas generators by reducing revenues. We can expect this trend to intensify as RPS requirements and aggressive climate policies continue to bolster the renewable portion of our energy mix.

Capacity markets and Resource Adequacy (RA) requirements are intended to help mitigate this issue. In California, the California Public Utilities Commission’s RA program requires that load-serving entities maintain a reserve margin of 15% above their forecasted peak load, and importantly, includes requirements for flexible capacity in order to address ramping concerns.

However, due to an over-supply of capacity, not all generators receive RA contracts, and some gas plants are finding it increasingly difficult to weather the surge of renewables. Last year, Calpine’s 578 MW Sutter Energy Center shut its doors, and the 1,022 MW La Paloma power plant filed for bankruptcy, blaming the rise of renewables, lower than anticipated demand for electricity, and “an inhospitable regulatory environment.” Both plants opened in the early 2000s, retiring (or facing serious risk of retirement) less than halfway into their 30-40 year lifespan. Some readers will recall a February LA Times article, which strongly suggested that regulatory ineptitude and complacency has led to the oversupply of natural gas capacity, and unnecessarily high bills for California ratepayers. It’s worth noting that, while the article made a bit of a splash, not everyone found it particularly insightful.

Perhaps more to the point, however, the article raises questions as to how much capacity is truly needed to ensure the desired level of reliability. Have we truly overbuilt the system? Should we be concerned about letting flexible capacity retire? Discussions of this nature are becoming increasingly widespread: the CPUC, CEC and CAISO held a joint workshop on plant reliability issues last month; the FERC hosted a workshop on state’s support for particular types of generation (and the effects on wholesale markets) several weeks ago; and, at the behest of Rick Perry, the DoE is conducting a study on the “erosion” of baseload power due to renewable energy policies (although many would argue that Perry’s motivation differs considerably from that of California policymakers).

Regardless of political ideology, however, it’s apparent that careful consideration of the interaction between conventional and renewable generation is necessary. While many of us hope that groundbreaking advances in storage technology (and policies in place to deploy it), or further utilization of load shifting and demand response, will reduce or even eliminate the need for reliance on fossil fuels, we’ve yet to reach that point. Until then, significantly decarbonizing our electric grid will hinge upon finding an acceptable balance between intermittent renewable resources and more flexible options which provide the reliability required by grid operators.