John Nichols is a Fellow at the Center for Energy & Environmental Policy at the Caesar Rodney Institute.
Part 1: Delaware needs more electricity. Demand is rising, existing power plants are aging, and concerns about whether enough new generation is being built are growing. So, why isn’t anyone building a new power plant in Delaware? The answer begins with a major change Delaware made more than two decades ago in how we produce and buy electricity.
Under Delaware’s 1999 Electric Utility Restructuring Act, Delaware deregulated electricity generation, ending the old system in which Delmarva Power both generated and delivered electricity. Delmarva delivers power but no longer serves as the traditional monopoly owner of the generation supplying its customers. So, every new plant serving our region must be built by a private, independent developer who recovers the investment from the wholesale market. That market is now structured so that new dependable generation cannot be financed.
How the market sets the price
Our regional grid operator, PJM, starts with the lowest-cost electricity available and keeps adding electricity from more expensive sources until there is enough to meet demand. The price of the last source of electricity needed sets the market price paid to all the generators supplying power at that time. PJM’s own market operations manual spells out this system.
Why wind and solar bid zero — and below zero
Federal subsidies can allow wind and solar to bid at zero — or even below zero. Because wind and solar have no fuel cost, the cost of producing 1 additional megawatt-hour once a facility is built is very low. Federal production tax credits can push that advantage further, allowing some generators to keep producing, even when wholesale electricity prices fall below zero. This is documented by the U.S. Energy Information Administration.
What that does to the plants we depend on
Zero and negative bids can reduce what dependable power plants earn. Because the lowest-priced electricity is used first, zero and negative bids from wind and solar can push more expensive coal and natural gas generation out of the market. First, it displaces them — they run fewer hours. Second, it drags down the clearing price for the hours they do run. Peer-reviewed research on PJM confirms this price suppression effect. So, they lose revenue two ways at once: fewer running hours and a lower price for each one.
More importantly, the grid still needs dependable generation when the wind is not blowing, or the sun is not shining. So, while subsidized wind and solar can reduce what coal and natural gas plants earn, the grid may still need those plants to remain available.
The ‘missing money’
The revenue shortfall for reliable power plants is known as the “missing-money” problem. Coal and natural gas plants can run for fewer hours and collect less revenue from the energy market. But those plants still have to cover the costs of remaining available when the grid needs them. PJM’s Independent Market Monitor explains that a primary reason for having a capacity market is that the energy market alone does not provide enough net revenue to attract and retain all the generation needed for reliability.
The plants being subsidized cannot replace the ones being lost
Wind and solar are credited at only a fraction of their potential output because their actual output depends on whether the wind is blowing, or the sun is shining, when electricity is needed most. You cannot retire 100 megawatts of dependable power and replace it with 100 megawatts of wind or solar and expect the same reliability.
The proof is in how anything gets built now
The electricity market is no longer providing enough incentive to get dependable power plants built. Instead, new projects are moving forward through administrative workarounds, including PJM’s one-time Reliability Resource Initiative and private co-location deals. When financing a power plant requires a captive buyer outside the market, the market has stopped doing its one job.
There is supposed to be a safety net for exactly this problem: a second market that pays plants simply to exist and be ready. It is screaming “build” at the top of its lungs — and nothing is coming.
That is Part 2.
Learn more
Watch CRI’s podcast, “Why Aren’t New Power Plants Being Built in Delaware?” at youtube.com/watch?v=k3cV7RbKlTg.
Sign the CRI affordable-energy petition at caesarrodney.org/affordable-energy-petition.
Reader reactions, pro or con, are welcomed at civiltalk@iniusa.org.
