The Dispatch Queue – An Alternative Means of Accounting for External Costs?

The Problem

While most people express a desire to use cleaner, lower-CO₂-emitting power generation sources, there is still no tangible mechanism in the electricity market that encourages their use over dirtier, highly-emitting sources. There are regulations and requirements for pollution controls, but once these minimum requirements are met, there is no incentive to use a cleaner source over a dirtier one.

The external (public health and environmental) costs of generation sources such as coal and oil are very significant, and if they were fully accounted for by the market, it would almost double their price. Some have called the fact that external costs are not accounted for the largest "market failure" within our energy economy. Given that these external costs are as real as the "normal" economic (or internal) ones, the current market is warped, in that it effectively subsidizes dirty sources by having a significant fraction of their real overall cost not be reflected in the market price.

One may say that the best response would be to significantly tighten pollution regulations, perhaps to the point where no sources have significant external costs. There are problems with this approach, however, above and beyond the fact that the energy industry has (and will?) successfully blocked the legislation that would be required. Significant tightening of regulations raises issues such as how expensive compliance will be, and whether or not viable alternative (cleaner) sources would be available. The beauty of simply placing a cost (or tax) on pollution that reflects its costs to public health and the environment is that those issues need not be addressed. The market just decides between sources based on the true, overall cost of each, resulting in the minimum overall (economic + environmental) cost-generation portfolio.

The above reasoning is what led to policies like cap-and-trade or a CO₂ emissions tax being proposed as a solution for the global warming problem. This has not flown politically, however. Policies that attempt to have external costs included in the market cost of energy have been labeled a "tax increase." This is particularly true given that the associated pollution taxes (or emissions credit costs) would have largely gone to the government.

Well, if we can't tax pollution, how about encouraging the use of clean sources by giving them subsidies? This has proved to be more popular so far, but this idea has also recently run into trouble, given the current situation with the budget deficit and national debt. Events like the Solyndra bankruptcy have put government clean energy subsidies even more on the defensive. Thus, it seems that neither policies involving money flowing to the government nor policies involving money flowing from the government are politically viable at this point.

One final idea, which does not involve money going to or from government, is simply requiring that cleaner sources provide a certain fraction of our overall power generation. The many state Renewable Portfolio Standards (that do not include nuclear) and the Clean Energy Standard being considered by Congress and the Obama administration (which does include nuclear) are examples of this policy. While better than nothing, such policies are not ideal in that they are crude, and don't involve a quantitative incentive based on real external costs. An energy source is either defined as "clean," or it is not. Note that the definition of "clean" would be decided politically, as opposed to objectively based on tangible external costs determined by scientific studies (nuclear's exclusion from state Renewable Portfolio Standards policies being one outrageous example). Finally, there is the fact that any such policy would require legislation.

All of the above begs the question whether there is a policy available that will encourage the use of cleaner energy sources that is revenue-neutral (i.e., does not involve money flowing to or from the government), does not involve the outright (political) selection of certain energy sources over others, and does not require legislation.

Enter the Dispatch Queue

There must be enough power plants in a given region to meet the maximum load (or demand) expected to occur. In fact, total generation capacity must exceed maximum demand by a specified "reserve margin," to address the possibility of a plant going offline, or other possible considerations. Due to the fact that demand varies significantly with time, a significant fraction of the generation capacity remains offline, some or most of the time.

The dispatch queue is a means by which utilities, or independent regional grid operators, decide which power plants will operate in order to meet demand at any given instant. A good discussion of dispatch queues and how they operate can be found in this Department of Energy report.

The general goal of the methodology used to set the dispatch queue order is to minimize overall generation cost, while staying in compliance with all federal or state laws (environmental rules, etc.). This is done by placing the power plants with the lowest "variable" cost first in the queue. Plants with the highest "variable" cost are placed last. The "variable" cost of a plant represents how much more it costs to operate the plant than it costs to leave it idle (i.e., it includes the fuel cost and maintenance costs that arise from operation, but does not include the plant capital cost, personnel costs, or any fixed maintenance costs). Thus, one starts with the least expensive plants, and moves up (in cost) until generation meets demand. The remaining, more expensive plants are not fired up. This ensures that the lowest-operating-cost set of plants is used to meet demand at any given time.

As far as who makes the decisions is concerned, in many cases the local utility itself runs the dispatch for its own service territory. In most of the United States, however, there is a large regional grid (covering several utilities) that is operated by an Independent System Operator (ISO) or Regional Transmission Organization (RTO), and those organizations, which are independent of the utilities, set the dispatch queue for the region.

The Idea

As discussed above, a plant's place in the dispatch queue is based upon variable cost, with the lowest variable cost plants being first in the queue. As discussed in the DOE report, all the dispatch queues in the country base the dispatch order almost entirely on variable cost, with the only possible exceptions being issues related to maximizing grid reliability. What if the plant dispatch methodology were revised so that environmental costs were also considered?

Ideally, the public health and environmental costs would be objectively and scientifically determined and cast in terms of an equivalent economic cost (as has been done in many scientific studies such as the ExternE study referenced earlier). The calculated external cost would be added to a plant's variable cost, and its place in the dispatch queue would be adjusted accordingly. The net effect would be that dirtier plants would be run much less often, resulting in greatly reduced pollution.

This could have a huge impact in the United States, especially at the current time. Currently, natural gas prices are so low that the variable costs of combine-cycle natural gas plants are not much higher than those of coal plants, even without considering environmental impacts. Also, there is a large amount of natural gas generation capacity sitting idle. The current situation is almost tragic, where we could replace a huge amount of old, dirty coal-fired capacity with modern gas-fired capacity, which would result in a huge reduction in both air pollution and CO₂ emissions, and could do so at little cost. This would, in fact, occur if the electricity market put even a small weight on environmental considerations, but alas it places none.

More specifically, if dispatch queue ordering methods were revised to even place a small (economic) weight on environmental costs, there would be a large switch from coal to gas generation, with coal plants (especially the older, dirtier ones) moving to the back of the dispatch queue, and only running very rarely (at times of very high demand). The specific idea of putting gas plants ahead of coal plants in the dispatch queue is being discussed by others.

The beauty of this idea is that it does not involve any type of tax or government subsidy. It is revenue neutral. Also, depending on the specifics of how it's implemented, it can be quantitative in nature, with environmental costs of various power plants being objectively weighed, as opposed certain sources simply being chosen, by government/political fiat, over others. It also may not require legislation (see below). Finally, dispatch queues and their policies and methods are a rather arcane subject and are generally below the political radar (many folks haven't even heard of them). Thus, this approach may allow the nation's environmental goals to be (quietly) met without causing a political uproar. It could allow policy makers to do the right thing without paying too high of a political cost.

Questions/Issues

The DOE report does mention some examples of dispatch queue methods factoring in issues other than just the variable cost. It is fairly common for issues of grid reliability to be considered. Also, compliance with federal or state environmental requirements can have some impacts. Examples of such laws include limits on the hours of operation for certain polluting facilities, or state requirements that a "renewable" facility generate a certain amount of power over the year. The report also discusses the possibility of favoring more fuel efficient gas plants over less efficient ones in the queue, even if using the less efficient plants at that moment would have cost less, in order to save natural gas. Thus, the report does discuss deviations from the pure cost model, to consider things like environmental impact and resource conservation.

I could not ascertain from the DOE report, however, what legal authorities govern the entities that make the plant dispatch decisions (i.e., the ISOs and RTOs), and what types of action would be required in order to change the dispatch methodology (e.g., whether legislation would be required). The DOE report was a study that was called for by the Energy Policy Act of 2005, which implies that its conclusions would be considered in future congressional legislation. I could not tell from reading the report if the lowest cost (only) method of dispatch is actually enshrined somewhere in state or federal law. If so, the changes I'm proposing would require legislation, of course.

The DOE report states that in some regions the local utility runs the dispatch queue itself. In the case of the larger grids run by the ISOs and RTOs (which cover most of the country), the report implies that those entities are heavily influenced, if not governed, by the Federal Energy Regulatory Commission (FERC), which is part of the executive branch of the federal government.

In the case of utility-run dispatch queues, it seems that nothing short of new regulations (on pollution limits, or direct guidance on dispatch queue ordering) would result in a change in dispatch policy. Whereas reducing cost and maximizing grid reliability would be directly in the utility's interest, favoring cleaner generation sources in the queue would not, unless it is driven by regulations. Thus, in this case, legislation would probably be necessary, although it's conceivable that the EPA could act (like it's about to on CO₂).

In the case of the large grids run by ISOs and RTOs, it's possible that such a change in dispatch methodology could be made by the federal executive branch, if indeed the FERC has the power to mandate such a change. In the current political situation, where the executive branch favors market-based mechanisms for reducing emissions (e.g., CO₂) but doesn't have sufficient support in Congress, this approach could be an alternative means for the administration to meet its objectives, without legislation being required. It must be noted, however, that although legislation would not be required, it is not clear how much direct influence the administration has over the FERC, which is an independent regulatory body. It may not be in FERC's nature to initiate such a significant policy change by itself.

Effect on Nuclear

With respect to the impacts of including environmental costs in plant dispatch order determination, I've mainly discussed the effects on gas vs. coal. Indeed, a switch from coal to gas would be the main impact of such a policy change.

As for nuclear, as well as renewables, the direct/immediate impact would be minimal. That is because both nuclear and renewable sources have high capital costs but very low variable costs. They also have very low environmental impacts; much lower than those of coal or gas. Thus, they will remain at the front of the dispatch queue, ahead of both coal and gas. Nuclear and renewable generation sources will be put into service whenever they are available, and this proposed policy change would do nothing to change that. It is likely, however, that such a change in dispatch policy would have indirect impacts, further down the road, that would benefit nuclear as well as renewables.

Given the political opposition to new coal plants, as well as looming air pollution (and perhaps CO₂) reduction requirements, most observers believe that there will be few, if any, new coal plants built in the United States. Meanwhile, renewables will provide a specified fraction of overall generation in the future, mostly based on state or federal government mandates. For most of the rest of our new generation needs, many expect nuclear and gas to be the primary competitors.

Given the future competition between nuclear and gas for bulk baseload power generation in the future, the future price of natural gas is one of the primary factors that will affect nuclear's future growth. In addition to reducing air pollution and CO₂ emissions (which would result in tremendous environmental and public health benefits), a change in dispatch policy that results in a shift from coal to gas will help correct the current imbalance between natural gas supply and demand (i.e., alleviate the current gas glut) and firm up natural gas prices. This in turn would result in at least some increase in nuclear generation.

________

Hopf

Jim Hopf is a senior nuclear engineer with more than 20 years of experience in shielding and criticality analysis and design for spent fuel dry storage and transportation systems. He has been involved in nuclear advocacy for 10+ years, and is a member of the ANS Public Information Committee. He is a regular contributor to the ANS Nuclear Cafe.