Economic dispatch done best when done locally

Both the states and the federal government are looking at who should decide which power plants are used at any given moment to meet demand. In question is which approach will reliably serve customers with the lowest-cost electricity.

The Energy Policy Act of 2005 (EPAct) raised the issue when it directed the Federal Energy Regulatory Commission (FERC) and the U.S. Department of Energy (DOE) to each issue a report to Congress on economic dispatch. The DOE was also assigned the task of studying the related topic of efficient dispatch.

Decisions about which power plants are used to meet demand are now made at either the state level, through a public utility commission, or at the regional level, by either a regional transmission organization (RTO) or an independent system operator (ISO), both of which use FERC-approved dispatch processes.

Although it is certainly prudent to periodically review and assess existing procedures for dispatching power plants to meet demand, FERC and the DOE should respect those procedures. They work, and they have been approved by the relevant local regulatory agencies. Replacing them all with a single federal dispatch model has the potential to create higher, not lower, electricity prices. It could also threaten a number of other public and utility industry goals, including electric reliability, long-term rate stability, fuel diversity, and the promotion of renewable energy resources.

The new energy law defines economic dispatch—or, more specifically, "security-constrained economic dispatch"—as the operation of the integrated transmission and electric power supply system in a manner that minimizes the cost of electric power, recognizing any operational limits of generation and transmission facilities. Efficient dispatch looks at the more narrow issue of prioritizing the use of natural gas-powered generating plants so that those plants with the highest thermal efficiency levels are used first.

The DOE presented its conclusions on economic dispatch in a report submitted last November. The agency found that the existing methods for dispatching power do minimize electricity costs while also achieving public policy goals. Regarding its study of efficient dispatch methods, the DOE discovered that efficient dispatch is not the same as economic dispatch. In fact, efficient dispatch can often result in uneconomic dispatch that leads to higher electricity prices for consumers.

For example, utilities use their less-efficient single-cycle, gas power plants at times of peak demand because these plants have the ability to start up very fast, are operationally very flexible, and are used for reliability purposes. In addition, older steam turbine plants are usually fully depreciated. From a consumer perspective, these plants are the best choice to run and have the lowest cost, despite having lower thermal efficiencies than other gas-fired plants that may be available.

An overemphasis on short-term costs, which EPAct proposals raise, could also create the unintended effect of driving demand for gas as a generating fuel even higher. Clean coal power plants and the next generation of nuclear facilities both have higher capital costs in comparison with natural gas-powered plants. If the highest efficiency gas plants were always to be dispatched first, it would discourage potential builders of coal and nuclear plants from taking on the added financial risk. In what will become an annual report on the topic, the DOE will continue to look at ways to improve methods for dispatching power.

FERC is now preparing its report on economic dispatch for an August release date. The FERC report will share the insight that it gained earlier this year through a number of regional meetings with states, utility and non-utility generators, and other stakeholders.

As FERC prepares its recommendations, we are cautioning that it consider the potential for creating a serious conflict with the established processes for dispatching power. The nation’s RTOs and ISOs already use FERC-approved dispatch procedures to optimize the mix of energy resources available in each region. Additionally, the dispatch process used by RTOs also considers potential transmission limitations and constraints of their respective systems. Such constraints include control voltage and stability issues, line and transformer loadings, and operating reserve requirements.

Outside of the RTOs and ISOs, the state regulators that oversee the process have an obligation to dispatch power in a way that keeps electricity costs as low as possible for consumers. They also ensure that the state’s energy policy and environmental goals are pursued. At its annual meeting last November, the National Association of Regulatory Utility Commissioners adopted a resolution supporting the continuing need for flexibility in using economic dispatch without preference to specific generators or fuel usage.

Developing a one-size-fits-all model for dispatching power is an oversimplified approach for what in reality is a locally driven, complicated process. We welcome FERC and the DOE’s scrutiny of the process, but we urge them to respect the existing state and regional processes.