How Utility Monopsony Regulation Led To Colorado’s Shockingly Cheap Wind And Solar Bids
- Jan 24, 2020 12:30 pm GMT
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Public Service Company of Colorado’s (PSCo) recently approved “Clean Energy Plan” will retire two coal plants and replace them with “shockingly” cheap new wind and solar projects after receiving 430 bids on a request for proposals (RFP) to build new generation.
The most striking result of PSCo’s RFP may not be renewable prices below the marginal cost of coal or the record participation, but instead that a utility which was the only buyer in a solicitation for generation did not exercise its “monopsony” power – defined as a single-buyer in a market – to disadvantage potential suppliers.
Utility regulators can encourage similar results by addressing utility monopsony power so that competitive solicitations result in many bidders and low prices for generation projects.
But these low-cost competitive bid results didn’t just magically show up; they resulted from long-term hard work by regulators, utilities, and stakeholders. A new research paper written by America’s Power Plan expert Ron Lehr details how Colorado’s experience working to ensure competitive bid results holds lessons for other states transitioning away from uneconomic coal generation, as summarized below.
Managing utility incentives to encourage clean energy innovation
Regulated utilities can use a four-step process to achieve a cost-effective transition from old fossil fuels to new renewables:
1. Conduct financial analysis to reveal fuel and operating costs for energy at each power plant, then compare fossil unit costs with renewables costs. This comparison, often omitted from utility-led resource planning, can facilitate moving utility investments from more expensive operational polluters to lower-cost clean resources through early retirements.
2. Address utility financial incentives that determine how much coal plant capital cost remaining will be included in consumers’ utility rates, specifying how much investment remaining in early-retired plants will be recovered and over what period. Ask: Should uneconomic generation be included in consumers’ rates, and if so, for how long?
3. Begin refinancing resulting regulatory assets, through securitization or other means, to generate additional consumer savings that reduce shareholder returns.
4. Allow utilities to reinvest in new clean resources they own to refill utility rate bases and provide superior returns for equity investors to rebalance in shareholders’ favor.
PSCo’s experience is an optimal example of step four above – getting the best current market prices for new renewables from competitive solicitations in which utilities participate. Well designed and regulated competitive procedures can overcome monopsony power, resulting in many bidders and low prices for generation projects. Since wind and solar costs continue to drop rapidly, only current results from competitive procurements provide access to current market prices for these resources – the results in Colorado speak for themselves.
Low bid results in Colorado
PSCo’s RFP for new replacement generation resources resulted in median bid prices for wind of about $18 per megawatt-hour (MWh) and about $29 per MWh for solar (including federal tax credits), well below the marginal cost of many of PSCo’s existing coal power plants.
Wind and solar coupled with storage were marginally higher, but remarkably affordable. The numbers of bids received were nearly ten times those received in response to a prior bid, which also resulted in wind and solar costs that decreased consumers’ costs of electricity service.
Utility monopsony incentives and outcomes
Vertically integrated monopoly utilities that own generation, transmission, and distribution facilities have market power when they acquire new generation resources from other firms, since they control transmission networks required to move power from generation to loads and are the only legal electricity supplier in their markets. Utilities are incentivized to use their monopsony power to disadvantage their potential suppliers, thereby maintaining their market control and financial advantages.
Utilities will exercise their monopsony power in a number of ways even while they ask for bids for new generation from other firms. Most of these methods boil down to information control: The utility controls what information potential suppliers have to formulate their bids, including performance and bid requirements, evaluation criteria, and system needs. In many cases, utilities retain significant discretion to reject bids without much justification.
Utility managers can choose to avoid these expressions of market power and run fair and open bid processes instead. But too often, they exercise their monopsony power to the detriment of competitive power providers, in which case prudent regulation can intervene.
Solutions to mitigate utility monopsony power
PUC oversight and prevention of monopsony power can protect consumers against utility exercise of market power. This might obligate PUCs to implement oversight measures, many of which succeeded in COPUC oversight of PSCo’s resource acquisition process:
- Write rules opening planning to public scrutiny, so planning information provided by utilities supports bidder and market confidence.
- Include transmission access to regions with renewable resources in planning, since planning and executing transmission investments takes utilities more time than it takes developers to build wind and solar.
- Require utilities to file draft RFPs and PPAs as part of planning to give bidders early notice of terms and conditions their bids must respond to – then revise drafts if utility-proposed terms and conditions are unclear, arbitrary, or self-serving.
- Hold open and documented bid conferences to clarify questions and respond to concerns, promoting bidder confidence.
- Carefully justify and time-limit all confidentiality claims, so all bid information becomes public after bids result in contracts.
- Prevent self-serving utility bid procedures and assessments by employing independent evaluators to oversee bid processes and report to the PUC, especially if utilities want to bid their own projects in response to a solicitation.
- Judge bid success by numbers and variety of bids received and by competitive prices for resources offered, accepted, and put into service.
Lessons from the Colorado monopsony utility experience
Colorado’s experience holds several lessons to help other states achieve similar bid results.
First, link utility planning to resource acquisition – reducing risks that inappropriate investments will tax consumers without corresponding benefits. Utility planning should be strongly linked to utility investments, so with good planning, both utilities and developers can invest with confidence and with less need for regulators to adjudicate disputes about utility decision-making. Draft resource RFPs and PPAs can be submitted for commission approval along with required planning information and bid evaluation criteria, with procedures reassuring bidders that serious opportunities will follow.
Second, PUC plan approval should inform and support procurement. In Colorado, utility integrated resource plan approval, undertaken in two phases, creates rebuttable presumptions that utility actions taken in concert with approved plans are prudent. The first phase ratifies planning methods and assumptions, terms and conditions for RFPs, bid evaluation procedures, PPAs, and portfolios of resources to be filled by bids. Based on this first phase approval, the utility issues its RFPs, evaluates resulting bids, and reports its recommended portfolio of bids to the commission. The second phase of commission approval ratifies (or changes) the recommended resource portfolio so the utility can proceed to bid negotiations, contract awards, construction, and operation.
Third, utility ownership and competitive bidding can coexist. Utilities sometimes use ill-conceived or self-serving bid processes as excuses to accomplish their desired resource acquisitions, or to justify their own generation investments in rate base. Most bidders will not participate in utility bids where the outcomes are predestined against them succeeding. Utilities can own a portion of the market for new generation if they bid successfully or acquire bid-in projects or project co-ownership, so they can provide equity earnings on which their earnings per share are judged by financial analysts. But they should not be allowed to avoid transparent bidding since utility market domination without bidding does not engage competition to reduce costs, encourage technology development, and promote new approaches.
Utilities, regulators, and consumers can benefit from utility monopsony regulation
The COPUC has consistently revised planning and bidding rules, with lessons emerging as experience and conditions change, and Colorado’s rules have evolved to respond. Discussions are now underway to incorporate additional early retirements of uneconomic fossil generation, expanding wholesale markets, evaluating contributions to distributed and demand response resources, and integrating the state’s aggressive decarbonization goals across other energy sectors like transportation, buildings, and industry.
These suggestions mean utilities, regulators, and consumers can benefit. PSCo’s bid results show these results are achievable, if the right planning procedures are followed, regulators regulate utility monopsony power in the public interest, and competitors are motivated by adequate information and transparent processes to risk capital by submitting low-cost bids.
These outcomes are not the work of a day or a week, but following Colorado’s lessons learned can accelerate the clean energy transition.