Taking your questions sequentially:

So with higher fuel costs in the market, could this cover your capital costs?

As is often the case, it all depends. If fuel costs go up but power prices don’t, I’m simply pinched with a tighter spark-spread. If power prices go up as well… it all depends on how much they rise. But I may not be understanding your question entirely. If you’re not running your plant, you’re not getting money, ergo you don’t have anything to pay off lenders, operators or anyone else for that matter. So generally speaking, increases in fuel costs are not liked by power plant owners.

Ideally, large plants have long term contracts for fuel purchases. These prices are negotiated, sometimes to below market prices. Therefore, I, as the plant operator, could make more money selling my fuel than burning it. I suppose it would all depend on the fuel contract I have, but is this possible?

In theory, yes, and as you say, depending upon the contracts. But note that the calculus is not simply whether or not you can buy at a lower cost than you can sell, but rather whether if you buy and convert it into power you make more money selling power than you otherwise would selling the fuel. This usually argues in favor of power, for the simple reason that power is usually worth a lot more than fuel on a per-unit-energy basis, even once power plant efficiency losses are factored in.

I am still struggling how negawatts work in a market system, so any insight would help.

I’m quite familiar with Amory and negawatts. As I understand this argument though, it is an argument for how policies could be structured, not how they presently are. So while one could change the rules to accommodate such a payment, it doesn’t happen in the present system. I’m not sure the math holds up though, at least at the level of the competing central generator, as the value to the overall system associated with curtailing load is well in excess of the value realized by the individual upstream generator. So even if we were to implement Amory’s model, that payment would have to be with the system manager (who controls multiple generators and wires) rather than with a single generator.

My questions relate to the concept of selling your fuel to cover your fixed costs. For example, if you decide not to run your plant for that one hour, you are saving on fuel and maintenance costs. From what I gathered you wrote, you would still have to pay-off the lenders. So with higher fuel costs in the market, could this cover your capital costs?

Ideally, large plants have long term contracts for fuel purchases. These prices are negotiated, sometimes to below market prices. Therefore, I, as the plant operator, could make more money selling my fuel than burning it. I suppose it would all depend on the fuel contract I have, but is this possible?

This leads me to another point, which I have heard Mr. Lovins (efficiency guru) speak about many times. It relates to a plant operator paying customers not to consume electricity. Let’s say I pay my customers from my non-fuel operating costs bucket to not consume my electricity. In a sense, I am avoiding burning my fuel, which I could sell to cover my capital costs and therefore reduce my environmental impacts. Depending on the price of fuel, I could actually make a profit. Therefore it seems like a win-win situation. I am still struggling how negawatts work in a market system, so any insight would help.

I assume you’re talking about this report from FERC?

I broadly agree with you, but I think the FERC report gets a couple key things wrong. They seem to suggest that the increase in electric rates is due only to higher fuel costs and commodity (copper, steel, etc.) costs, which could be inferred to mean that once markets settle down, power prices will settle back as well. The facts on the ground are more nuanced, resulting from the fact that we haven’t built any new generation other than natural gas since ~1990, and the new stuff all has to be amortized into current rates. That more complicated story is here.

In the meantime though, I certainly take your point that this makes the case for clean energy stronger – watch this space for a subsequent post on exactly that issue.

Sean