Competitive markets are intended to achieve the lowest reasonable cost for a service or product through the interaction of many buyers and sellers, free entry, and competitive price formation under perfect information. Wholesale electricity markets were established to achieve least cost outcomes by introducing competition and incentivizing efficiency in the provision of electricity service. Under standard competitive assumptions, short-term efficiency requires that in such markets, resources be dispatched in order of cost, with higher-cost units serving load only as demand warrants. Over the long term, efficiency is achieved as market prices guide investments needed to maintain reliability at least cost. In practice, however, markets do not operate perfectly, and some deviations from efficient outcomes are inevitable. While occasional departures from efficient outcomes may occur, systematic or persistent deviations can undermine market objectives and warrant regulatory attention.
Organized markets can depart from the fundamental principles of economic dispatch due to imperfect information, manual interventions, inherent biases, and rent-seeking behavior among participants. This report discusses a subset of such departures from efficient market outcomes within PJM, referencing them as uneconomic operations or uneconomic dispatch. In PJM, this issue has been especially pervasive for coal units, which historically were baseload resources but are nowadays often the most expensive, marginal resource.
Uneconomic coal operations are not isolated incidents but occur by a combination of permissive market rules, utility incentives, regulatory decisions, and policy interventions. In combination, these weaken price signals and allow aging, high-cost coal units to remain online even when they are no longer competitive.
This report examines mechanisms that allow or drive uneconomic coal operations at different degrees:
- Self-scheduling, in which generators operate regardless of market prices, often recovering losses through state-approved power cost recovery mechanisms.
- Uplift payments, which compensate generators under specified conditions for operating or committing when market revenues are insufficient.
- Reliability Must-Run (RMR) agreements, which keep uneconomic units online after retirement announcements due to localized reliability concerns.
- Policy interventions, including recent federal actions, that override or blunt market signals.
While each mechanism may serve a legitimate purpose under limited circumstances, their combined and prolonged use creates reinforcing distortions that undermine competitive market outcomes. In that sense, short-term reliability actions can mask long-term inefficiencies, while long-term policy distortions increase the need for short-term interventions—both of which increase operating costs and, eventually, ratepayer costs.
This report outlines and distinguishes the mechanisms that have historically enabled uneconomic operations. Although uneconomic operations can occur across all resource types, this analysis focuses on coal units as the primary example, based on recent experience and ongoing discussions regarding load growth and the need for coal resources.
A common misconception that brings coal units to the forefront of these discussions is that they are indispensable for grid reliability. In practice, the reliability contribution of coal plants has declined as the fleet ages, and retaining aging units can pose greater reliability risks than replacing them with more flexible, lower-cost resources of equivalent firm capacity. The report, however, does not seek to provide a comprehensive set of solutions to such inefficiencies or to the mechanisms that give rise to them; rather, it represents an initial step toward systematically characterizing these mechanisms and establishing a foundation for additional work on potential remedies.
Initial recommendations to limit uneconomic operations and restore alignment between reliability, affordability, and competitive market outcomes include enhancing transparency around out-of-market cost recovery, clarifying cost-allocation principles, and strengthening regulatory scrutiny of prolonged uneconomic operations. Additionally, accelerating transmission and interconnection processes can help ensure that more flexible and lower-cost resources can reliably enter the system.
Addressing uneconomic operations is not about targeting a specific resource, but about ensuring that least-cost resources enter the system, that service remains reliable, and that operations and system development are efficient, particularly in an era where load growth, extreme events, inflationary pressures, and other factors are challenging both affordability and reliability.
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