With CPP on ice, utilities seek organized market reforms to save baseload plants
Utilities in the Midwest are concerned retiring coal and nuclear plants too early leaves the grid vulnerable to price spikes and reliability problems.
In the power sector, as in life, nothing brings people together like a common enemy.
Last year at the annual convention of the Edison Electric Institute (EEI), the trade group for U.S. investor-owned utilities, that common enemy — or at least a point of common critique — was the EPA’s Clean Power Plan.
The five utility CEOs that comprise EEI’s board panned the plan to cut carbon emissions from the power sector 32% by 2030, saying they wanted the agency to come up with something more “workable” for the power sector.
A year later, the tune has changed.
After the extension of crucial tax breaks for renewable energy at the end of last year, Clean Power Plan compliance for many EEI members is looking much more manageable than before, and the judicial stay on the regulation has meant states and companies have more time to plan for it.
With the EPA now out of the spotlight, utilities are turning their attention to a new front: Reforming the nation’s organized markets.
While they are generally working to lower prices for consumers, some utilities believe markets — like the one run by PJM Interconnection — are not properly valuing baseload generation, especially nuclear plants, forcing them to shut down prematurely. The concerns were compounded by an announcement from Exelon earlier this month that it would retire two uncompetitive nuclear plants in Illinois after a subsidy proposal to save them did not pass the state legislature.
“Merchant energy generation is struggling in the U.S.,” said Gerry Anderson, CEO of DTE Energy, the utility that serves Detroit. “We see some signs of things that leave me sitting back and asking, ‘What are we doing?’ — like the announcement of two nuclear plants in the prime of their productive careers potentially being put out for retirement at the very time where we say we value low carbon electricity production.”
Without reforms, utilities like DTE and AEP Ohio are concerned the low prices of natural gas and renewable energy will continue to push higher-cost coal and nuclear plants to shut down in organized markets, leaving the grid vulnerable to price spikes and reliability issues, and hurting decarbonization efforts.
Grid operators like PJM say they are constantly working to improve market structure, and that some of the retirement worries have been overblown. Even so, it appears the utility sector is preparing a concerted campaign to alter market structures for their baseload plants — either by working in the market, or changing it from the outside.
“I think it’s something that the [utility] CEOs are likely to put a whole lot more focus into because the outcomes are beginning to absolutely not make sense, and we’re going to press in,” Anderson said.
The battle over organized markets
The nation’s organized electricity markets, set up in the late 1990s and early 2000s, serve about two-thirds of the U.S. population. Unlike certain regions such as the Southeast, where vertically-integrated utilities still own the entire power system, non-utility independent power producers are encouraged to play in organized markets, with the idea that more competition will lower prices for consumers.
By some measures, that’s happening. The latest PJM capacity market auction, for instance, returned unexpectedly low prices for generators due to the low cost of natural gas and energy efficiency measures that have slowed demand growth.
In a sense, that’s evidence the markets are working. But while good for consumers, persistently low prices for generation are putting pressure on some power plants that are still in the prime of their careers. According to Anderson, they are contributing to the “slow roll bankruptcy” of the competitive generation industry, with only plants owned by regulated utilities and those with special income supports safe from market forces.
“You see some plants formerly owned by Ameren out [of the markets],” Anderson told Utility Dive after the panel. “You have plants from FirstEnergy and AEP either saying we get relief or these go out. You see prime nuclear plants by Exelon and others who are just saying either these have to be fixed or we’re out.”
Nick Akins, the CEO of American Electric Power (AEP), agreed with Anderson. Since 2013, AEP has sought income guarantees from Ohio regulators for a group of coal plants it says are essential for reliability and price stability, but which have come under pressure in the PJM markets.
“You have baseload assets, whether coal or nuclear, that are retiring or are being forced to retire because of a market structure that does not pay for the sustainability of these long-term assets,” Akins said. “These markets are driven by short-term solutions and we’re actually putting a system together that we’re going to depend on marginal generation resources — natural gas, which isn’t completely built out yet from an infrastructure standpoint.”
From the utility perspective, the concerns are two-fold — price and reliability. While natural gas prices are low now, they have been volatile in the past, which could make customers vulnerable to price spikes if the system relies on gas generation. And if gas delivery to plants is interrupted, as it was during the 2014 Polar Vortex, some utilities worry reliability could be compromised if coal and nuclear plants aren’t there to provide power.
