'Can't be half-pregnant': Power market upheavals prompt states, feds to
take actionare
As FERC prepares for a technical conference nuclear
supports and gas plants coming under pressure in ERCOT and CAISO
Utility Drive
Author
Published
March 8, 2017
Strange things are afoot in organized power
markets.
You can see it in New York, where existing,
carbon-free nuclear generation needs help from the state to keep running. In
Ohio, where generators are selling coal plants after failing to win financial
support. And in Texas, the nation's largest organized market, where even
combined-cycle gas plants have come under pressure.
Last week, Mauricio Gutierrez, the
president and CEO of NRG, called the independent power producer model
"obsolete and unable to create value over the long term." His company
owns a dozen coal, gas and nuclear
plants in Texas, and generation revenues for that region dropped more than $90 million last
year, primarily because of lower power prices in the state.How will the power industry evolve in 2017?
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"There does seem to be an acute
problem across the markets where your supposed market outcome is driving high
fixed-cost baseload resources off the system," said Raymond Gifford, a
partner with Wilkinson Barker Knauer LLP and a former Colorado utility
regulator. "Attempts to create capacity markets have proven
insufficient."
Gifford and WBK partner Matthew Larson have
co-authored a pair of white papers looking
at what states have been doing to preserve baseload resources, as well as the
tension that exists between markets and public policies like renewable energy
incentives and nuclear power subsidies.
"Zero-emission credits," passed
in in New York and Illinois to preserve nuclear plants, appear to be the
direction states are moving in, the pair concluded.
"States are coalescing around an
‘around market’ template to preserve nuclear baseload power plants," they
wrote in last month's report. "Connecticut, Pennsylvania, New Jersey and
others are looking to this template for an ‘around market’ solution of their
own, and these states are the next frontier of the ZEC strain of ‘around
market’ solutions."
So far, most of the focus has been on
struggling nuclear generation. Coal plants faced with challenging market
conditions have often shuttered, or been sold to a buyer with more appetite for
risk. But now it appears gas plants could be at risk as well, evidenced by
the La Paloma gas plant filing for bankruptcy in California
late last year.
"You can't be half pregnant but that's
what we've tried to be," said Larson. "We kind of like markets but if
we don't like the outcome we're going to reverse it or start playing with
prices. You can point to a number of policy imperatives — some of them
defensible and others not — but ultimately this is an area where the
political economy pressures … overwhelm the ability to run a market."
"The fundamental reality," said
Gifford, "seems to be you're not able to cover your fixed costs in a
market that is essentially dispatching with some equilibrium between
intermittent renewables, driving down prices during large parts of the
day, and simple-cycle gas, which has less fixed costs to cover [than large
baseload plants]."
Troubles in Texas, California, PJM
markets
Each wholesale electricity market carries
its own set of resources, priorities, challenges and incentives, but across
several regions similar problems are cropping up.
PJM, in the Mid-Atlantic, operates both
energy and capacity markets. The Electric Reliability Council of Texas (ERCOT),
on the other hand, operates only an energy market, but stresses are beginning
to show in each.
Last month, Bloomberg View noted how cheap Texas
wind has been hurting independent power producers with gas-fired facilities in
the state. While Texas energy demand has continued to climb, the state now
gets more energy from wind farms than nuclear plants. And as fuel-free wind is
dispatched first, it has driven down energy prices, cutting revenues for IPPs.
"Each market is a little different,
but you can draw conclusions if you have all these markets exhibiting some of
the same problems — and the states for, political economy reasons if nothing
else, are copying some of the same answers," said Gifford.
“ERCOT is the purest expression of the
market model," he said. It would be a "seismic" shift, he added,
if independent producers are struggling there.
Public policies, while they may be
necessary to increase or protect favored resources, are having undeniable
impacts on the markets, Gifford and Larson said. In states like Texas, cheap
renewables are often dispatched first in the generation stack. Due to declining
costs and the federal production tax credit, wind resources in particular can
bid in at low or negative prices, lowering the market clearing rate for all
plants in the stack.
Until recently, the dynamic put large
baseload plants at most risk due to their high fixed costs. But as renewables
continue to proliferate and decline in price, even natural gas generators are
starting to feel pressure in markets rich with wind and solar, like Texas and
California.
This month, Calpine informed the California
ISO last year that four gas peakers coming off long-term contracts were no
longer economical and would be shut down by 2018. Two of them, Yuba City and
Feather River, were found to be needed for
reliability.
Emergency
peaker plants identified as uneconomic by Calpine.
Credit: Source:
California ISO
"When you get down to it, we have
such a competing set of public policies imperatives ... that price
formation is distorted eight ways to Sunday," said Gifford. "We're
using Rube Goldberg attempts to preserve what's a pretty rickety structure in
the first place."
Capacity markets, where they exist, are not
working, Gifford said. The power industry's high fixed costs and relatively low
marginal costs are making it difficult for some generators to compete. But
without a way to reliably recover fixed costs, one of two things happen, said
Gifford: "Either all go bankrupt, or the capital formation never happens
in the first place."
"Capacity markets in PJM have
generally been judged not sufficient to keep capacity in the market," he
said, noting that its capacity market is generally considered the most
robust.
Stu Bresler, senior vice president of
operations and markets for PJM, took some issue with Gifford's assessment, but
also acknowledged that markets are evolving in the narrative laid out by the
WBK white papers.
"Markets are successfully achieving
what they have been designed to accomplish: ensuring reliability at the lowest
reasonable cost," Bresler said in a statement. "PJM’s markets are
producing prices that efficiently and reliably drive the entry of efficient,
new resources and the exit of older, uneconomic resources."
But he added that, as the white papers
noted, "demands on markets are changing as public policy makers begin to
emphasize factors other than cost. PJM is committed to examining how to
harmonize markets and public policy and will investigate ways to use
market-based incentives that align with desired resource attributes."
The FERC problem
In January, the Electric Power Supply
Association made two filings asking federal regulators to take action on
nuclear subsidies passed in New York, calling them a clear overreach and
requesting the Federal Energy Regulatory Commission to take mitigating actions.
In recent years, similar challenges to state
generation supports have been knocked down by federal authorities. Last
year, FERC blocked power purchase
agreements approved by Ohio regulators that aimed to support aging
coal and nuclear plants owned by FirstEnergy and AEP Ohio. Before that, the
U.S. Supreme Court ruled in Hughes v. Talen Energy Marketing against
a state incentive in Maryland that federal regulators said would impact
wholesale price formation.
Now, FirstEnergy Corp. is pushing for legislation in
Ohio that, similar to New York's method, would use "zero-emission tax
credits" to support the Davis-Besse and Perry nuclear plants in Ohio.
Backers of the zero-emission credits say
they differ in structure from the generation programs struck down last year, as
they simply reward nuclear resources for their
carbon-free generation. The credits under the ZEC program, they say,
are little different than renewable energy credits widely accepted as a part of
state RPS programs.
FERC, with authority over power markets,
will ultimately have to take up the issue. Last week, the commission issued notice of a technical conference
to take place May 1 and 2, "to discuss certain matters affecting wholesale
energy and capacity markets operated by the Eastern Regional Transmission
Organizations (RTOs) and Independent System Operators (ISOs)."
But right now, FERC has just two members
— Acting Chairman Cheryl LaFleur and Commissioner Collette Honorable
— and both are Democrats. Without a quorum of three, the commission cannot
take any major actions. And from a policy standpoint, things may be at a
standstill until President Trump can nominate more than one Republican.
Many in the industry share that view,
particularly given potentially lengthy vetting processes for FERC nominees.
FERC and power markets are "incredibly esoteric," Gifford pointed
out, and will likely not be the subject of the first major energy actions of
the administration. An executive order to review and repeal the Clean Power
Plan, for instance, is expected before any movement on FERC.
"Not withstanding the Clean Power Plan
going away, in whatever form that takes, this issue has way bigger reach
than any in my opinion," said Larson. "And it continues to fly under
the radar."
Along with FERC nominees from the White
House, a court hearing in the South District Court of New York on the state's
ZEC program is coming up at the end of this month. While an appeal is expected
no matter how the court rules, the legal interpretation in the case will likely
set the stage for litigation in other states and any eventual action from
FERC.
"This is a very big fork in the road
here for FERC, and which way they go determines how this plays out,"
Gifford added. "And that's what we're really waiting for."
