Retail and Wholesale Supply Issues

In April 2017, Energy Secretary Rick Perry issued a request for the Department of Energy (DOE) to organize a study examining electricity markets and reliability.  The request was looking to explore three specific concerns: 1) The evolution of wholesale electricity markets, including the extent to which federal policy interventions and the changing nature of the electricity fuel mix are challenging the original policy assumptions that shaped the creation of those markets 2) Whether wholesale energy and capacity markets are adequately compensating attributes such as on-site fuel supply and other factors that strengthen grid resiliency and, if not, the extent to which this could affect grid reliability and reliance in the future; and 3) The extent to which continued regulatory burdens, as well as mandates and tax and subsidy policies, are responsible for forcing the premature retirement of baseload power plants.

As one may imagine, this request led a number of environmental and intermittent resource groups to question exactly what this exercise was attempting to accomplish and if its findings would be politically focused.  After months of abundant speculation, on August 23, 2017 the DOE released its findings.  While the principal conclusions of the study will not come as a surprise to those in the electricity markets, the study seems to take a solid “middle of the road” approach.

Perhaps most significant in this otherwise extensive and unclear report was that the DOE did not find that renewables are a threat to grid reliability and also did not obviously state that coal was necessary for grid reliability.  They specifically said, “Hydropower, nuclear, coal and natural gas power plants provide [essential reliability services] ERS and fuel assurance critical to system resilience”.  By grouping these fuel sources all together they relax the discussion around each of these fuel sources, predominantly coal and nuclear.

The main take away from the study is that favorable economics of natural gas-fired generation was the primary driver of baseload (i.e. coal and nuclear) power plant retirements.  Low growth in electricity demand (attributed to some permanent loss of load from the economic downturn and energy efficiency policies) coupled with the expansion of renewables on the grid have also played pertinent roles in baseload retirements.  The report also touched on adverse economic impacts of the requirements for regulatory compliance for some baseload plants.  DOE primarily named coal and nuclear costs to implement the  Mercury and Air Toxics Standard (MATS), the EPA’s Clean Power Plan and the Cooling Water Intake Rule as reasons cited for additional plant retirements.

The report was expected not only to analyze but also provide “concrete policy recommendations and solutions”.  In this space, the recommendations presented were less concrete and particularly vague.   The bulk of the recommendations focused on FERC.  Some of those suggestions included having FERC expedite their ongoing efforts with states, RTO/ISOs and stakeholder input to improve energy price formation , studying and making recommendations on regulatory mechanisms to compensate grid participants for services necessary to support reliable grid operations and working to expeditiously process LNG export and cross-border natural gas pipeline applications.  The report also calls on DOE and other Federal agencies to accelerate and reduce costs for licensing, relicensing and permitting of grid infrastructure like nuclear, hydro, and coal providing some hazy “specific reforms” for these technologies.

The DOE is looking for the public to submit comments regarding this study, although it is also unclear who is receiving these comments and how long this window will be open. The report will not end the ongoing debates in various states regarding whether nuclear and/or coal generation resources should be subsidized to ensure that all existing plants remain in operation, even if particular plants are inefficient or uneconomic.  It also fails to address whether wholesale market changes adopted after the Polar Vortex (such as PJM’s Capacity Performance product) are sufficient to provide the additional compensation and market signals to ensure generation reliability.

For additional information, please reach out to: Amy York (ayork@mcneeslaw.com) or Pam Polacek (ppolacek@mcneeslaw.com).

Capacity prices cleared PJM Interconnection LLC’s (“PJM”) most recent auction for the “rest of RTO” region of PJM at $76.53 per megawatt-day (“MW-day”) for the PJM delivery year beginning June 1, 2020.  The “rest of RTO” region represents all of the unconstrained zones of PJM and makes up the majority of the PJM footprint.  This is the second consecutive auction where capacity prices have declined in the unconstrained PJM zones, while at the same time PJM was implementing more stringent capacity rules under the “capacity performance product.”  The clearing price for the 2018/19 and 2019/20 delivery years was $164.77/MW-day and $100/MW-day, respectively.

For the first time, the Duke Energy Ohio and Kentucky zone (“DEOK”) was constrained with capacity clearing at $130/MW-day.  The Mid-Atlantic Area Council (“MAAC”), Eastern MACC (“EMAAC”), and COMED Load Delivery Areas (“LDAs”) were also constrained with capacity clearing at $86.04, $187.87, and $188.12/MW-day in those LDAs, respectively.  The higher price in the EMAAC LDA was driven in part by 2,300 MW of generation retirements.  The MAAC LDA includes Potomac Electric Power Company, Baltimore Gas and Electric Company, Metropolitan Edison Company, Pennsylvania Electric Company and PPL Electric Utilities.  The EMAAC LDA is a subzone of MAAC and is comprised of Atlantic Electric Company, Delmarva Power and Light Company, Jersey Central Power and Light Company, PECO Energy, Public Service Electric and Gas Company, Rockland Electric Company.

In addition to decreased capacity prices, PJM cleared a record high reserve margin of 23.3%, representing a 6.7% increase over PJM’s target reserve margin of 16.6%.

Overall the supply and demand balance in PJM remained largely unchanged from the prior auction, with a 2,196.7 MW reduction of cleared capacity (165,109.2 MW vs. 167,305.9 MW) offset by a 2,800 MW decrease in PJM’s reliability requirement driven by lower forecasted peak demand (153,915 MW vs. 157,188 MW).  Notable changes for supply side resources clearing the auction included year-over-year increases in new generation (2,389.3 MW), capacity imports (121.3 MW), and energy efficiency (195.1 MW), and uprates to existing generation (434.5 MW).  Notable year-over-year decreases included a reduction of cleared demand responses (2,527.6 MW), wind (81.3 MW), and solar capacity resources (209.7 MW).

PJM will conduct up to three additional incremental capacity auctions for the delivery year beginning June 1, 2020.  However, in the past the incremental capacity auctions have had little impact on the overall capacity price.

Recently, many large commercial and industrial enterprises have sought to reduce their operating expenses by shopping for their electric supply.  If you are negotiating an electric supply agreement with an electric supplier, there are a few key terms that you should consider.  Please click here to learn more about the following key negotiable terms: (1) price and product; (2) regulatory changes and other price change opportunities; (3) contract term and renewal; and (4) billing issues.  If you have any further questions, please contact us and we will be happy to assist you.