Where free wind meets cheap gas in U.S., power dynamics changing
(Bloomberg)—For a snapshot of the woes of the U.S coal and nuclear industries, take a look at Illinois.
Following a four-year drop in electricity demand, power companies there announced the closing of coal and nuclear plants that account for more than 10 percent of generating capacity. The shutdowns come amid a fourfold increase in cheap wind from neighboring states and growing competition from generators burning low-cost natural gas.
Exelon Corp., the operator of 11 nuclear reactors in Illinois, and Dynegy Inc., which has 10 coal-fired plants in the state, are asking lawmakers to bail out their money-losing assets to prevent further job-cutting, closures and, in Exelon’s case, preserve carbon-free electricity production.
“You’ve got free wind power coming from the west and cheap gas coming from the east and that’s not a good place to be for coal and nuclear power plants,” said Travis Miller, a utility analyst for Morningstar Inc., an investment research firm.
Illinois isn’t alone. The power industry upheaval is playing out in more than a dozen states that deregulated their electricity markets, opening their borders to competition, over the past two decades. In those locations, owners of aging generators are particularly vulnerable as the average wholesale power price has dropped by about half since 2008. In response, electricity providers in places like Ohio and New York are asking for millions of dollars to keep their units running.
Nowhere has the confluence of market forces produced such a profound dislocation as in Illinois. The rise of lower cost competition from inside and outside the state has pushed coal and nuclear units to the brink. For example, unregulated power suppliers in southern Illinois are competing against out-of-state generators able to recover costs through state-approved rates while selling their excess power on the deregulated markets.
There’s little relief in sight. Generators have reached a point where they don’t see any “real pickup” in prices for the next year or so, according to Kit Konolige, an analyst for Bloomberg Intelligence. They are being forced to confront the uncomfortable question of how long they can afford to lose money.
“The power price you are getting now is so much lower than it used to be a few years ago,” Konolige said. “Plants that used to be comfortably in the money are losing it now.”
In New York, Governor Andrew Cuomo has proposed a clean energy standard that would require utilities to buy credits from qualified, financially struggling nuclear operators.
In Ohio, American Electric Power Co. and FirstEnergy Corp. won guaranteed rates from the state’s utility regulator in March for some money-losing coal plants and FirstEnergy’s Davis-Besse power reactor, before the matter was stalled by U.S. regulators.
In the Midwest grid, the average annual wholesale power price plunged 43 percent to $25.80 a megawatt-hour in 2015 from 2008, according to data compiled by Bloomberg. Driving those numbers is an 85 percent drop in natural gas prices over the past seven years. The percentage of Midwest wind power has increased from about 2 percent in 2012 to as much as 12 percent this year, according to Genscape data compiled by Bloomberg.
Dynegy on May 3 said it would shut coal units with a capacity of 1,835 megawatts over the next year. The decision came after the plants failed to recover their operating costs in the most recent power capacity auction. An additional 500 megawatts is under review.
The coal plants have been undercut by out-of-state utilities that can offer power at low prices because they get paid regulated rates in their home states, said Dynegy Chief Executive Officer Robert Flexon, who asked the Illinois legislature to intervene to keep the coal units operating.
Plant closings can be averted if Illinois lawmakers act quickly to resolve “market design deficiencies,” Flexon said.
Legislation to bring all Illinois plants and transmission lines under the umbrella of PJM Interconnection LLC, the largest U.S. power market, will be introduced Thursday, Dynegy said in a statement. The state is currently divided into two markets.
Dynegy said asking for state government assistance in moving from one power market to another wouldn’t be a bailout. “We are already shutting down units that are uneconomic,” spokesman Micah Hirschfield said. “We simply want to be on a level playing field with northern Illinois.”
Exelon is seeking help to save its Illinois nuclear reactors. The company said on May 6 that it will shut the 1,069-megawatt Clinton reactor by June 1, 2017, and the 1,871 megawatt Quad Cities plant, which has two reactors, by June 1, 2018, unless the state adopts “adequate” legislation to reverse losses by May 31.
Exelon is behind a bill that “is essential to preserving Illinois’ at-risk nuclear plants and putting the state on a path to achieve its carbon reduction goals,” said Paul Adams, a spokesman for Exelon.
The bill backed by Exelon would require utilities to buy 70 percent of their generation from nuclear, wind or solar sources, Shahriar Pourreza, an analyst at Guggenheim Securities LLC, wrote in a May 6 note to clients.
The company presented a “tight deadline” for policy makers and guessing the outcome of legislative moves has been “challenging”, Pourreza said. Clinton and Quad Cities have lost more than $800 million in the past six years, Exelon Chief Executive Officer Chris Crane said on a conference call with investors.
“The energy market is depressed in the region,” Pourreza said in an interview. “That’s the long and short of it.”