Thoughts on power markets? Executives have a few

By Edward Klump | 05/31/2017 07:14 AM EDT

It’s March. Southern Co. CEO Tom Fanning is sitting in a hotel lounge in downtown Houston talking energy policy, President Trump and what’s wrong with U.S. power markets.

(Left to right) Electric markets are stirring considerable debate among key players in the power sector, including Tom Fanning, CEO of Southern Co.; Pat Wood III, a former chairman of the Federal Energy Regulatory Commission; and Chris Crane, CEO of Exelon Corp.

(Left to right) Electric markets are stirring considerable debate among key players in the power sector, including Tom Fanning, CEO of Southern Co.; Pat Wood III, a former chairman of the Federal Energy Regulatory Commission; and Chris Crane, CEO of Exelon Corp. @ThomasAFanning/Twitter; LinkedIn (Wood); Exelon Corp. (Crane)

It’s March. Southern Co. CEO Tom Fanning is sitting in a hotel lounge in downtown Houston talking energy policy, President Trump and what’s wrong with U.S. power markets.

At one point, Fanning brings up a name many in the electric industry know, especially in Houston: Pat Wood III.

The former Texas regulator and Federal Energy Regulatory Commission chairman pushed what became, in Fanning’s view, "a failed experiment" to spread Texas’ merchant approach to electricity. Fanning, whose company is based in Atlanta, says he still believes in "the model that we live in, that we fought hard to retain — the integrated, regulated model."


And Wood? He’s committed to his competitive vision, even if there’s room for market tweaks. He described, in a March phone conversation, how he drank the "Kool-Aid" years ago when he saw positives from deregulating the natural gas sector.

"Margins are there to be eroded, and so that’s what competitive markets do beautifully," said Wood, chairman at Dynegy Inc. "So I’m proud to be associated with that, and I’m proud to wear the laurel that Mr. Fanning gave me."

As questions swirl around business models, no U.S. debate may be more important for the electricity sector than one on wholesale market design. Low gas and power prices, government aid for some generation, and uninspiring demand are causing heartache for generators such as Dynegy and NRG Energy Inc. Sagging economics also raise questions for any party that owns aging power plants fueled by coal and nuclear energy.

To explore where the electric discussion is heading, E&E News compiled takes from some of the industry’s most prominent observers. The views came largely from interviews and appearances at conferences in Texas this year, including CERAWeek by IHS Markit, the Energy Thought Summit, and events put on by the Gulf Coast Power Association and KPMG.

The picture that emerges is one of competing interests and goals. For some players, there’s defense of a regulated model. For many, the question is how to reimagine competitive markets to ensure both electricity and compensation are adequate. Renewables and their federal incentives and intermittent nature are often fodder for debate.

A consensus on solutions remains elusive. Parties sought to hash out some ideas during a FERC technical conference this month, including potential actions by grid operators (Energywire, May 3). And FERC nominees have faced questions about market issues. In any case, there’s no love lost between regulated providers and merchant power companies.

"We’re not a utility," Robert Flexon, Dynegy’s CEO, declared last week in Houston. "We don’t like utilities. We’re a competitive player."

Kemper and Vogtle

Life has become more complicated for Southern since Fanning sat down to talk this past March. At the time, he touted the long-term planning that can accompany a regulated structure. But it remains to be seen what extra costs Southern’s customers may face with billions of dollars on the line from two major projects.

In Mississippi, the Kemper County Energy Facility has seen continued delays as it aims to capture carbon dioxide from a coal-fueled power plant. And Westinghouse Electric Co. LLC, a key contractor for planned nuclear reactors at Plant Vogtle in Georgia, filed for bankruptcy in the wake of cost overruns (Energywire, May 25).

"Two words: Kemper. Vogtle," Wood said this year, suggesting such projects are "way out of economic reason" for ratepayers. Wood was speaking for himself and not necessarily companies where he’s on the board, including Dynegy, SunPower Corp. and Quanta Services Inc.

Fanning said the integration of "making, moving and selling energy and single points of responsibility" is preferred to "so-called organized markets." But Wood talked customer choice and said, "Liberty always wins.

"In the great cycles of history, monopolies tend to end up on the shore of failed dreams, and liberty kind of goes on down the river," Wood said.

For companies in competitive wholesale markets, though, design remains front and center. Are markets actually competitive? Should nuclear and renewables and coal and other sources receive special treatment? Who should bear the risk of new investments? How urgent is change as consumers enjoy lower power prices driven by cheaper natural gas?

Uncertainty is evident among non-utility power producers, which are facing takeover and merger rumors. At the same time, Energy Secretary Rick Perry has called for a review of U.S. power markets, including examining baseload power and reliability.

Another marker came recently as PJM Interconnection LLC, a grid operator with a presence in the Mid-Atlantic and Midwest, announced lower capacity prices in much of its footprint (Energywire, May 24). And Exelon Corp. said yesterday that it plans to retire the Three Mile Island nuclear plant in Pennsylvania unless the state provides policy reform.

Challenges for Exelon

Fanning, who’s chairman of the Edison Electric Institute that represents investor-owned utility companies, referenced Exelon CEO Chris Crane back in March, calling him "a nuclear guy in the middle of merchant markets."

"And at one time, that was really profitable, but now it’s not," Fanning said, suggesting Crane was running one of the best U.S. nuclear businesses in a failed model. Crane, speaking in March in Austin, Texas, said market designs weren’t sustainable for an all-of-the-above strategy.

"When the government and the markets decide to pick winners and losers versus outcomes, it skews the market," Crane said. He suggested an overemphasis on wind energy destabilized the market in Texas. Fanning said overbuilding renewables and squeezing out some baseload capacity could have "long-term consequences."

But much has been made about subsidies that Exelon lined up for some reactors in Illinois and New York, though those setups were challenged in court (Energywire, Jan. 11). Crane said, "The competitive market was skewed years ago when we decided we wouldn’t take a load shape, a demand shape, we would incent based off of a technology."

To him, a way forward for states that want cleaner energy would be having regional transmission organizations put a price on carbon. He acknowledged that might not happen in the near term.

Crane looked back at the polar vortex of 2014, which he said showed the value of nuclear plants. The focus should be on reliability and capacity, he said.

"You hope that we don’t turn parts of the country into a third-world country or what you see in the Caribbean when you’ve got the rolling brownouts during the day," Crane said. "I think we’re much more sophisticated, and we can work together to come up with the designs."

A view from the West

Edison International comes at the discussion from its own angle after unloading a merchant generation business.

Pedro Pizarro, CEO of California-based Edison, called the positioning "less an indictment of the whole merchant model and more a reflection of how we view the potential for returns in the sector." The company still relies on merchants for electricity, he said in Houston this year, and he hopes other players in that space are healthy while they’re needed.

"I think it’s a tough business," Pizarro said. "It’s not one that we want to be in."

He expects "continuing work to make sure that the markets’ price structures adequately compensate generators who are now shifting from really focusing on meeting peak needs to meeting flexible ramping needs," as an example.

CEO Ben Fowke of Minnesota-based Xcel Energy Inc. said operating in a regulated market enables long-term planning. But he also recognized a need to be thinking about how energy is delivered to customers.

"I have a saying inside the company that, if we want to stay regulated, we better think competitively," Fowke said in Austin this year. "And we apply competitive discipline to all of our decisions, to our culture, to the way we hold each other accountable, to driving innovation."

On the other hand, he said organized markets "tend to be more short-run-oriented" and can stir up "unnecessary swings and volatility." He said they are hurting the ability for nuclear plants to operate amid low prices, and that will need to be addressed further in his view.

Different places, different models

Barry Smitherman, a former Texas energy regulator, said it’s fine to see different models in different parts of the country, including competitive ones managed by the Electric Reliability Council of Texas (ERCOT), PJM and the Midcontinent Independent System Operator.

"And those markets ought to run competitively until such time as the Congress of the United States says we’re going to do it differently," he said in a March interview. For Texas’ main grid, such a decision could fall to state lawmakers.

Smitherman said people in restructured markets have been aided by low power prices in light of low natural gas prices.

"You can say it’s not the competitive model, it’s low gas, but in the competitive market, gas is the marginal fuel, so it has effectively set the price, which has been very low," Smitherman said.

He is a member of NRG’s board, though his comments didn’t necessarily reflect the views of the NRG board or management.

After speaking in Houston this year, Christine Tezak, a managing director at ClearView Energy Partners LLC, reflected on wholesale power and said many people "who were optimistic about restructured markets are disappointed."

A drop in wholesale power prices over time, Tezak said, has a lot more to do with input pricing tied to gas than with "the brilliant efficiency of market solutions."

Tezak mentioned that factors such as renewable portfolio standards and distributed generation lower the demand available to the rest of the competitive market.

A period of ‘disruption’

"Our markets are going through a significant disruption and transformation," Mauricio Gutierrez, CEO of NRG Energy Inc., said during an April interview.

He said it’s good to have cheap, abundant and domestic shale gas as renewables become more cost-efficient. Gutierrez also said demand is becoming smarter while state policies are dipping into the electric realm.

His concern? "I’m seeing state actions that basically retrench as opposed to embracing the change," he said. Gutierrez called for "market-based solutions" that have the right price signals and factor in all externalities, such as carbon dioxide.

Exelon’s Crane, in an interview, said stakeholders need to get together to look at reliability and costs and come up with the right market design.

But should he and others have seen gas prices dropping before the plunge and adjusted?

"I can tell you that nobody saw it," Crane said, adding that "the rate of efficiency that came into the fracking" wasn’t seen "even by the industry."

Does he still believe in competitive markets?

"We are what we are, and it would be very tough to put the competitive market back into a regulated" setup, Crane said. "And we’re not seeing a lot of desire for it. If you’re a regulated market and your business model’s stable, I’m sure you want to stay a regulated model. I think we need to keep working on this competitive market."

Facing a ‘conundrum’

Dynegy raised eyebrows last year when it supported draft legislation in Illinois that would’ve given a boost to some coal-fueled units (Energywire, Nov. 22, 2016). That plan didn’t pan out, though aid for some Exelon nuclear generation moved ahead.

Wood said recently that, in his view, the southern Illinois market is "broken" and needs a more competitive model. Competitive markets may not always please shareholders, but Wood said such markets shift risk from ratepayers to competitive companies.

When supplies are tight, according to Wood, a company can come "to the rescue" and "get paid for it."

Still, Gordon van Welie, CEO of ISO New England, told a gathering in Austin this year that "how to maintain the market structure" is a big near-term challenge. The CEO said efforts to decarbonize can push out "resources that we use to keep the lights on in the wintertime, so there’s a real conundrum."

He’s also pessimistic about the idea of relying on "an energy-market only construct" that’s seen in ERCOT. Wholesale prices in that Texas market can rise to $9,000 per megawatt-hour with scarcity conditions, while capacity payments to generators in other U.S. regions are common to try to ensure there’s enough supply.

"In an energy-only market design, you have to politically be willing to kind of live through the tide going out," Cheryl Mele, ERCOT’s chief operating officer, said in Austin this year.

At the Public Utility Commission of Texas, a docket is now open to study points raised in a study funded by Calpine Corp. and NRG — which both generate power — on possible market changes related to price formation.

Commissioner Brandy Marty Marquez remarked during a recent webcast that the body needs to define what issue to address.

"I’ve had a lot of meetings with a lot of folks over the last year, and I’m like, ‘We got low prices and we got a lot of energy. I don’t know what to do for ya,’" Marquez said.