With stakes high, Dynegy preaches capacity market reform

Dynegy Inc.'s Edwards power plant and NRG Energy Inc.'s Powerton plant burn the same Powder River Basin coal. They deliver to the grid the same commodity -- electrons used to run air conditioners, light lamps and charge iPhones. And the power stations are just 3 ½ miles apart -- one on either side of the Illinois River near Peoria, Ill.

But measured by the dizzying economics of power markets, the plants might as well be a world apart.

The 1,500-megawatt Powerton plant is within the PJM Interconnection LLC, the bulk power grid operator for a 13-state area that stretches from northern Illinois to the Mid-Atlantic. Edwards, a 695 MW plant, is located within the Midcontinent Independent System Operator (MISO), which stretches from the Gulf Coast to Manitoba.

To nearly everyone, the border, or "seam," between grid operators is invisible. But to Dynegy, the dividing line potentially means tens of millions of dollars a year in lost revenue -- so-called capacity payments to generators for a promise to be available at a later date.

Dynegy, one of the country's largest independent power producers, which bulked up with the acquisition of Ameren's Illinois coal fleet last year, wants to be on an equal footing with upstate power generators by changing how the MISO capacity market works. Another option would be jumping ship, along with all the rest of central and southern Illinois, to PJM.


The latter alternative, initially reported by Crain's Chicago Business, adds another layer of political intrigue to what's already shaping up to be a high-stakes energy debate at the state Capitol next spring, with Chicago-based Exelon Corp. in search of some type of legislative support for its nuclear fleet (EnergyWire, May 29), renewable energy advocates seeking to unlock millions of dollars in funds for wind and solar development, and legislators grappling with the effects of U.S. EPA's Clean Power Plan (EnergyWire, Aug. 19).

Exelon's push for support of its Illinois reactors has already raised the hackles of some in the state. The idea of transferring most of Illinois to a new regional electric grid -- a move that would raise electricity prices for consumers -- has likewise generated swift reaction.

While Dynegy officials may have already had discussions with state legislators, spokeswoman Katy Sullivan said the company isn't actively shopping a proposal to redraw PJM's boundaries.

"We're not actively pursuing a legislative solution at this point," she said. "We think there are probably other ways to address some of our concerns."

MISO reforms sought

One such way is asking the Federal Energy Regulatory Commission to force MISO to change the rules of its capacity market.

Dynegy is among a trio of power producers that petitioned FERC in late August to make MISO's capacity market more closely resemble PJM's. Another company making the request was Exelon, which operates the Clinton nuclear plant in MISO's footprint.

The August filing, technically a rehearing request in a related case going back two years, has yet to be decided and there is no timetable for doing so, said Sullivan. She said FERC would have to act "relatively soon" for any changes to be in effect for the next MISO capacity auction. It would also depend on the scope of any changes ordered.

The companies in their filing said the challenges faced during last winter's polar vortex, coupled with MISO's own June survey showing a 2.3-gigawatt shortfall in its reserve margin as soon as mid-2016, necessitate quick action by FERC (EnergyWire, June 9).

"The close call in the winter of 2013-2014 and the looming resource adequacy deficiency highlight the need for capacity market reforms and the need for expedited consideration," the filing said.

Among the handful of capacity market changes the companies seek -- and a big difference between PJM and MISO capacity markets -- is the time horizon.

PJM's capacity auction looks out three years and established a clearing price of $120 per megawatt-month for generators like NRG's 1,500-megawatt Powerton plant for a 12-month period that begins in mid-2017. MISO's auction, meanwhile, sets clearing prices in April for the 2014-15 planning year that begins weeks later. The most recent clearing price for plants in Illinois in that auction was $16.75 per MW-day.

Sullivan said MISO's own capacity survey for 2016 suggests new generation is indeed needed, in part because of a wave of coal retirements expected before EPA's Mercury and Air Toxics Standards take effect in April 2016. But the grid operator's current market construct establishes capacity prices only through mid-2015.

Among those signals is MISO's most recent survey of market participants that showed a potential shortfall of 2.3 gigawatts in the grid operator's north and central regions.

While the survey is a useful tool, it doesn't carry the weight of price signals established in PJM's forward auction, Sullivan said.

"Try to invest in a power plant based on a survey," she said.

Already, the FERC filing by Dynegy and other generators to overhaul MISO's capacity market has drawn a sharp response from a wide variety of participants, including state regulators, utilities and trade associations.

Among the criticisms: The request to FERC is procedurally flawed and misstates the purpose and results of the MISO capacity survey. Others note that the proposed reforms would do nothing to protect against outages from another polar vortex.

"Even if the future capacity margin picture confronting MISO in 2016 and thereafter were actually as bleak as [Dynegy and others] attempt to portray it with their highly selective assemblage of data points, there is nothing about their proposed 'resource adequacy construct' that would actually 'ensure future resource adequacy,'" the National Rural Electric Cooperative Association and American Public Power Association said in a response.

Indiana's utility commission called the filing "an attack on the jurisdictional authority of states over capacity planning and resources within the Midwest region" and noted that generators in PJM likewise experienced problems with forced outages during the polar vortex.

MISO, meanwhile, caught in the midst of a dispute among members, had little to say other than noting its mission "to ensure reliable, least-cost delivered energy for all electricity consumers."

Opposition mounting

No matter the type of capacity reform sought by Dynegy and other merchant generators, whether it's MISO reforms or joining PJM, there's is skepticism among consumer groups.

"Capacity markets really haven't been working well for consumers," said David Kolata, executive director of the Citizens Utility Board, a Chicago-based consumer advocacy group. "We're spending billions and billions of dollars and not getting the capacity."

Consumer and clean energy advocates argue that the Dynegy narrative -- that the current MISO market construct isn't sending the appropriate investment signal to the market -- doesn't appropriately take into account the role of energy efficiency, demand response and rooftop solar generation, the price of which continues to fall.

While a recent court ruling raises questions about the future role of demand response as a capacity resource, there's little question energy efficiency will continue to eat away at energy demand, especially as Illinois utilities roll out smart grid infrastructure, Kolata said.

"Taking all of those things together, the notion that we have to radically change the market structure to provide existing plants more revenue doesn't make a lot of sense," Kolata said.

Howard Learner, executive director of the Environmental Law and Policy Center, said it boils down to this: Dynegy wants more money for the same product -- generating capacity.

Learner said the request ignores that Dynegy knew the market rules when it took on five Ameren Corp. coal-fired power plants in December. In that transaction, Dynegy assumed a mountain of debt but paid no cash out of pocket. The company also made the Ameren plants part of a new subsidiary -- a ring-fenced company to protect corporate assets from creditors in the event of bankruptcy.

Moving downstate Illinois to PJM would represent "a direct transfer of wealth from cash-strapped residential consumers and businesses facing difficult challenges to Houston-based Dynegy," he said. "That doesn't make good sense."

And if the issue is coal retirements and grid reliability, MISO has a system in place to address that in the form of System Support Resource (SSR) payments to temporarily keep older power plants running if they're needed for grid reliability.

Citing analysis by electricity consultant Mark Pruitt, Learner said moving the rest of Illinois to PJM would cost downstate consumers $302 million in the first year alone.

Upside for Dynegy

Dynegy officials likewise acknowledge that millions of dollars are at stake but frame the issue in a much different way.

Hank Jones, Dynegy's chief commercial officer, this spring predicted that MISO faces "a looming and eminent shortfall in capacity in April 2016," mostly the product of a wave of coal retirements in the grid operator's legacy footprint related to MATS compliance.

Dynegy executives have also been clear about the earnings leverage of the company's low-cost 7,000 MW Illinois coal fleet for higher capacity prices. And already, negotiated bilateral capacity contracts for future years suggest that at least some big industrial power users share their view of the marketplace.

Despite the financial upside, the power producer maintains that the push to reform capacity markets isn't driven by money and has detailed ways it seeks to boost capacity revenue without sought-after reforms.

And while SSR payments represent a sort of life-support to struggling older units, like a 90 MW unit at Edwards, they do nothing to encourage new generation, Sullivan said.

"This is a structural question about what is MISO trying to encourage," she said.

PJM rumblings

While Dynegy continues to push its case at FERC, the company won't rule out other possible fixes to what it views as a flawed capacity market.

"What we're really looking for is a functioning market that provides the right signals for investment,' Sullivan said.

Historically, moves between regional transmission owners have been the result of a petition by a transmission-owning utility. And any change would require FERC approval, PJM spokesman Ray Dotter said.

Ameren, which owns the high-voltage transmission network in downstate Illinois, has pushed for a more forward-looking capacity market.

But the company has no plans to leave MISO, Richard Mark, CEO of Ameren Illinois, said in a statement.

Mark said Ameren wouldn't speculate on any state legislation that may be introduced in the future and also noted that FERC would have to approve any move from MISO to PJM.

"Under such a scenario, federal authorities would have to be convinced it was in the best interest of Illinois customers and other customers in MISO," he said. "Illinois legislators also would certainly need to take into consideration the impact such a move would have on customer rates."

As for Exelon, which is part of the same appeal to transform MISO's capacity market, a spokesman said the company is aware of no proposal to include the rest of Illinois in PJM and could not comment on whether it would oppose such a move.

Twitter: @jefftomich | Email: jtomich@eenews.net

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