Electricity markets are intrinsically complex and unpredictable. But even those most familiar with the Midwest wholesale market were caught off-guard by results of an auction run by the region's grid operator to help ensure there is adequate generating capacity to keep the lights on.
The results were disclosed Wednesday by the Midcontinent Independent System Operator (MISO), the operator of the bulk power grid for much of the nation's midsection, and divided by each of various subregions. For most of MISO's 15-state footprint, including areas thought to be short of generating capacity like Michigan, the clearing price was just above $3 per megawatt-day (MWd).
But in southern Illinois, a region of the state that has surplus generating capacity, the result of the MISO capacity auction was 50 times higher.
The $150 price -- a tenfold increase from last year's clearing price -- was more than double what Wall Street analysts expected and promises to further spice up what's already a vigorous debate in Illinois over the future of the state's energy policy.
"On its face, it's impossible to justify and illustrative of how the capacity regime is failing consumers," said David Kolata, executive director of the Citizens Utility Board, a consumer advocate for residential utility consumers.
Kolata believes the auction will be challenged at the Federal Energy Regulatory Commission and could wallop southern Illinois consumers to the tune of $150 million a year, based on preliminary estimates.
CUB expected higher prices, but the utility watchdog was stunned by the wide differential between southern Illinois (the northern half of the state is part of another regional transmission organization, PJM Interconnection LLC) and the other parts of MISO, such as Michigan, where there's serious concern about a generation capacity shortage.
"I don't think you can justify those kind of price differentials," Kolata said.
The MISO auction, formally known as a "planning resource auction," covers the 12 months from June 1 to May 31, 2016. The auction is meant to ensure there are adequate generating resources available to meet peak demand and a specified reserve requirement across MISO's footprint and within each of nine specific zones.
While some imports of power between zones are assumed, MISO requires a certain amount of generation to be physically located within each zone to meet peak demand and the reserve requirement.
According to MISO, the differential between the $150 clearing price this year and last year's $16.75 had less to do with an imbalance of supply and demand and was instead a product of bidding strategies.
The biggest owner of generation in southern Illinois is Houston-based Dynegy Inc., which doubled down on its coal fleet and now owns nine coal-fired power plants representing 7,000 MW of capacity in southern Illinois.
In a news release late Tuesday, Dynegy disclosed that 2,262 MW of capacity cleared the auction. But that includes more than 1,700 MW estimated to cover retail load obligations. The company won't realize MISO capacity revenue for that load.
A company spokesman declined to elaborate on the press statement.
Another generator, Exelon Corp., acknowledged that its 1,100 MW Clinton nuclear plant cleared the auction at $150, which analysts estimated could yield $40 million to $50 million in additional revenue for the 2015-2016 year.
Chicago-based Exelon has said for more than a year that three of its nuclear plants, including Clinton and two plants in PJM, are losing money because of competitive pressures from natural gas-fired generation and wind. The company is pushing legislation in Springfield that would create a low-carbon resource standard in Illinois that it says would level the playing field for its nuclear fleet and other non-carbon fuels like wind and solar energy (EnergyWire, Feb. 25).
In a research note, analysts at UBS Securities say the auction results "certainly help Clinton but could reduce the urgency for legislative reform in Illinois."
An Exelon spokesman wouldn't disclose how much additional revenue it might realize from the MISO auction, but said only that it wouldn't be enough to materially improve the plant's financial profile.
"The auction results reduce Clinton's economic losses, but the plant remains uneconomic and may prematurely shut down absent Illinois legislative changes to outdated policies that do not allow nuclear energy to compete on a level playing field with other zero carbon resources," spokesman Paul Elsberg said in a statement.
Environmental and consumer groups are lobbying for a competing energy legislation (EnergyWire, Feb. 6). Two of the organizations released reports this week stating that expanding Illinois' renewable energy standard and energy efficiency standard would save consumers money over the next decade and a half.
One of the reports prepared by the Union of Concerned Scientists, which was the subject of a House committee hearing in Illinois on Wednesday, estimated that the expansion of renewables and energy efficiency would help Illinois utility consumers save $12 billion compared to what they would otherwise spend on electricity over the next decade and a half.
The Citizens Utility Board, which focused on the effect of a 50 percent expansion of the state's efficiency standard, estimated $1.6 billion in savings for residential utility customers over the same time period.
The group included in its analysis an estimate for capacity prices going forward in PJM, but not results of the most recent MISO auction.
Kolata, CUB's executive director, said the surprise jump in MISO capacity prices for southern Illinois only underscores the importance of energy efficiency and other demand-side resources.
Reporter Edward Klump contributed.
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