The energy markets in Ohio do not disappoint when it comes to excitement. This summer proved to be another season full of potential policy changes and market anomalies.
Trump Gives Coal CPR
Trump announced a roll back of pollution controls on coal-fired power plants to slow the pace of the transformation in the power sector toward natural gas. Market forces of cheap natural gas have strained the economics of coal-fired generation for a decade; more than 200 coal plants have closed since 2010. The EPA’s proposed relaxed standards are meant to slow the sharp pace of retiring coal plants to a rate of 20% between now and 2030. Without the new standards the rate of decline is predicted to be 29%.
The proposal eliminates the requirement of certain pollution controls if the plant invests in efficiency improvements. It is expected that efficiency improvements will only be made in regulated states where captive ratepayers must foot the bill. Opponents say that the few plants this may help will not outweigh the negative health impacts of the standards.
FES Announces More Plant Closures
FirstEnergy Solutions (FES), the bankrupt subsidiary of FirstEnergy Corp., announced it will deactivate more than 4,000 MW of coal and oil generation in Ohio and Pennsylvania in 2021 and 2022. This announcement comes on the heels of its previous notification to PJM of its plan to shutter the 908 MW Davis-Besse nuclear plant, the 1,268 MW Perry nuclear plant and the 1,872 MW Beaver Valley nuclear plant in 2021.
FES blames the closures on the market, which it says “does not adequately compensate generators for the resiliency and fuel-security attributes that these plants provide.” FES has taken this argument to the Trump administration pleading that the closure of these plants is a national security issue and calling on Section 202(c) of the Federal Power Act. The rarely used wartime section of the act does allow the Secretary of Energy to issue temporary orders if “emergency reasons of a sudden increase in demand for electric energy or shortage of electric energy” were to occur.
More closures do reduce supply; however, with a 21% capacity reserve, electricity scarcity is a hard argument to make. Nevertheless, the Trump administration has circulated a “confidential” draft plan which would require grid operators to buy electricity from the struggling plants before any other source, thereby propping up the financials of these plants.
PJM Pricing Changes on Horizon
Late last year, PJM began considering increasing payment to power generators that are less responsive to pricing signals such as coal and nuclear plants. In a highly technical proposal, PJM discussed changing its Locational Marginal Price (LMP) dispatch algorithms. Baseload units are generally not bidding in their marginal costs to PJM because, in the low-price environment, they are only profitable a few hours during the day. Under these conditions these plants accept the LMP prices that are set by more price-responsive units (i.e., natural gas units).
PJM points to the need to more accurately reflect the resources required to incentivize flexible resources and to minimize out-of-market uplift payments which are needed to keep high-priced units running for reliability. Bottom line: Market analysts are predicting LMP prices to increase, capacity prices to decrease, with a net effect of 2% to 5% increase overall.
Low Natural Gas Storage, Who Cares?
Natural gas storage is 20% lower than the five-year average and 8% lower than the five-year minimum, yet pricing is still near record lows. Prices at $2.80 per MMBTU, which is where we are today, has occurred when storage has been 500 BCF over the average, yet today we are 600 BCF below the average!
Shale production is crushing the market fundamentals as we know them. The cost of pulling natural gas out of the shale regions continues to decline and production output is at all-time highs. This production is in close proximity to consumers reducing risk of long haul pipeline constraints. Furthermore, regional pipelines are being built at a frantic pace to move the gas to higher-priced markets.
Even with the increase in demand for natural gas from power generation it is not enough to prop up prices. Record-breaking production levels at low operating costs are keeping a lid on what ordinarily would be high prices going into the fall and winter.
This summer has been the thirteenth hottest summer on record for PJM and has caused a higher than normal number of notifications to customers who wish to control their for Peak Load Contribution (PLC). Customers can lower their capacity costs from suppliers by reducing load during the five highest-peak hours on the PJM system. Catch the right hours with a load curtailment and customers’ capacity costs will go down proportionally.
Energy professionals provide notifications to customers as to when these hours may occur based on projected PJM system demand. The target number for these notifications is no more than seven or eight in any given summer in order to capture the five hours. This year most providers have sent out at least eleven and we are still only in early September.
Susanne is a contributor to The Ohio Manufacturers' Association (OMA) Energy Guide blog. OMA’s Energy Guide is the path to customized energy pricing, terms, and smart energy management for Ohio’s manufacturers. To see how the OMA helps manufacturers purchase and manage the costs of energy, please visit: http://energyguide.ohiomfg.com/