BY JULIE WERNAU
Ever have someone bail when they said they'd be there?
That's exactly what happened during the polar vortex last winter when nearly a quarter of power producers didn't show up to provide power to the electric grid during one of the coldest days on record.
As a result, grid operators were left scrambling to keep the lights on. Electricity prices on the open market skyrocketed and the grid came close to failing.
Now the PJM Interconnection — which oversees the grid in 13 states, including the Chicago region — has proposed a "no excuses" policy that would increase consumers' electric bills and financially reward the one form of power it relied on when record-setting cold set in: nuclear.
On Jan. 7, when coal plants stopped working because their conveyor belts froze and natural gas plants couldn't obtain enough fuel in time, nuclear plants kept running at 95 percent capacity.
"We did have a very close call with the polar vortex," said Andy Ott, executive vice president of markets for the PJM Interconnection. "I don't think it was a complete breakdown of the system. But it's clear the system will break if we don't change something soon."
The move would boost the bottom line of Chicago-based Exelon Corp., the nation's largest owner of nuclear power plants, at a time when it is threatening to close some of those plants because of increased competition from wind and natural gas generated power. The company has lobbied hard for some of the reforms PJM is suggesting.
Electricity bills are expected to go up as part of what PJM is selling as an "insurance policy" to prevent outages and price spikes.
Ott estimated that in an average weather year the changes proposed by the grid operator would add $2 to $3 to monthly electricity bills. But some analyses have placed that increase as high as $18 per month starting in June 2018 over today's prices for the average Commonwealth Edison residential customer.
To ensure that enough electricity — plus a reserve — is supplied to the grid, PJM chooses the lowest-cost mix of power from electricity generators during an annual "capacity" auction. Winners are awarded lucrative "capacity payments," paid by consumers in their electricity bills, as an incentive to invest in plants and to provide power to the grid.
There were flaws in PJM's system. Generators that didn't show up on a particular day were only penalized if they were consistently truant. And the penalties were low; they still earned capacity payments, but the payments were just reduced. That system worked because there were plenty of backup coal-fired plants to draw power from. Many of those plants have closed, making the grid more dependent on gas-fired plants.
"That was OK when gas was a relatively small part of the generating mix and we had a large buffer of all these coal plants," said Jonathan Arnold, managing director at Deutsche Bank Securities. "But in the past 10 years we've added a bunch of renewables, which are inherently unreliable because it's there when the wind blows and not when it's not, coal plants are shutting down and nuclear plants are finding it tough to survive, and we're transitioning to natural gas which is an on-demand fuel."
Since 2008, the PJM region has lost 24,000 megawatts of electricity produced by coal plants partly offset by the addition of 16,000 megawatts of natural gas-fired power. Natural gas production from hydraulic fracturing around the country has flooded the market, lowering commodity costs and boosting the economics of power produced from natural gas.
But gas pipeline capacity hasn't caught up with demand for gas. And last winter natural gas-fired power plants and utilities that supply natural gas to homes and businesses competed, revealing flaws in PJM's system.
Some consumers on variable rates saw prices spike to 35 cents per kilowatt-hour during the first six months of 2014 — more than four times the going utility rate, and six times ComEd's rate during that time. ComEd is a unit of Exelon.
ComEd customers on a real-time pricing program have an electricity rate that changes hourly. Those rates rose to $2 per kilowatt-hour for a time Jan. 6 when ComEd's fixed-rate customers were paying pennies.
"The extreme weather of this winter was a blessing in disguise because it gave the system operators an opportunity to see a vulnerability that could have gone somewhat under the radar," Deutsche Bank's Arnold said.
Under proposed rules, which are under review by the Federal Energy Regulatory Commission, generators would face steep fines for not showing up.
The thinking, according to PJM, is that the possibility of fines will encourage power plant operators to make investments to prevent cold-related shut downs. For example, coal plant operators would chose to cover coal piles so they don't freeze and natural gas plants would buy pipeline capacity in advance or store natural gas on-site to prevent equipment breakdowns. Failure to take such steps could be costly for companies picked in the auction.
"We could lose more money than we actually made, multiple times that of the money we earned from the market," said Dean Ellis, managing director or regulatory affairs at Houston-based Dynegy, which owns 10 power plants in Illinois that burn mostly coal.
At the same time, PJM proposes that those penalties should flow into the pockets of generators who show up as promised. The biggest beneficiaries would be nuclear plant owners like Exelon. Nuclear plants have fuel on hand and equipment that doesn't need to be weatherized to operate, so they're unlikely to suffer weather-related outages. Wind and solar operators who provide fill-in power also would earn payments.
The downside of the proposed changes? PJM expects generators to bid higher at auction to account for the increased risk of being penalized. Generators also have had to prove that their costs were as high as they said they were. Under PJM's proposed rules, generators would avoid having to justify their costs unless their bids were so high that it would be cheaper to build a new power plant than to pay the price a generator said it needed to operate it.
The proposed reforms have raised concerns among those knowledgeable about the grid. Some question whether it will really provide an incentive for power plants to weatherize or simply boost corporate profits and drive up electricity costs.
"This is an overreach by PJM that is providing a very, very expensive solution to a problem that has more flexible and probably lower cost ways of being resolved," said Howard Learner, executive director of the Chicago-based Environmental Law and Policy Center.
Learner says the reforms are a veiled attempt to "force Illinois businesses and taxpayers to pay more subsidies for nuclear plants."
Are the proposed changes with capacity payments enough to save the four Exelon nuclear plants in Illinois and New Jersey that are threatened with closing?
The answer, analysts say, is maybe.
Julien Dumoulin-Smith, executive director of equity research for electric utilities at UBS Securities in New York, said if reforms eliminate electricity spikes, power prices could plummet. If that happens Exelon could lose more money than it makes on more lucrative capacity payments.
Still, other analysts predict that higher-capacity payment will be so lucrative that Exelon nuclear plants that didn't clear this year's auction —Quad Cities, Byron and Oyster Creek — would make enough money to avoid shutting down.
Joseph Dominguez, Exelon's senior vice president, governmental and regulatory affairs and public policy, called the financial outcome for Exelon a "guessing game." He also said the company's Clinton nuclear plant served another system operator and therefore wouldn't reap benefits of the reforms.
The 2011 auction for 2014-15 procured 149,974.7 megawatts of capacity at $126 per megawatt-day in the area that includes Chicago. That compares with $27 per megawatt-day consumers had been paying the previous year, about a four-fold increase. In 2015-16, prices were expected to increase again to $136 per megawatt-day before normalizing.
Now Deutsche Bank analysts are projecting that under the new rules, prices would continue to increase to $140 per megawatt-day in 2016-17, $180 in 2017-18 (for a portion of energy procured under the new years as part of a transition process) and $250 per megawatt-day beginning in 2018-19 when all electricity would be procured under the new rules. Others are projecting prices could spike as high as $375.
Exelon, which lobbied for the reforms, stands to gain 50 cents per share or about 20 percent of its expected earnings per share in 2016 for every $100 per megawatt-day increase in the PJM capacity price, according to an estimate by Bernstein Research.
But Bernstein Research says that's insignificant compared with the financial boost the company could obtain from efforts by the U.S. Environmental Protection Agency to reduce carbon dioxide emissions produced by generators.
Bernstein estimates that EPA regulation of carbon dioxide has the potential to increase Exelon's long-term earnings by $1.60 a share, or over 60 percent of the 2016 consensus.
The Nuclear Energy Institute report in October said Exelon's Byron, Quad Cities and Clinton plants face possibly closing. Exelon has said the plants are in danger of being closed "because they face a perfect storm of economic challenges that threaten their continued operation," according to the letter Exelon is encouraging people to send to legislators.
While the state does not need to select how to meet its goal and submit an implementation plan to the EPA until 2016 at the earliest, Exelon is pressing the state legislature to take up the issue in the spring, saying three of its nuclear plants are on the chopping block now.
"The fact remains that several of Exelon's Illinois nuclear facilities have been experiencing major annual losses in the past few years due to a combination of factors, not least of them the market's failure to properly value their carbon-free, always-on energy," Dominguez said. "Illinois presently has market-based, clean energy programs that benefit all zero-carbon resources except for nuclear energy, which creates challenges for the continued operation of some plants. One option is to allow nuclear energy to compete in these programs."