Cheap Power Prices to Come Undermine Mon Power Harrison Purchase
The State Journal
28 May 2013
By Pam Kasey
A coming drop in regional power prices in 2016-17 may undermine
FirstEnergy's argument that buying the coal-fired Harrison power
station is Mon Power's best move on behalf of ratepayers.
The information about 2016-17 power markets, released Friday,
could mean FirstEnergy subsidiary Mon Power has time to consider
ways of diversifying its fuel sources rather than, as it has
proposed to the Public Service Commission of West Virginia in a
case that will be heard this week, deepening its near-complete
dependence on a single fuel, coal.
Energy and capacity markets
Mon Power doesn't currently own enough generation capacity to
meet current and growing demand of its own ratepayers and the
ratepayers of Potomac Edison, for which it supplies power.
The situation has to be addressed because electric utilities have
to perform two big functions: They have to generate or buy enough
electricity to meet their customers' day-to-day demand and, in a
closely related but different function, they have to own or
control under contract enough generation capacity to meet their
customers' peak demand.
Those functions are referred to in power markets as "energy" and
"capacity." Mon Power right now is short both energy and capacity
and sees those shortfalls growing.
It could meet its shortfalls in the wholesale energy and capacity
markets administered by regional grid manager PJM Interconnection.
Alternatively, it could address them by entering power purchase
agreements with other generators, by building new generation
capacity that relies on any of the range of fuels, by buying
existing generation capacity or by providing incentives to
customers for energy efficiency.
The best solution depends in part on the future of the power
markets. If energy and capacity markets will be low, it make the
most sense to cover the shortfalls in the market — to rent, in a
sense. If they will be high, it makes the most sense to own.
The companies have proposed to the PSC that the best solution is
for Mon Power to spend about $1 billion buying the 80 percent of
the Harrison power station it does not own. Buying Harrison will
protect ratepayers against power prices that FirstEnergy has
warned could rise.
But that warning was called into question on Friday.
Markets heading down
Power markets are heading down in 2016-17, according to the
information from PJM, which manages the electric grid in all or
parts of 13 states and the District of Columbia.
PJM holds an auction each May for generation capacity that will be
operating three years in the future. As the region's power
generation fleet shifts continually due to retirements and new
entrants, the auction serves a valuable planning function that
enables utilities and PJM to know just who will be burning what
fuel where and at what price a few years down the road.
Capacity auctions held several years ago set prices of about $16
per megawatt-day in 2012-13 — that is, right now — and $28/MW-day
Prices shot up in the last two auctions to $126/MW-day for 2014-15
and $136/MW-day for 2015-16, due largely to planned retirements of
aged coal-fired power plants.
Those higher prices for two years running opened up the
possibility that capacity prices would stay at a new, higher
"Given this trajectory, there is no basis to contend that
wholesale capacity will continue to be relatively inexpensive, or
that continued market reliance is a prudent approach," wrote
FirstEnergy Services Co. Director of Regulated Generation and
Dispatch Michael Delmar in testimony filed May 17 with the PSC.
But in the auction just completed, prices dropped to $59 for
2016-17, a response in part to an influx of new gas-fired plants
by, according to PJM.
"Capacity prices were pressured by a combination of factors," said
Andrew L. Ott, PJM senior vice president for markets. "Prices were
generally lower than last year's auction due to competition from
new, gas-fired generation, low growth in demand because of the
slow economy and increased imports from other regions, primarily
to the west of PJM."
This might be the kind of cushion that would give Mon Power time,
as some intervenors in the case have suggested, to put together a
solution to its shortfalls that includes natural gas, renewables
and energy efficiency.
A few notes
Several things must be noted.
First, it is not possible to tell from the case filings that are
available to the public how proposed price for Harrison compares
with the capacity auction results.
Second, if capacity prices were to stay low, that would have two
implications. One is that, as described above, Mon Power could
cover its capacity needs more cheaply in the market than, perhaps,
has been anticipated. The other is that, if it were to buy the
Harrison plant, it would receive less in the market for its own
excess capacity to offset the purchase price on ratepayers'
And third, the results of the 2016-17 capacity auction give
information about prices three years out, and the Harrison plant
is expected to operate for possibly 30 more years. So while
Friday's announcement does call the characterization of the past
couple years of auction results as a trend into question, it's not
a complete picture of price trends through the life of the plant.
PSC case number 12-1571 goes to evidentiary hearing May 29-31. The
hearing may be viewed on the commission's website.