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 in 2013-14.

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 level.

"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' monthly bills.

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.