Air Rules Could Risk 11% of PJM Generation

Anticipated clean air regulations could force the retirement of as much as 19,000 MW of coal capacity in the Mid-Atlantic—or 11% of the region’s generation—unless power prices rise to levels that make operation of the plants profitable, according to the independent market monitor for PJM Interconnection.

That was a key finding of a 2010 "State of the Market" report for PJM Interconnection LLC, which runs the grid for 13 Mid-Atlantic states and the District of Columbia. The report was prepared by Monitoring Analytics, a consulting firm that serves as a federally required independent monitor of the markets that PJM runs.

As a primary conclusion, the market monitor said most markets in PJM—for power, capacity and most so-called "ancillary services"—are competitive. For example, the market monitor said the markup of locational marginal energy prices last year averaged only 0.6%—a sign of competitive health because competition typically forces down profit margins.

Importantly, however, the market monitor said the market for regulation services—short bursts of power used to keep the grid balanced—was not competitive.

Roughly echoing concerns expressed in last year’s report, the market monitor said PJM’s regulation service market was not structurally competitive as a result of rules the grid operator enacted in 2008.

The report says the structural problem is routinely fixed because mitigation measures keep regulation services prices at competitive levels.

But to fix the problem longer-term, the market monitor urged PJM to tweak its definition of opportunity costs in PJM’s regulation services market, a definition the market monitor called "inconsistent with economic logic."

Opportunity cost reflects the price a provider could have obtained by selling his power as part of another product, and PJM’s rules allow regulation service providers to include a component of those costs in their market offers.

The market monitor said PJM’s definition of opportunity cost produces offers into regulation services market that are above competitive levels at some times and below competitive levels at other times.

"The rules responsible for this outcome were flawed when implemented and remain flawed, although PJM has corrected some issues," said Monitoring Analytics President Joe Bowring in a press release accompanying the report released on March 10.

A PJM spokesman acknowledged a "disagreement" on the pricing of regulation services between the market monitor and PJM staff.

For the coal fleet in PJM, the report suggested that plants comprising nearly 7,000 MW of capacity are already having some trouble staying financially viable at current power prices.

That is presumably because the price of the primary competing electric generation fuel—natural gas—has been steadily low for months.

And because gas plant prices generally set market-clearing prices in PJM, coal generators have been left with the worst of two worlds—lower revenues from lower power prices and fuel prices that have remained steady while competitors’ fuel prices have dipped.

"Analysis of actual 2010 net revenues shows that 6,769 MW of sub-critical and supercritical coal units did not cover their avoidable costs even after capacity revenues were considered, of which 6,021 MW were located in the [New Jersey] region," said the market monitor report.

"Units accounting for 4,862 MW are recovering less than 75% of avoidable costs and units accounting for 2,763 MW are recovering less than 65% of avoidable costs."

Avoidable costs are mostly non-fixed costs that would go away if a plant halted generation. They are important economically because plant shutdown decisions are based on whether revenues exceed avoidable costs.

In a brief interview the day after the report was released, Bowring said that as a practical matter not all of the coal plants cited are at immediate risk of shutdown because prices could rise and for other reasons.

He pointed to those recovering less than 65% of avoidable costs as likely being at short-term risk.

Financial problems will likely get worse for parts of PJM’s coal fleet after the Environmental Protection Agency issues anticipated rules aimed at limiting emissions of fine particulates, ozone and hazardous air pollutants such as mercury, the report says.

"Analysis of units lacking the environmental controls necessary to meet likely regulatory requirements shows that between 14,345 MW and 19,068 MW of installed capacity, depending on the nature of the requirements, would require an increase in energy or capacity revenue in order to cover their avoidable costs including project investment costs and remain in operation if faced with mandatory investment in environmental controls," said the market monitor.

The market monitor said the key factor in whether retirements would be in the high end of the range or the low end of the range is how tightly EPA decides to clamp down on emission of nitrogen oxides, a precursor to ozone.

Bowring stressed during the interview that his report does not suggest all those plants will shut down immediately when the EPA rules come into effect, and that increases in power and capacity prices might keep some in business.

Rather, the report says the plants "face risks of increased capital expenditures, and the market will sort out how that gets addressed," Bowring said.

The market monitor’s report does not estimate how much capacity or energy prices would need to rise to make the economically vulnerable coal plants profitable under new EPA rules. Conversely, it also does not project the impact on prices of retiring some 14,000 to 19,000 MW of coal generation.

—Jeff Beattie is a reporter for The Energy Daily, where this article first appeared.