Powering the Mitten: Report warns of looming electricity capacity shortfall

Electricity shortages, rolling blackouts, and surging electricity prices were the order of the day in California back in 2000 and 2001. California's power crisis, which has been attributed to a "perfect storm" of increased demand, reduced supply, and market manipulation by energy traders such as Enron, drove electricity prices up to as much as $600 per megawatt-hour and eventually cost the state of California between $40 and $45 billion.

The crisis was enabled by 1996 legislation which deregulated the electricity market in California. The law, largely embraced on all sides by Democrats, Republicans, and investor-owned utilities, was touted as a free-market solution for reducing energy prices by increasing competition. Instead, power supplies shrunk and prices skyrocketed. California suspended deregulation in 2003.

Here in Michigan, another perfect storm may be brewing. This one is composed of capacity loss as coal-fired power plants retire, and of a lack of investment in new power generation. That's according to a report commissioned by DTE Energy and Consumers' Energy that was released in November by Lansing-based Public Sector Consultants. The report warns of a potential electricity generation capacity shortfall in Michigan as soon as 2016.

The cause: a pending generation capacity loss of as much as 1.3 gigawatts -- enough to power Lansing, Grand Rapids, and Detroit -- because of the retirement of many of Michigan's coal-fired power plants. The plants are being closed primarily for economic reasons; they are old and costly to operate and are becoming even more costly as a result of new environmental regulations governing carbon and other emissions. At the same time, the report says, Michigan's partially deregulated market, under which up to ten percent of average retail sales can be purchased from alternative energy suppliers, has not provided adequate incentives for utilities to invest in much-needed new generation capacity.

The result: Michigan's power reserves could be getting very tight in the near future.

The "Mighty Marysville," a coal-fired power plant on the St. Clair River, closed in 2011. Photo Credit: Patrick Lapinski/Inland Mariners.

Capacity shortfall

The report bases its warnings on a forecast from MISO, the Midcontinent Independent System Operator, which operates the grid in Michigan and much of the midwest.  MISO advises states to maintain a capacity reserve margin, and it forecasts that much of Michigan's lower peninsula will begin to dip into that margin as soon as 2016.

"MISO sets what is called the 'planning and reserve margin'," says MISO spokesman Andy Schonert. "It's a kind of cushion to ensure we have reliable electric generation on the system. But it really falls to the states and their planning processes to make sure they're bringing the right amount of generation online."

In December, the Michigan Public Service Commission issued new directives for electricity generators, extending the timeframe for which they are required to evaluate and report on their ability to meet future demand from a one-year assessment to a five-year assessment.

"The reason we’ve made this change is to get more information about capacity in light of the coal plant retirements that we know are coming," says MPSC Chairman John Quackenbush. "Having only one year of planning is perhaps adequate when you have excess capacity, but we know we have a significant number of coal plants retiring soon due to environmental regulations from the federal government."

While the MPSC has the authority to require regulated utilities and cooperatives to submit this information, it can only ask for it from the alternative energy suppliers that operate within the state under Michigan's partially deregulated market.

"The difference is that we have the authority to require utilities to provide the information, but we can only request it from alternative energy suppliers," says Quackenbush. "We’re concerned about it. We need to make sure that alternative energy suppliers are arranging for adequate capacity. They can’t just assume it will automatically be there for them; they need to be focused on planning too, otherwise Michigan as a state will be in an unreliable power situation."

2016 Resource Adequacy Forecast, Local Resource Zone Summary
Source: Midwest Independent System Operator via Public Sector Consultants

Who decides Michigan's energy future?

Conflict over the respective roles of state and federal government in ensuring Michigan's electricity generation capacity and reliability is brewing as well.

"The federal role is to make sure that the interstate transmission system operates reliably," says Valerie Brader, deputy legal counsel and senior policy advisor for Gov. Rick Snyder. "It does not regulate where plants get built or what size or anything like that. All of that goes to the states, which have authority over both the rates and the electric generation resources."

Brader believes MISO, a federally regulated body, overstepped its bounds in October when it required a utility to keep the coal-fired Presque Isle Power Plant open for reliability purposes. It had been slated for closure after a loophole in Michigan's electric choice law had allowed a mining customer, who accounted for a majority of the plant's load, to leave for an alternative energy supplier. But because closing the plant would diminish capacity and threaten reliability, MISO ordered the utility to keep it open, with the cost to be borne by remaining customers, forcing high costs onto customers including homeowners and small businesses. Those customers are expected to see steep rate hikes.

"That's something that is really at the heart of what states normally do, which is to figure out what people should get paid to run generation," says Brader. "But because it was threatening that interstate grid, MISO asserted authority to decide that for us. The only way you can appeal their decision is through FERC, the Federal Energy Regulatory Commission. Michigan appealed the decision and is continuing to appeal the initial determination from FERC regarding both the size of the rate increase and the way it's allocated. We know FERC's decisions are likely to cause short-term, sudden rate shocks."

Brader says the federal government is essentially forcing the state to keep an old, dirty, uneconomic power plant open, and is shifting the cost burden onto the people of the Upper Peninsula.

"This is the most expensive, the most unfair and least environmentally protective option," says Brader. "There's just no reason to like FERC's solution.."

According to Schonert, MISO's actions are in line with fulfilling its function to ensure stable operation of the transmission grid.

"We do what we can to help ensure reliability and work with the states to make sure they're seeing what we're seeing as far as future forecasts, and that they're taking that into consideration when they do their work," he says.

According to Brader, the state is working to identify an alternative solution.

"We are actively working to identify a better solution," she says. "We are deeply involved in discussions with private parties to see if we can solve the current reliability issues in the upper peninsula." 

She also warns that the U.P crisis is just a taste of what's to come. 

"What is happening in the U.P. is just the canary in the coal mine for Michigan," she says. "It is absolutely possible to see this kind of federally imposed rate hike happen in the lower peninsula. We're already seeing FERC signalling that it's essentially ready to create the same situation in the lower peninsula that we've been trying to cope with in the Upper Peninsula; it has signaled it might not agree to allow Consumers' Energy to retire a slate of seven coal-fired plants, which it is under federal court order to do. Michigan needs to develop our own solution to avoid the federal government doing it for us."

This piece is part of a series of special reports on Michigan public policy issues made possible through a partnership with Public Sector Consultants.

Source for lead graphic: Midwest Independent System Operator via Public Sector Consultants.
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Julie Metty Bennett, Public Sector Consultants
Julie Metty Bennett, Public Sector Consultants

IMG: What are some of the factors driving Michigan’s potential shortfall of energy resources?

Julie Metty Bennett: It's being driven mostly by a shift in where we are getting fuel to meet our electricity needs. Right now, Michigan gets about half of its power from coal-fired power plants, which is higher than the national average. Nationally, about 39 percent of power comes from coal. Most of our coal plants are more than 50 years old, and they’re expensive to maintain. In addition, recent environmental regulations promulgated by the EPA are now going into effect that will require significant investment in these older plants. So, coupled with the fact that they are old and expensive to maintain in the first place, the added cost of meeting new regulations means it is becoming very uneconomic to operate many coal-fired power plants. So they are being shut down.

Research shows that nine coal-fired units in the state are going to be retired in the next two years. They provide about 1.3 gigawatts of electricity. Just to put that into perspective, that is enough power for a million people — or the population of Detroit, Lansing and Grand Rapids combined. This is going to create a huge gap between how much energy we are supplying and the amount we need.

IMG: What options does Michigan have to fill that gap in the short-term?

JMB: We need balance in our approach. Public policy plays a big role here in bridging the gap. Michigan has a renewable portfolio standard that encourages renewable energy, and we also have energy-efficiency targets which require utilities to work with customers to reduce demand. Those are both good policies that will help to bridge the gap.

Renewable energy sources are intermittent, and until we can develop cost-effective energy storage technologies, we can't just rely on when the wind blows and when the sun shines. So there is a need for new base load plants that can provide continuous reliable power to meet our round-the-clock needs. Natural gas is likely going to be the fuel of choice for new base load because the price is low and projected to be stable in the coming years.

IMG: PSC's new report on electric reliability describes a conundrum we face in Michigan right now — that to bridge this gap, utilities will have to invest in these new base load plants, but uncertainty in the market makes it difficult for them to make that investment. Can you elaborate on that?

JMB: Michigan's current energy law allows some customers, primarily large business customers, to bypass their utility and buy electricity independently from alternative energy suppliers. Still, regulated utilities are still required to serve all potential customers in their area, creating a revolving door for customers who can return to the utility with limited notice.

The result is that the utility has no way to be certain of the size of its customer base. We know we need to invest in these new base load plants. That represents a huge cost for the utility, but at the same time, they face uncertainty in the customer base. It creates a huge disincentive for them to build these new plants.

An example of this is playing out right now in Michigan's Upper Peninsula. The Presque Isle Power Plant [a coal-fired power plant] had a big industrial customer — mining company Cliffs Natural Resources — that left the utility for an alternative energy supplier. That customer represented a majority of the plant's load. Once it left, it became too costly for the utility to continue operating the plant, so they wanted to shut it down.

Interestingly, it was the federal government that stepped in and told the utility that it must keep that plant on the grid for reliability purposes. The result was a cost shift to the remaining customers, driving up rates significantly. The state then said, "Hey, this is really a state issue, we are the ones who are responsible for ensuring reliability." So now they are fighting, and it is a real mess.

What the state and the feds are agreeing on is that the plant needs to stay open. Whose authority under which that happens, and how expensive it is going to be, is being debated. It looks like it could cost $50 per month for homeowners and $700 per month for business owners to keep that plant going.

IMG: How can this situation be avoided in the future in Michigan?

JMB: Renewable energy and energy efficiency are being talked about at the state level right now, and there will hopefully be legislation in 2015 to either keep those programs going or make them more aggressive. That would help fill the gap.

But the base load power plant issue also needs to be addressed. This experiment in Michigan where we allow some customers to bypass their utilities is causing a lot of problems. So we could just get rid of that revolving door, or tweak it around the edges.

I think we need to talk about a plan for how we are going to provide energy across the state. Right now, the current energy policy that we have does not allow us to plan. As a result, we’re seeing supply shortages and the federal government step in to address things that we should be talking about at the state level. We want to be able to provide power to Michigan residents through Michigan policy. If it is state policy that is causing the problem, we have the ability to fix that.