Losing Model: Dynegy blames MISO market design for coal death
Dynegy recently announced plans to shut down multiple Illinois coal-fueled units — 1,835 MW in total from MISO Zone 4. The decision to shut down operations at the Baldwin and Newton units was made after the plants, once again, failed to recover basic operating costs in the most recent MISO capacity auction.
Competitive generating assets in MISO Zone 4, regardless of fuel type, are unable to support their operating costs in the existing MISO market design, according to Dynegy. Generators are compensated in two ways — through the capacity market and through the energy market. The out-of-state utilities offer their capacity into the annual auction at little to no cost since they are more highly compensated through their home state regulatory process, putting competitive generators at a tremendous disadvantage.
This same issue also applies to the energy market, where utilities also offer their energy in at no cost and continuously dispatch their baseload plants regardless of price as they are able to pass through their variable costs to ratepayers. Since generators in Zone 4 are not regulated, they rely entirely on the capacity and energy markets which are, in effect, suppressed by the regulated utilities’ offering practices.
MISO’s market design does not penalize or prevent this practice. This dynamic prevents Zone 4 generators from receiving an adequate level of compensation to cover their generating costs. If Newton and Baldwin were located in PJM — as northern Illinois plants are — or Zone 4 was regulated as the other MISO generators outside of Illinois are, no shutdowns would occur.
“This is a losing model that exports southern and central Illinois jobs and economic base to the surrounding states resulting in a catastrophic economic outcome for downstate Illinois,” said Robert C. Flexon, chief executive officer of Dynegy. “As has been demonstrated repeatedly, there is a large disparity between how central and southern Illinois competitive generating stations are treated compared to generating stations in northern Illinois and MISO participants outside of Illinois. Central and southern Illinois competitive units in MISO Zone 4 are wrongly grouped with out-of-state utilities rather than the competitive power producers in northern Illinois and PJM. This must change.”
MISO is limited in what they can do to correct the situation, as their membership is overwhelmingly represented by out-of-state utilities that reap the benefits of the existing market design and, not surprisingly, are highly resistant to any design changes.
“Disappointingly, rather than resolve the market design deficiencies, which has the added benefit of retaining Illinois jobs and economic benefits, the only response from Illinois officials to date occurred last year,” Flexon said, “when the Attorney General’s office filed a complaint claiming that the clearing capacity price received by Dynegy for less than 10 percent of the Company’s megawatts in MISO Zone 4, that was comparable to prices in northern Illinois and did not even cover Dynegy’s costs, was not just and reasonable. Dynegy has spent more than a year defending itself against this baseless claim.”
As part of the shutdown process, a notice filed with MISO for each unit triggers a reliability review by MISO. If MISO determines the units aren’t needed for reliability, Dynegy expects to shut down operations at Newton unit two in September 2016, Baldwin unit one in October 2016, and Baldwin unit three in March 2017.