How might MISO market reform affect US power generation
In recent months three major power producers (Exelon Corp., Entergy Corp., and Dynegy Inc) have announced nuclear and coal plant closures in the Midwest Interconnection System Operator (MISO). As well, in November last year, MISO filed asked the Federal Energy Regulatory Commission for permission to hold a forward-looking capacity market auction; the idea being that it would help provide more stability in the generation sector within the region. Can it succeed? Will it stave off power shortages?
S&P Global Ratings thinks the changes could contribute to a reshaping of the region’s generating fleet, as independent system operator (ISO) states seek to transition from a coal dominated fleet to incorporating more renewables and gas-fired generation. MISO has proposed a new approach that replaces the current one-year forward-looking auction with a three-year forward-looking mechanism. S&P Global Ratings thinks it could result in adjustments to the demand curve, potentially replacing the current vertical curve with a sloped one, and a seasonal approach to capacity pricing, are also on the table. “A stronger capacity market mechanism means more incentive for gas-fired generation (compensating for diminished energy margins), and, with such a significant quotient of the ISO’s capacity concentrated in coal, this might be a welcome development.”
However, whether or not MISO generators will be able to provide the level of reliability demanded in the region remains to be seen. “To understand the necessity for a forward-looking capacity auction, one must first understand the market as it is right
now. Part of the reason that we’ve failed to see the same level of development in MISO as we have in PJM and ISO-NE
is that we don’t see the same level of transparency and visibility in future pricing,” explains Michael Ferguson, a senior credit analyst at the firm. “The structure of the market makes competition difficult for unregulated generators in the first place. Whereas PJM, New York-ISO, and ISO-NE operate in the fashion of unregulated markets, MISO employs more of a hybrid structure, mixing its unregulated generation with utility-owned assets (except largely in Zone 4).”
Ferguson says the problem, at least for unregulated generators, is that it is very difficult to compete with their regulated contemporaries, which can bid into capacity auctions at very low costs, “because they can recover costs through rate base (this is not aided by the presence of vertical demand curve). Unregulated generators must recover their costs through capacity pricing and energy margins. This is reflected in bidding behaviour–with no pressure to earn a sustainable return in the markets, there’s little incentive for regulated generators to bid in at higher prices, leading to downward pressure in capacity pricing (though there are exceptions, such as in southern Illinois, where transmission constraints led to capacity prices spiking to $150/megawatt [MW]-day
for the 2015-2016 Planning Resource Auction, before receding more recently.”
Moreover, Ferguson, who wrote the latest report on the implications of the reform on the credit outlook for local generators, says that while the MISO region boasts a substantial reserve margin, closures announced for key coal and nuclear assets over the next two years may dissipate the cushion. Whether or not MISO generators will be able to provide the level of reliability demanded in the region remains to be seen. Although the MISO region boasts a substantial reserve margin, closures announced for key coal and nuclear assets over the next two years may dissipate the cushion
Inevitably perhaps, the new Trump administration will likely halt, at least temporarily, the implementation of the Clean Power Plan (CPP). However, S&P Global Ratings still expects that, longer term, the transition to a lower carbon economy will continue, and that policy incentives, both at the federal and state levels, will perpetuate the trend…..