Power Market Operators and Participants See a Glimmer of Optimism in Current Chaos
Compared to just five years ago, today’s U.S. power landscape has been transformed. Low natural gas prices, market dynamics, technical issues, and policies that favor renewables precipitated the closure of five nuclear reactors since 2013, seven others are slated to shutter soon, and at least five will remain open owing only to state programs that deem them too economically and environmentally significant to close. Concerns about the long-term viability of the wholesale market model in the face of political intervention are drawing to a crescendo, prompting the Federal Energy Regulatory Commission (FERC)—which may finally have its quorum restored following President Trump’s nomination of two candidates to fill vacant leadership seats—to set up a technical conference as an outlet for these issues.
Havoc has been unleashed in some traditional markets too. The Westinghouse financial debacle has left the future of the four costly AP1000 nuclear projects uncertain. And while the Trump administration has begun rolling back key Obama-era rules along with key climate policies, average annual net generation from coal-fired units—which reached an annual high of 2 billion kWh in 2007—plunged to 1.2 billion kWh in 2016. In 2016, notably, natural gas generation’s share of the U.S. mix soared to 33.8%, for the first time surpassing coal’s share, which was 30.4%. Also, for the first time, non-hydro renewables’ share of total U.S. generation surged to 8.4%, surpassing hydro’s 6.5% share in 2016 (Figure 1).
A Silver Lining
At the ELECTRIC POWER Conference and Exhibition in Chicago in mid-April, concerns about wide-ranging uncertainty afflicting the power sector were echoed by several speakers and attendees. Yet, Bryan Hanson (Figure 2), president and chief nuclear officer of Exelon Nuclear, who gave the annual event’s keynote speech on April 11, provided a glimmer of optimism. Despite recent setbacks that have rattled the nuclear industry, he said, the future of the sector was sound.
Facing stiff competition from cheap gas power and an influx of renewables, U.S. nuclear generators in competitive wholesale markets are forced to grapple with rising costs and falling wholesale power prices, along with more stringent regulatory mandates, and “a lack of federal and state energy policies that value our product,” said Hanson. “And then, there are the political and legal issues … but I’ll stop there.”
Exelon, he noted, stakes the core of its business on its nuclear fleet, generating 20.2 GW of nuclear power from 23 reactors at more than a dozen plants scattered across Illinois, Pennsylvania, New Jersey, New York, and Maryland. Over the years, its profit-making strategy has been transformed alongside efforts to modernize, which have required innovation and technology, and new approaches to operation and maintenance to improve efficiency and reduce costs to make its fleet “as competitive as possible.”
Yet, Exelon’s reinvention efforts would have fallen flat if measures it backed on the public policy front hadn’t succeeded, Hanson said. “As early as 2014, we were looking at potentially having to shut down more than a third of our nuclear fleet simply because the plants were losing money. Two stations in Illinois (Clinton and Quad Cities) and two more in New York (Ginna and Nine Mile Point) were at risk,” he said. “The prospect of shutting the plants down—and putting thousands of our talented, hard-working employees out of work—broke my heart. Policy reforms were the only thing that could save them,” he said.
That’s why Exelon embarked on a hard-fought campaign to underscore nuclear power’s value to local stakeholders, state policy makers, elected officials, and state legislators, and with the crucial backing of a broad coalition of more than 200 business, labor, environmental, and even religious groups, the company managed to help enact the Future Energy Jobs Act in Illinois in December 2016. A similar measure had previously been adopted in New York to preserve the at-risk Nine Mile Point and Ginna reactors upstate. For Hanson, the measures were pivotal for Exelon and the larger nuclear industry. “We had to take action,” he said.
But the fight isn’t over. The states’ measures are being challenged in court by a consortium of non-nuclear merchant generators, including Dynegy, Eastern Generation, NRG Energy, and Calpine Corp., which argue that they interfered with FERC’s jurisdiction over wholesale electric rates and unlawfully interfered with interstate commerce. Even so, Exelon “is confident about the future,” Hanson said. One driving factor certain to underscore nuclear’s value is that “The transition to a lower-carbon economy is irreversible,” he said. Market forces, technology advancements, and consumer preference show an overarching shift towards “energy that is clean and affordable,” Hanson added.
An Era of New Threats
Yet, according to Andrew Ott, who is president and CEO of PJM Interconnection, a regional transmission organization (RTO) that operates a competitive wholesale electricity market within 13 states and the District of Columbia, “competitive markets are working.”
PJM has seen 30 GW of new gas-fired capacity come online over the past six years, 85% of which was on competitive investment—and most are without long-term power purchase agreements, said Ott, who was one of three panelists at the ELECTRIC POWER executive roundtable (Figure 3) on April 11. “What we’re seeing… is a fairly significant fuel swap, where we have in that same period about 24,000 MW of coal plants retiring,” he said. “It’s more than just a fuel swap. It’s actually a technology swap.”
Today, PJM has about 300 MW of grid-scale storage, and an assortment of resources and provided services, like frequency regulation, that is requiring it to interact and coordinate with the distribution system or distribution companies, he noted. The rapid ramp up of gas capacity in PJM’s system—from 4% in 2008 to 30% today—has actually served to boost fuel diversity in the PJM space rather than being a liability. Ott added: “I think the legitimate question is if this is a sustainable approach. Will we build ourselves into a problem?” A report PJM compiled to answer that, he said, basically says, “We think we are fine from a reliability perspective.”
For now, PJM’s biggest worries are rooted in critical infrastructure exposure. More serious than the organization’s past concerns, which were centered on weather-related outages or equipment failure, are cyberthreats and terrorists, he said. Ott later revealed that the organization is so concerned about system corruption that it created a secondary, constantly updated energy management system that it calls its “Golden Image,” and which it keeps in a “dark room.”
“If we find our control systems are unmanageable because they’re corrupted and we just can’t use them anymore, we have the ability to jettison that whole system and bring on the [Golden Image] system within an hour within the current online structure,” he said.
But Ott also suggested there was palpable anxiety about how exposed fuel delivery and power systems are, and, inevitably, about how sturdy efforts to restore systems can be. “There’s a lot more risks that we’re facing as a power industry,” he said. “The question is ‘Are we really accounting for all those risks in our operations?’”
One way to do it is to factor in resiliency, which in the context of the power system includes the ability to harden the system against and rapidly recover from high-impact, low-frequency events. “We need to look at resilience,” Ott said. “We need to start pricing resilience and flexibility into our markets.”
Resiliency should also be a factor driving transmission planning, he said. But rather than rely on state action, such as Illinois’ measures to prop up its nuclear plants as an environmental and economic measure, that action should occur on a regional level. “It’s certainly more logical that if we’re seeing regional benefits to these types of assets we should price it in. Of course, the most efficient way to do that is through a regional carbon price,” he said. “That may not be politically attainable but we think there are ways to look at the way energy prices are formed, look at the way certain aspects of resources are valued.”
One example would be to think about pricing commodities. “Maybe we should price flexibility separately and maybe we should price energy dispatch and balancing of supply and demand a little bit differently,” he said. “The commodity itself then would price out based on just the supply and demand balance.”
The Complexity of Regional Operations
For John Bear, president and CEO of the Midcontinent Independent System Operator (MISO), another panelist on the roundtable, the recent state nuclear incentives posed a conundrum: “We’ve got kind of this crazy incentive trend today going on where you have incentives for renewables, which is really causing some strain on the nuclear fleet. Then you’ll have state incentives to support those nuclear fleets,” he said. “How do we balance those things out?”
He also pointed to federal and state subsidies, which pose complications for operators of regional markets. Wind generators, for example, get incentives to stay running, despite oversupply. “We put some things in place to try to incentivize them not to do that—which is another market mechanism—but then a state will come in and say, ‘This is disadvantaging.’ ”
