Thoughts on power markets? Executives have a few RSS Feed

Thoughts on power markets? Executives have a few

It’s March. Southern Co. CEO Tom Fanning is sitting in a hotel lounge in downtown Houston talking energy policy, President Trump and what’s wrong with U.S. power markets.

At one point, Fanning brings up a name many in the electric industry know, especially in Houston: Pat Wood III.

The former Texas regulator and Federal Energy Regulatory Commission chairman pushed what became, in Fanning’s view, “a failed experiment” to spread Texas’ merchant approach to electricity. Fanning, whose company is based in Atlanta, says he still believes in “the model that we live in, that we fought hard to retain — the integrated, regulated model.”

And Wood? He’s committed to his competitive vision, even if there’s room for market tweaks. He described, in a March phone conversation, how he drank the “Kool-Aid” years ago when he saw positives from deregulating the natural gas sector.

“Margins are there to be eroded, and so that’s what competitive markets do beautifully,” said Wood, chairman at Dynegy Inc. “So I’m proud to be associated with that, and I’m proud to wear the laurel that Mr. Fanning gave me.”

As questions swirl around business models, no U.S. debate may be more important for the electricity sector than one on wholesale market design. Low gas and power prices, government aid for some generation, and uninspiring demand are causing heartache for generators such as Dynegy and NRG Energy Inc. Sagging economics also raise questions for any party that owns aging power plants fueled by coal and nuclear energy.

To explore where the electric discussion is heading, E&E News compiled takes from some of the industry’s most prominent observers. The views came largely from interviews and appearances at conferences in Texas this year, including CERAWeek by IHS Markit, the Energy Thought Summit, and events put on by the Gulf Coast Power Association and KPMG.

The picture that emerges is one of competing interests and goals. For some players, there’s defense of a regulated model. For many, the question is how to reimagine competitive markets to ensure both electricity and compensation are adequate. Renewables and their federal incentives and intermittent nature are often fodder for debate.

A consensus on solutions remains elusive. Parties sought to hash out some ideas during a FERC technical conference this month, including potential actions by grid operators (Energywire, May 3). And FERC nominees have faced questions about market issues. In any case, there’s no love lost between regulated providers and merchant power companies.

“We’re not a utility,” Robert Flexon, Dynegy’s CEO, declared last week in Houston. “We don’t like utilities. We’re a competitive player.”

Kemper and Vogtle

Life has become more complicated for Southern since Fanning sat down to talk this past March. At the time, he touted the long-term planning that can accompany a regulated structure. But it remains to be seen what extra costs Southern’s customers may face with billions of dollars on the line from two major projects.

In Mississippi, the Kemper County Energy Facility has seen continued delays as it aims to capture carbon dioxide from a coal-fueled power plant. And Westinghouse Electric Co. LLC, a key contractor for planned nuclear reactors at Plant Vogtle in Georgia, filed for bankruptcy in the wake of cost overruns (Energywire, May 25).

“Two words: Kemper. Vogtle,” Wood said this year, suggesting such projects are “way out of economic reason” for ratepayers. Wood was speaking for himself and not necessarily companies where he’s on the board, including Dynegy, SunPower Corp. and Quanta Services Inc.

Fanning said the integration of “making, moving and selling energy and single points of responsibility” is preferred to “so-called organized markets.” But Wood talked customer choice and said, “Liberty always wins.

“In the great cycles of history, monopolies tend to end up on the shore of failed dreams, and liberty kind of goes on down the river,” Wood said.

For companies in competitive wholesale markets, though, design remains front and center. Are markets actually competitive? Should nuclear and renewables and coal and other sources receive special treatment? Who should bear the risk of new investments? How urgent is change as consumers enjoy lower power prices driven by cheaper natural gas?

Uncertainty is evident among non-utility power producers, which are facing takeover and merger rumors. At the same time, Energy Secretary Rick Perry has called for a review of U.S. power markets, including examining baseload power and reliability.

Another marker came recently as PJM Interconnection LLC, a grid operator with a presence in the Mid-Atlantic and Midwest, announced lower capacity prices in much of its footprint (Energywire, May 24). And Exelon Corp. said yesterday that it plans to retire the Three Mile Island nuclear plant in Pennsylvania unless the state provides policy reform.

Challenges for Exelon

Fanning, who’s chairman of the Edison Electric Institute that represents investor-owned utility companies, referenced Exelon CEO Chris Crane back in March, calling him “a nuclear guy in the middle of merchant markets.”

“And at one time, that was really profitable, but now it’s not,” Fanning said, suggesting Crane was running one of the best U.S. nuclear businesses in a failed model. Crane, speaking in March in Austin, Texas, said market designs weren’t sustainable for an all-of-the-above strategy.

“When the government and the markets decide to pick winners and losers versus outcomes, it skews the market,” Crane said. He suggested an overemphasis on wind energy destabilized the market in Texas. Fanning said overbuilding renewables and squeezing out some baseload capacity could have “long-term consequences.”

But much has been made about subsidies that Exelon lined up for some reactors in Illinois and New York, though those setups were challenged in court (Energywire, Jan. 11). Crane said, “The competitive market was skewed years ago when we decided we wouldn’t take a load shape, a demand shape, we would incent based off of a technology.”

To him, a way forward for states that want cleaner energy would be having regional transmission organizations put a price on carbon. He acknowledged that might not happen in the near term.

Crane looked back at the polar vortex of 2014, which he said showed the value of nuclear plants. The focus should be on reliability and capacity, he said.

“You hope that we don’t turn parts of the country into a third-world country or what you see in the Caribbean when you’ve got the rolling brownouts during the day,” Crane said. “I think we’re much more sophisticated, and we can work together to come up with the designs.”

A view from the West

Edison International comes at the discussion from its own angle after unloading a merchant generation business.

Pedro Pizarro, CEO of California-based Edison, called the positioning “less an indictment of the whole merchant model and more a reflection of how we view the potential for returns in the sector.” The company still relies on merchants for electricity, he said in Houston this year, and he hopes other players in that space are healthy while they’re needed.

“I think it’s a tough business,” Pizarro said. “It’s not one that we want to be in.”

He expects “continuing work to make sure that the markets’ price structures adequately compensate generators who are now shifting from really focusing on meeting peak needs to meeting flexible ramping needs,” as an example.

CEO Ben Fowke of Minnesota-based Xcel Energy Inc. said operating in a regulated market enables long-term planning. But he also recognized a need to be thinking about how energy is delivered to customers.

“I have a saying inside the company that, if we want to stay regulated, we better think competitively,” Fowke said in Austin this year. “And we apply competitive discipline to all of our decisions, to our culture, to the way we hold each other accountable, to driving innovation.”

On the other hand, he said organized markets “tend to be more short-run-oriented” and can stir up “unnecessary swings and volatility.” He said they are hurting the ability for nuclear plants to operate amid low prices, and that will need to be addressed further in his view.

Different places, different models

Barry Smitherman, a former Texas energy regulator, said it’s fine to see different models in different parts of the country, including competitive ones managed by the Electric Reliability Council of Texas (ERCOT), PJM and the Midcontinent Independent System Operator.

Read full article at EEE News