Less Coal, But More What?

It’s not hot yet across the entire U.S., but it soon will be. Power plant rules haven’t changed yet, but they will.

With the unofficial start of summer just around the corner, utilities and independent system operators are looking for ways to relieve peak loads and congestion on the electricity grid for the coming season and down the road.

Although every region of the country claims it has adequate generation for even the hottest days of summer, each ISO is also looking forward as U.S. Environmental Protection Agency rules will take affect in coming years.

Grid operators are planning now for how to replace coal with natural gas, along with a side of demand response and a dash of renewables. Many of the changes won’t come for years, but the planning is happening now and changes to pricing and rules, will happen ahead of the EPA rules.

“From a PJM perspective, the lights aren’t going to go out,” Paul Sotkiewicz, chief economist at PJM Interconnection, said during a Restructuring Today webinar on Wednesday.

There are two EPA rules that are putting pressure on older coal generation, the cross-state air pollution rule, which is currently on stay until further ruling, and the MATS rule, which regulates mercury and other heavy metals and is scheduled to go into effect in April 2015.

PJM Invests in Transmission

In PJM’s territory, the problem is not a lack of capacity. Sotkiewicz said that there’s quite a bit of natural gas that isn’t being used to its full capacity. PJM expects that nearly 14,000 megawatts of coal-fired generation will retire by 2016. Most of the plants are over 40 years old or 400 megawatts or less, which makes up about 30 percent of PJM’s current coal fleet.

In anticipation of the changes, the capacity auctions for the 2015 to 2016 year in PJM territory procured a record amount of new generation for one year, nearly 5,000 megawatts. Almost all of the new generation is gas-fired. For the first time ever, new combined-cycle gas plants are the same price as a northern Appalachian coal plant, according to Joseph Bowring, independent market monitor for PJM and president of Monitoring Analytics.

Overall, PJM has 164,561 megawatts of capacity resources. Along with new gas resources, the capacity auction procured nearly 15,000 megawatts of demand response and energy efficiency. Energy efficiency, solar and wind saw double-digit growth since the year before, although the renewables are still just a drop in the bucket in terms of generation. Solar, for example, increased to 56 megawatts, a 22 percent increase from the year before.

To combat retiring coal generation, PJM recently announced $2 billion in transmission upgrades. There will be more than 130 projects that range from substation upgrades to rebuilding transmission lines. More than half the projects will be in Ohio, where there is a lot of coal retiring. However, the upgrades could also be a boon to renewables like wind, which has various transmission constraints.

MISO Seeks More Wind, Demand Response

The Midwest Independent System Operator is facing essentially the same problem as PJM, although it is even more pronounced, since more than 70 percent of its fleet is coal-fired. MISO also has transmission constraints that are being revisited, but there have been no announcements about upgrades similar to what PJM is doing.

The constraints will mean a change to demand response rules, said Jameson Smith, manager of regulatory studies at MISO. “Demand response qualification requirements and deployment procedures will be reviewed and given a potential increase in use.”

For MISO, there’s more wind that’s currently slated to be built than gas, but that could also change in coming years, said Smith. Any new gas could need new pipeline infrastructure, which can take at least five years to develop. At this time, “there’s limited ability to increase existing gas-fired unit capacity,” said Smith. But wind needs transmission too, which means that no matter what comes on-line to replace coal in the next five years, there will have to be substantial investment.

ERCOT Pushes Up Prices

In Texas, ERCOT is already planning to spur new generation by raising the system-wide offer cap. Last summer, prices hit $2,500 per megawatt-hour as ERCOT’s grid was strained by high temperatures. If a ruling now being considered is approved, that could jump to at least $4,000 as early as this August, and perhaps rise considerably more in coming years. “There’s a consensus that the system-wide offer cap will have to go significantly higher,” Ken Anderson, commissioner of the public utility commission of Texas, said during a Restructuring Today webinar. “We need to at least double it -- and maybe triple it.”

A bump to the SWOC will also come with a change to a variety of other rules, including a potential increase of 200 megawatts to come from energy efficiency programs and a decision that could allow waste gas and energy storage to play in ERCOT’s markets. The cost of a negawatt is still considerably cheaper than building new generation.

Anderson said that he believed that the commission was removing most of the barriers to energy storage coming into the wholesale market, and now it was just a matter of economics. The next few years will also be rosier for negawatts. “Eventually, I’d like to get demand response out of energy efficiency completely and into the competitive space,” he said during the webinar. “We need to give some certainty to where the market will be in 2014, 2015 and beyond.”