IEEFA Update: Electricity Auctions Across Major Swaths of U.S. Spell Further Distress for Fading Coal Plants

More Capacity From Gas-Fired Generation and Renewable Sources Creates an Existential Problem for the Old Order

Coal-fired electricity plants across much of the U.S. earn their revenues by selling megawatt hours (MWh) into competitive wholesale capacity markets in the capacity that generation represents in megawatts (MW).

The trends in the revenue these plants earn through selling their capacity in periodic auctions are increasingly worrisome for their owners.  Energy market prices have been low for years—and are expected to remain so for the foreseeable future. More and more, capacity revenues are making the difference between a financially viable plant that is earning a reasonable profit for its owners and one that is headed for bankruptcy and/or retirement.

That’s why the results of the recent capacity auctions conducted by the PJM Interconnection (PJM) and Midcontinent Independent System Operator (MISO) are such bad news for many coal plants.

PJM operates the competitive wholesale electricity markets in portions of 13 states, from Delaware and Pennsylvania in the east to Illinois in the west (and the District of Columbia). MISO operates wholesale markets in 15 states, from Louisiana and Mississippi north to Michigan, Minnesota and North Dakota, as well as the Canadian Province of Manitoba.

These, obviously, are not small areas.

PJM conducts a three-year-ahead capacity market, which means its most recent auction activity was to provide capacity for the capacity year that runs from June 1, 2020, through May 31, 2021. MISO conducts an auction for the upcoming capacity year, so its most recent auction was for the capacity year from June 1, 2017, to May 31, 2018.

THE RESULTS OF BOTH AUCTIONS WERE UNEXPECTEDLY LOW AND NOT JUST BY A LITTLE BIT. Expectations for the results of the MISO auction had been in the range of $10 to $20 per MW-day in unconstrained regions of MISO and an even higher $72 to $100 per MW-day in certain transmission-constrained areas like southern Illinois and Michigan. However, capacity prices in MISO “plunged,” as SNL Financial put it.

Prices in MISO’s Zone 4, Southern Illinois, fell by 99 percent from $150 per MW-day in the previous auction for the 2016/2017 planning year, to just $1.50 per MW-day. The capacity price for the 2017/2018 planning year was the same, $1.50 per MW-day for all of the rest of MISO, including the zones in Indiana, Michigan, Wisconsin, Missouri and Iowa that are home to large numbers of coal-fired generators and in which the current capacity price is $72 per MW-day.

The expectations for the PJM auction were for prices to fall within the range of $90 to $125 per MW-day in all of PJM except for several transmission-constrained zones. Instead, prices plunged here too, and for the second consecutive auction. After dropping by 40 percent to $100 per MW-day, from $164.77 in the auction for the 2019-2020 capacity year, the prices in the most recent PJM auction fell by another 24 percent to slightly over $76 per MW-day. This represented a decline of more than 50 percent in just two years.

Significantly, coal plants get even these low capacity prices only if they are selected (“cleared”) in the capacity auction. If plants don’t clear, they’re not eligible for any capacity revenues. Even though PJM procured some 165,000 MW of resources for the period from June 1, 2020, to May 31, 2021, over 16,000 MW of generating resources failed to clear the auction, and therefore are ineligible to receive capacity revenues during the 2020/2021 capacity year.

The strikingly lower capacity prices in both PJM and MISO have been attributed to a combination of more generating capacity being offered in auction and lower demand forecasts. Richard Doying, MISO’s executive vice president of operations, noted that the lower capacity prices in the MISO capacity auction were largely reflective of new generating supplies and lower load forecasts. He also noted that increased demand-side resources and energy efficiency were offered in the auction, and cleared. There also were increases in renewable resources of both wind and solar that were offered in the auction.

Analysis by UBS has any number of large coal plants under pressure in Pennsylvania and Ohio as a result of the low price in the recent PJM capacity auction—and says there could be a “re-acceleration of retirement plans off the back” of the weak energy market and low capacity market prices. Even larger coal plants in many parts of PJM that are fully compliant with environmental regulations could be at a “very clear risk” of retirement.

THERE’S NO PUTTING MUCH LIPSTICK ON THIS PIG:RESULTS OF THE RECENT MISO AND PJM AUCTIONS mean substantially lower revenues for coal plants.

A good case in point is the Petersburg Generating Station, a 1,600-MW coal plant in the Indiana Zone of MISO. This plant will earn 98 percent lower capacity revenues between June 1, 2017 and May 31, 2018 than it did in the prior 12 months. That’s a decline from $42 million in capacity revenues to less than $1 million.

The news on capacity revenues earned by the new owners of the 1,884-MW Homer City coal plant in PJM in Pennsylvania – a plant that has already gone through bankruptcy twice – is not good either. In the capacity year June 1, 2020, through May 31, 2021, will be $57 million lower than the plant will have earned in the preceding 12 months.

Revenue losses like these, on top of low energy market prices, will mean that coal plants that previously were marginally profitable will no longer be viable. Many coal-fired generators in MISO and PJM that are not economic now cannot continue to operate without substantial help from capacity markets—help there is little reason to believe will materialize.

Capacity prices aren’t likely to rebound at any point in the near future. Both MISO and, especially, PJM, will very like continue to have substantial additional amounts of capacity bid into their capacity auctions in coming years given all the renewable and natural-gas fired resources coming online in these regions.

David Schlissel is IEEFA’s director of resource planning analysis.

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