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Senate Hearing: Wholesale Electricity Prices Too Low To Support Coal, Natural Gas Power Plants In Market; Natural Gas Reliability Issues Will Continue

On May 1, the Senate Environmental Resources and Energy Committee was told the wholesale prices of electricity in the PJM regional electric grid are too low to support coal and natural gas power plants.

It is also likely the reliability problems of natural gas-fired power plants during events like Winter Storm Elliot in December will continue.

Key Takeaways From Hearing

-- PJM wholesale market prices are clearing at historically low levels that are not high enough to support baseload power plants like coal, natural gas and nuclear. The last market cleared power at $28/MwDay was more than 10 times the cost of new entry into the market at $293/MwDay.

-- Electricity demand is rising faster than historic rates due to electric building proliferation, development of new computer data centers and cryptocurrency mining operations and the growth of electric vehicles.

-- Retirements of power generation are happening faster than anticipated. PJM projects 20% of its existing capacity will retire between now and 2030, approximately 40 GW.

-- Replacement capacity is not of the quality/quantity necessary to sustain reliability. PJM may not have sufficient power to meet demand and prices are likely to increase. Replacing 1 MW of gas, nuclear or coal takes about 6 to 7 MW of solar and onshore wind from a reliability perspective.

There were no representatives of renewable energy generators on the panel of witnesses.

Click Here to watch video of the hearing and for copies of all written testimony.

Highlights of Testimony

Glen Thomas, President of PJM Power Providers Group and former Chair of the PA Public Utility Commission, provided the Committee with an overview of issues affecting electric grid reliability and generation in the PJM Interconnection region.

The PJM Providers Group represents all forms of generation-- gas, coal, nuclear, solar, wind and other renewables.

Retirements/Replacements

“I'll say at the beginning these electricity markets are very complicated, but the problem really is a pretty simple one that we're looking at and it's a supply and demand problem.

“Quite frankly, demand is increasing and we'll explore some of the reasons why demand is increasing.

“Retirements are happening at a faster pace than I guess could be considered traditional. We're seeing about 40 GW retire between now and 2030… about 20% of the existing capacity is slated to retire

“The replacement of the capacity that's coming in is not of the quantity and the quality necessary to sustain reliability.

“What we're losing is not being replaced with a sufficient amount or sufficient type of resource necessary to sustain reliability and that's why as a result, we're going to be seeing reliability challenges if things don't change and we stay on our current trajectory.”

Increasing Demand

“Why is demand increasing?

“Electric vehicle proliferation, just look at all the mandates related to electric cars. I think I saw that the federal government came out with a 65% standard by somewhere in the mid 2030s in terms of the number of electric vehicles on the road.

“Electric building proliferation, this is an important one as folks move away from gas fired furnaces to more heat pump type heating systems.

“There's certain characteristics of heat pumps that make them wonderfully efficient when the temperatures are in the 40 to 50-degree range, but terribly inefficient when you get down in the 20s and the teens and what have you.

“That's exactly the time when the grid is stressed.

“Data centers are big, particularly in the suburban [Washington,] DC area, and we've seen cryptomining increasing.

“So all these demands on the electricity system are increasing, and this is more so than what we've seen traditionally or historically.

“Historically, demand has been relatively flat, maybe growing about 1% a year. PJM is projecting it to grow at much more significant rates than that.

“Certainly, federal and state environmental regulations have something to do with it, and in some cases we're actually seeing states that are mandating the closure of certain facilities, but the economic pressure is pretty significant.

Retirement Signals

“I've put up there [in the presentation slide] the last capacity auction clearing prices and the last capacity auction cleared at $28, and just to put that in perspective, $293 is to consider what's the cost of new entry [for baseload power plants], so that was what it would cost to bring a new unit on.”

“So $28 is the retirement signal, it's not a signal to the market to build and that's why some of these markets need to get fixed.”

Reserve Margins Drop

Thomas noted reserve electric generation margins-- the cushion between demand and what electric generation can supply in the PJM region is between 23% and 26%.

“What I think is remarkable about this [presentation] slide is how quickly things deteriorate under the current trajectory. So anywhere you see a number on this slide lower than 16%, that's where you should be concerned and you should be very concerned when you see numbers like 3% to 5% in 2030.

“Those are situations where we're basically out of reserve margins and you're, in essence, praying for good weather at that point because the system is not reliable and it's not compliant with reliability standards.”

New Generation Queue

“You can see the dramatic change in terms of what is in the [PJM Interconnection] queue to come in the system. This is 80% wind and solar, that's in the queue in Pennsylvania and like I said, that 80% adds up to about 12,700 MW, but that is nameplate capacity.

“When you put that in reliability terms, you're probably talking about 2,000 MW, which is about the size of Limerick or Susquehanna nuclear station or two new natural gas plants.”

“Why do we see these types of projects in the queue? This is where the economic signals are right now [based on PJM and Federal Energy Regulatory Commission market rules].

“Like I said, 80% of that queue is benefiting from the federal production tax credit or the investment tax credit, which basically gives incentives to wind and solar facilities, just to produce energy.

“So this is where the economic signals are right now, but not necessarily squaring with what is going to be needed.”

6 to 7 MW Solar/Wind Needed To Replace 1 MW Gas, Coal, Nuclear

“There's a difference between what a unit can produce, which is sometimes called as nameplate capacity and what its reliability contribution

“If I have, let's say, a 30 MW solar array, it's capable of producing 30 MW of power, but its reliability contribution is probably about 5 MW due to the intermittent nature of a solar facility.

“If you're replacing 1 MW of gas, nuclear or coal, it takes about 6 to 7 MW of solar and onshore wind to replace that. So that's an important distinction as we look at these numbers.”

Solar/Wind ‘Terrific’ Addition To Grid

"More wind and solar is coming on the grid and wind and solar is a terrific addition to the grid. It has a tremendous role to play. Wind and solar are great energy resources, not necessarily great reliability resources, but great energy resources,” said Thomas.

“I mean, the fuel costs are zero and they're zero carbon. I mean, there's a lot of benefits to renewables and that is going to increase. But what it means from a reliability perspective is you're going to see wind and solar running more and more, contributing more megawatts to the grid.”

In response to a question about what will fill the gap between retiring generation and new clean renewables in the regional grid, Thomas said--

“I think the only thing that closes the gap is new technology. I'll be honest. I mean, the way grid is configured right now with our mixer resources and the technology available, and like I said, the resources that are coming online are not replacing what is retiring, absent a technology advancement in either battery or some sort of carbon capture technology.

“I mean, I think technology solves this problem and our current technology isn't there. And it's very hard for me to sit here and predict when that technology is going to be there.”

Thomas also pointed out technologies like power storage paired with solar energy in particular improves its reliability.

PJM/FERC Rule Changes

"And the reality is, this is another reason why these [PJM] rules are important, because gas, coal and nuclear running less in the energy market because wind and solar is, that means they need more money in the capacity market to sustain their operations because even though they're not running as much, they're still needed and maybe they're only running 20, 30 hours a year, but those 20, 30 hours a year are three in the morning in Wilkes-Barre when it's cold. And you really need those units producing,” Thomas explained.

“So you need a revenue stream to keep those units running and available, even, excuse me, available even though they're running a lot less because wind and solar, and that when you talk about transition, that is why these PJM rules are so important because right now that revenue stream for those resources that is not running is telling them to retire,” said Thomas. “And that's the last thing we want them to do right now is retire.”

“I think the pressure's on FERC [Federal Energy Regulatory Commission] and PJM to get this fixed. And that's why PJM has asked FERC to suspend the capacity auctions until they can get these rules fixed,” said Thomas. “PJM is recognizing there's a problem here and they're taking steps to address it.”

Recommendations

Thomas made four recommendations to address the issues he raised--

-- PJM and FERC change capacity market rules to encourage the retention of existing resources that are needed for reliability and the development of new resources.

-- Federal and state policymakers make decisions that support and not undermine reliability.

-- Federal and state policymakers consider reliability when developing environmental regulations.

-- Interconnection queue reform.

Click Here Thomas’ presentation to the Committee.

James Locher, COO of Key Con LLC, operator of the Keystone and Conemaugh coal-fired generating stations outlined how coal-fired power had to fill the gaps left by natural gas-fired power plants during Winter Storm Elliot.

Locker also said the price for electricity in the PJM Interconnection wholesale power markets are too low to sustain the Keystone and Conemaugh power plants.

Locher said the Keystone and Conemaugh facilities announced they will close by 2028. Read more here.

“As frigid temperatures moved into the region on December 23, coal-fired power plants in PJM increased their electricity output to meet the increased demand.

“On the other hand, electric generation from natural gas-fired power plants dropped below 34 GW on December 25 after peaking at 43 GW just four days prior as reduced natural gas availability forced plants to go offline.

“In response, oil-fired backup generators, which relied on their on-site fuel storage, came online and provided over 10 GW of electricity on December 24 to fill the gap left by the natural gas-fired power plants.”

“Without adequate and comparably reliable replacement capacity accounting for the contributions of Keystone, Conemaugh and other coal fired units, future electric power system failures in PJM are more likely during similar extreme weather events.”

“Simply put, retiring these power plants without replacing them with comparable long-duration dispatchable capacity will leave PJM increasingly vulnerable to more extensive and prolonged energy emergencies during extreme weather events like Winter Storm Elliott.”

“The PJM Capacity Market is an auction-based market designed to ensure that the PJM network has secured adequate generation resources to meet electricity demand by encouraging plants to use their capacity payments for long term investments and critical maintenance, ensuring the reliability of generation assets and their ability to operate when called upon by PJM to perform.

“Nevertheless, the PJM Capacity Market is clearly broken as evidenced by the recent Winter Storm Elliott event.

“Capacity prices have been declining year-over-year. In fact, the PJM capacity market has declined in value from $8.3 billion to $2.2 billion over the past 3 years.

“The costs for employees, maintenance, insurance, taxes, stockpiling coal, and plant inventory, etc. are substantial for plants of this size.

“And as Winter Storm Elliott exposed, the potential penalties for non-performance are so mismatched with actual capacity payments that it creates an untenable risk/reward profile for generators.

“The recently declared $1.8 billion penalty [for nonperformance by PJM] for just one day in December during Winter Storm Elliott approximates the value of the PJM Capacity Market in an entire year.

“The capacity market decline is clearly hastening plant closures without regard to the reliability implications.

“Given the most recent auction clearing price, Key Con cannot remain viable. In fact, using the most recent auction clearing price, Key Con can cover less than 50% of its fixed costs.

“The second area that is currently and prospectively adversely impacting the timing of Key Con plant closures are final and pending new environmental regulations.”

Locher lists five federal and one Pennsylvania environmental initiatives impacting whether his plants will stay open or close, including the Regional Greenhouse Gas Initiative.

“In summary, Key Con [Keystone and Conemaugh plants] has been an extremely reliable and important asset in the PJM system for more than 50 years.

“Key Con, and coal facilities more generally, recently demonstrated their critical value in maintaining system reliability during the Winter Storm Elliott event.

“But the current Capacity Market construct and evolving environmental programs will accelerate the closure of these important assets.

“Nevertheless, we think that it is important for the public to understand the role that these facilities fulfill in this marketplace and the financial and personnel commitment that has been made by our owners and our union workforce to achieve and maintain their reliability.

“Unless they are somehow mitigated or reversed, the headwinds that I have outlined above will not allow Key Con to sustain operations into the immediate future and participate as a reliable bridge to a new energy future.”

Click Here for Locker’s written testimony.

Robert Dewechter, Cogentrix Energy, owner of two natural gas-fired power plants in Pennsylvania with 1,800 MW of capacity in Bradford and Montgomery counties, said both their plants operated continuously through Winter Storm Elliott and did not experience any equipment issues or freeze-ups and their gas supply remained intact and deliverable.

In response to questions, Dewechter did acknowledge company-owned power plants in other areas did have natural gas supply issues during the storm, but not in Pennsylvania.

[Note: At the peak of Winter Storm Elliott, about 47,000 MW were unexpectedly offline in PJM’s footprint. About 63% of all outages were natural gas-fired power plants, 28% was coal, 4% oil, 2% nuclear, 1% hydroelectric and about 1% “other,” according to PJM. Read more here.]

“Natural gas will continue to play a key role as more and more renewable energy and other zero-carbon power generation technologies get added to the grid. Plants like Liberty and Patriot are needed to ensure that these new resources can be integrated reliably, because these thermal plants can accommodate the intermittent nature of wind and solar resources.

“We can quickly and reliably provide power when the wind isn’t blowing and the sun isn’t shining.”

Click Here for Dewechter’s written testimony.

Matt Barmack, Vice President for Calpine owner of 2.5 GW of natural gas-fired generation in Pennsylvania, discussed energy policies in California and solar energy policies that have resulted in reliability problems.

Barmack also expressed concerns about states like Illinois that recently passed legislation to shut down natural gas generation as part of their climate action plans.

“Calpine has supported carbon pricing for a long time, carbon pricing only reduces emissions when it is implemented correctly.

“Carbon pricing that only applies to certain states in an integrated wholesale electricity market, such as RGGI [Regional Greenhouse Gas Initiative], is particularly problematic because rather than reducing emissions, it tends to shift emissions to states without carbon pricing and can actually increase overall emissions.”

Click Here for Barmack’s written testimony.

Additional written comments were provided by Energy Venture Analysis specifically on Winter Storm Elliot impacts.

Click Here to watch video of the hearing and for copies of all written testimony.

PJM Nonperformance Penalties

On or about the week of April 10, the PJM Interconnection began assessing up to $2 billion in penalties on about 200 electricity generators that failed to perform when called on by PJM during Winter Storm Elliot.

At the peak of Winter Storm Elliott, about 47,000 MW were unexpectedly offline in PJM’s footprint. About 63% of all outages were natural gas-fired power plants, 28% was coal, 4% oil, 2% nuclear, 1% hydroelectric and about 1% “other,” according to PJM. Read more here.

PJM did not release the names of the companies or the penalty amounts, saying that is for the individual companies to disclose to their shareholders and investors.

Click Here for a list of companies operating in Pennsylvania that could be affected.

At least one company has filed bankruptcy as a result of the penalties and six others have sought protection from the Federal Energy Regulatory Commission. Read more here.

On April 7, FERC gave PJM some flexibility for handling member defaults under certain conditions while they continue to participate in PJM’s grid markets. Read more here.

On April 14, PJM asked FERC for additional assistance in resolving nonperformance penalties to help avoid “market disruption, defaults, bankruptcies and the physical loss of assets.” Read more here.

PJM operates the electricity grid and wholesale power markets in 13 states (including Pennsylvania) and the District of Columbia.

Click Here: PJM Frequently Asked Questions Winter Storm Elliot Issues [LOTS of info.]

Click Here for PJM’s Winter Storm Elliott Information webpage.

Takeaways From February Hearing

The key takeaways during the first hearing on this issue February 27 were--

-- Natural Gas Continues To Have A Reliability Problem: 70% of the PJM electric generation that failed to perform during the December freeze were natural gas-fired power plants. Natural gas had the same problems during a cold weather event in 2014 and the polar vortex in 2018. That’s problematic for Pennsylvania because the state depends on natural gas for 53% of our electric generation and the electric grid generally as it becomes more dependent on natural gas.

-- Renewable Energy Generation Isn’t Coming Online Fast Enough: A study PJM released February 24 showed renewable energy generation sources were not coming online fast enough to replace fossil fuel plants that are retiring. PJM has started a critical path analysis to avoid this mismatch that could affect the ability of the grid to reliably supply electricity. Read more here.

-- 35,000 MW Of Renewable Generation Approved By PJM, But Not Connected: PJM said 35,000 MW of renewable resources are through the PJM approval process, but not commercially interconnected to the PJM grid due to issues like supply chains and siting.

-- 95% Of Proposed New Generation In PJM Is Renewable & Storage: 95% of the new energy generation seeking to connect to the PJM grid is solar, wind, and energy storage because renewable energy is cheaper than natural gas and nuclear.

-- Baseload-type Reliability Of Renewable Generation An Issue: While PJM said renewable energy performed “up to their capability,” it does not have the same “essential reliability services,” i.e. continuous baseload generation ability, as thermal generators. Renewables could, if long duration battery storage or other technology is deployed at scale.

-- Independent Energy Office Proposal: Sen. Gene Yaw (R-Lycoming), Majority Chair of the Senate Environmental Committee, said he is working on legislation to create an Independent Energy Office for energy planning and related issues, along the lines of the Independent Fiscal Office established for budget issues. Read more here.

-- Not Addressed Was The Spike In Natural Gas Prices: The hearing did not address the natural gas price spikes caused by international market forces that resulted in natural gas costs going up by as much as 128% for Pennsylvania consumers and electricity costs by as much as 34%. [Read more here]

Click Here to read more from February hearing.

Sen. Gene Yaw (R-Lycoming) serves as Majority Chair of the Senate Environmental Committee and can be contacted by calling 717-787-3280 or sending email to: gyaw@pasen.gov. Sen. Carolyn Comitta (D-Chester) serves as Minority Chair and can be contacted by calling 717-787-5709 or sending email to: senatorcomitta@pasenate.com.

NewsClips This Week:

-- Broad+Liberty: Energy Executive Warn Of Looming Power Shortages In PA At PA Senate Hearing

-- Utility Dive: State Regulators, Others Urge FERC To Reject PJM Plan To Delay June 14 Capacity Auctions

-- Utility Dive: FERC Commissioners Tell U.S. Senate Committee Power Plants Are Retiring Faster Than They’re Being Replaced - ‘The Arithmetic Doesn’t Work’

-- Reuters: Chesapeake Energy Expects Natural Gas Volatility To Remain, Could Hold Off Bringing Some Wells Online If Low Prices Continue

-- Reuters: Chesapeake Energy Profit Beats Estimates On Higher Output Of Natural Gas

-- Bloomberg: U.S. Shale Drillers See Natural Gas Price Rebound In 2024 After Prices Tumbled More Than 50% This Year

-- StateImpactPA - Rachel McDevitt: PA Default Utility Electric Rates To Go Down For Some This Summer [Thanks To Drop In Natural Gas Prices]

-- PPL Electricity Price To Compare To Drop June 1 For Customers Who Don’t Shop For Suppliers

-- PUC Sets Hearings On Philadelphia Natural Gas Works Proposed 10% Rate Increase

-- AP: BP Posts $5 Billion Quarterly Profit On Strong Oil, Gas Trading

-- Reuters: Shell Posts $10 Billion Quarterly Profit As Trading Offset Lower Energy Prices