Energy markets are in disarray. Look no further than oil prices slipping into negative territory for evidence of the chaos. We are only just beginning to understand the economic disruption wrought by a virus that has brought much of the global economy to a screeching halt.
While the turmoil in the oil sector is plainer to see, the same disruption and uncertainty is also upending power markets. In both cases, near-term conditions do not reflect longer-term reality. Global oil demand will rebound; so too will electricity demand.
While we are still in the throws of the crisis, it’s essential we already plan for the recovery. Affordable, secure and reliable power will be all the more important as the nation tries to get back on its feet.
But, if we aren’t careful, near-term market conditions could accelerate retirements of additional well-operating coal plants, further eroding the balanced electricity mix that has long ensured affordable, reliable power in markets across the country.
Even before the onset of the COVID-19 crisis, cracks were emerging in regional grids where fuel security and balance have been traded for increased reliance on just-in-time fuel delivery and the whims of the weather. Shrinking reserve margins, flirtations with rolling blackouts and spiking wholesale electricity prices are becoming far too common for comfort.
Michigan offers the latest evidence of the challenges emerging from the pivot away from coal. Just a week ago, the region’s grid operator, MISO, reported that capacity prices for the Lower Peninsula maxed out in their annual capacity auction. With a shrinking reserve margin, clearing prices for the capacity auction jumped 10 times what they had been a year ago. This comes as Michigan utilities have closed more than a dozen coal plants since 2016 and have more retirements scheduled.
Wholesale electricity prices are going up just when consumers and industry need support for economic recovery. The timing couldn’t be worse. Michigan is turning to costly energy imports to ensure reliability. The takeaway should be clear: the shift away from coal – often driven by state policy – is coming with real costs.
As policymakers, regulators and utilities grapple with the ramifications of the pandemic, pumping the breaks on further plant retirements is a logical step to hedge against uncertainty and to ensure our balanced, affordable and reliable electricity mix doesn’t become another victim of this unprecedented moment.
Indiana, even before the crisis, had already moved to require additional review of proposed retirements to ensure utilities weren’t passing unnecessary costs onto consumers while weakening the reliability of the grid. A thoughtful, do-no-harm approach to the electricity sector is exactly what’s needed across the country as we confront the uncertainty of the months ahead.
The past several years have seen a shift away from what we know works – balance, certainty, fuel security – to increased reliance on thinner margins, weather dependent resources and the inherent vulnerability of just-in-time fuel delivery. With global supply chains turned upside down, with chaos wreaking havoc across the oil and gas sector, and the economy shaken to the core, the era of flying by the seat of our pants into the unknown and of utilities filing a record number of rate cases needs to end.
Time and again, grid operators overestimate capacity additions while underestimating retirements. That kind of miscalculation, in a perilous moment like this, could prove disastrous. Now, more than ever, we need smart policymaking that puts reliability, resilience and affordability first. Ensuring we maintain essential coal generating capacity and properly value the security and balance it brings to the grid must be a priority.
- On April 22, 2020