Southwest Power Pool has aging coal fleet that may be hit by EPA rules

Overall, the age of generation resources in the Southwest Power Pool is increasing, with slightly more than 51% of SPP’s fleet 30 years old or older, and almost 70% of the 25 GW of coal resources at 30 years old or older.

“The aging of SPP’s fleet of resources means that a significant portion of resources could be impacted by Environmental Protection Agency rulings such as the Cross-State Air Pollution Rule,” said a July 9 report from the Market Monitoring Unit (MMU), the independent market monitor for the Southwest Power Pool (SPP) Regional Transmission Organization.

The MMU is responsible for providing an annual report on electricity market conditions to the SPP Board of Directors, FERC, the SPP Regional State Committee, and other interested stakeholders. FERC requires State of the Market Reports from all RTO and Independent System Operator MMUs. This report was filed with FERC July 10.

SPP is located in the southwest portion of the Eastern Interconnection and has members in nine states: Arkansas, Kansas, Louisiana, Mississippi, Missouri, Nebraska, New Mexico, Oklahoma and Texas.

SPP has a significant resource margin, although it did decrease between 2010 and 2011, the report said. The region’s total annual generating capacity compared to peak demand results in the resource margin: the amount of extra system capacity available after peak load has been served. In 2011, the resource margin was just over 24%, down slightly from 27% in 2010. “This healthy resource margin can have positive implications for both reliability and for mitigation of the potential exercise of market power within SPP,” the report noted.

As of the end of 2011, SPP had 215 active generation interconnection requests representing 36,495 MW of potential generation under study. The vast majority of the interconnection requests in hand were wind resources, at 27,450 MW, while natural gas represented 5,153 MW and coal represented only 3,555 MW.

SPP prices are comparable to system prices from the Electric Reliability Council of Texas (ERCOT) and the Midwest Independent System Operator (MISO), the report said. SPP’s yearly average price of $29.28 is slightly lower than MISO’s $31.50, and well below ERCOT’s $41.94. ERCOT experienced some extreme scarcity events during 2011 and so it cannot be directly compared to the neighboring regions.

While the SPP regional price was $29.28, average Market Participant prices ranged from a low of $24.57 to a high of $32.97. These price differences reflect transmission congestion and transfer limitations across the SPP footprint. If no congestion existed in the SPP region, the prices at all points would be identical, the report pointed out. During 2011, Market Participant price differentials decreased significantly even though fuel price increased slightly from the previous year. This decline in volatility is due to market system developments, including implementation of a new Congestion Management Event process (in late 2010) and a step Violation Relaxation Limit function (in early 2011).

Coal dominates the SPP mix, but for how long?

Energy generated in the SPP region in 2011 was predominantly from coal (64%) with natural gas a distant second (23%). Other fuel type categories include nuclear (6%), wind (6%) and hydro (1%). The fuel on the margin was 55% natural gas and 45% coal. This was a significant change from 2010 when gas was the marginal fuel 63% of the time.

As gas prices decline, the relative cost of generation from this fuel declines in comparison with other fuels, the report said. “In the long-term, it is anticipated that gas generation will substantially increase in both total capacity and market share,” it added. “As coal generation continues to be impacted by regulatory issues, the percentage of generation derived from coal will likely decline. Whether there is a precipitous drop will depend on the eventual outcome of climate legislation and the magnitude of taxes that may be levied on coal generation.”

Because coal resources in the SPP region are predominantly baseload units, they set price less than their overall percent of generation may imply, the report said. Also, coal plants have significant mechanical limitations that reduce operation flexibility as compared to some gas units. During 2011, coal was on the margin 45.2% of the time and natural gas was on the margin 54.7% of the time. Natural gas units in the SPP region are consistently used for load following, and are therefore on the margin more frequently.

“However, the gap between coal and natural gas narrowed somewhat between 2010 and 2011; in 2010 coal was on the margin 38.2% of the time and natural gas was on the margin 61.6% of the time,” the report said. “Coal on the margin has increased significantly over the last four years from a low of about 30% in 2008 to the current level of over 45% despite the fact that coal generation as a percent of total generation has declined slight over the last five years. This is probably the result of a multitude of factors. First, the utilities in Nebraska that joined the SPP Market in 2009 had a larger share of coal units than the SPP fleet of generating prior to that time. Second, market participants have increased the flexibility of their coal plant offers reflecting their confidence in the SPP Market. Finally, the increase in wind generation has displaced natural gas generation and forced coal up the supply curve causing coal to be on the margin more often. Wind generation has accounted for as much as 9% of monthly generation in 2012.”

The report said about 2011 developments: “One notable addition to the market was the City Utilities of Springfield which joined as a Market Participant on June 1st, 2011. This new Market Participant brought 698 MW of coal resources and 359 MW of gas resources to the market.”

CSAPR is a not so friendly ghost hovering over dispatch of pool resources

The report also took a look at the impacts of the EPA’s Cross-State Air Pollution Rule (CSAPR, often pronounced Casper), which was due to take effect Jan. 1 but is currently on hold pending a federal appeals court decision. “The CSAPR rule in its current form will pose challenges to SPP Market Participants (MPs),” the report said. “If the rule is implemented, MPs will have to meet emissions requirements while still maintaining supply adequacy as defined in the SPP Open Access Transmission Tariff and maximizing the value of their resources. The current rule sets a cap and trade system on a state basis. There are three programs in CSAPR: annual SOx, annual NOx and peak season NOx (May to September) programs.”

The report added that in order to comply with the rule, market players can potentially take a number of actions. First, they can retire or mothball older units, with the SPP footprint containing a high percentage of coal units that have been in operation for 30 or more years. Some of these units might be considered for retirement. Second, they can retrofit units with new equipment and technology that help reduce emissions. Third, MPs could fuel switch to use low-sulfur coal or ultra-low sulfur coal. Fourth, market participants could limit dispatch to mitigate emissions through lower economic maximums or by using self dispatch status.

“Some of the alternatives described above may be unavoidable,” said the report.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.