Overall, the assessment of Potomac Economics, the Independent Market Monitor for the Midcontinent ISO, indicates that the system’s resources should be adequate for summer 2013 if the peak conditions are not substantially hotter than normal.
In a report on 2012 results filed July 8 at the Federal Energy Regulatory Commission, Potomac Economics said that although MISO reports a planning reserve margin of 28.1% for the summer 2013, this margin falls to 16.9% if it includes only firm imports and more realistic assumptions regarding wind and demand response. This exceeds the minimum required planning margin of 14.2% and should be sufficient to cover MISO expected forced outages (which generally average 6% to 8% in the summer) and its operating reserve requirements of approximately 2.5%.
However, Potomac Economics also shows that under “90/10” weather conditions in the summer (i.e., conditions that should occur only once every ten years), this margin will fall to less than 6% as load rises and temperature-related generator derates occur. At this level, MISO will have to rely relatively heavily on imports that are not contracted on a firm basis.
“While the supply is likely adequate for the upcoming summer, the increased penetration of wind resources and new EPA regulations will put substantial economic pressure on baseload coal resources that should accelerate retirements and reduce planning reserve margins,” the report noted. “MISO’s analysis suggests that up to 12 GW of coal-fired capacity in MISO would be at risk of retirement due to the compliance costs of these regulations, which could be even higher if low natural gas prices continue over the long term. This underscores the importance of MISO Resource Adequacy Construct (RAC).”
MISO made several improvements to its RAC in 2012 that should improve the price signals for capacity. This includes the replacement of the Voluntary Capacity Auction (VCA) with an annual Planning Resource Auction (PRA) that features zonal requirements for capacity. However, Potomac Economics found that two significant shortcomings continue to undermine the efficiency of the RAC: the representation of the demand for capacity in MISO’s PRA; and the prevailing barriers to capacity trading between PJM and MISO. These issues contributed to MISO’s VCA clearing at close to zero in every month of 2012, as well as in the first annual PRA conducted in April 2013.
MISO relies heavily on coal-fired generation
Despite increased wind capacity and low natural gas prices, MISO continues to depend heavily on coal-fired generation, which accounts for nearly half of MISO’s generating capacity. MISO expects some capacity to retire in response to environmental rules, although the implementation of several of these rules has been delayed until 2015 or beyond. MISO expects fewer than 400 MW of coal retirements by summer 2013 (although several other coal facilities are considered inoperable). The most significant retirement, of the Kewaunee nuclear unit in Wisconsin, occurred in May 2013.
Nearly all of the capacity additions expected by summer 2013 are wind units, the majority of which are in western areas where wind profiles are the most attractive, the report said. Although wind resources are relatively costly, they benefit from a variety of subsidies, including production tax credits, state renewable portfolio standards, and the benefits of the transmission investments planned to improve their deliverability (i.e., Multi-Value Projects).
Attachment Y to the MISO Tariff requires suppliers seeking to retire or mothball a unit to notify MISO six months in advance of the desired retirement date. Based on a reliability study, MISO may then designate a resource as a System Support Resource (SSR), which it granted for the first time in 2012.
As of March 26, there were an additional 15 unnamed SSR candidates being evaluated by MISO, with a further seven already determined to qualify as SSR. An SSR cannot retire until a reliability solution, such as transmission upgrades, can be implemented or the reliability condition no longer exists. The SSR agreement provides for compensation to the market participant during this period of delayed retirement.
In July 2012, MISO filed Tariff revisions that clarified both the designation and compensation provisions, which was urgently needed because of the large number of units that may retire due to the EPA regulations or unfavorable economic conditions (e.g., low gas prices, increased wind penetration). “We will continue working with MISO on reviewing and, as needed, clarifying these procedures in order to ensure that SSR decisions result in efficient outcomes,” said the report.
Natural gas prices fell 31% in 2012 to average $2.85/MMBtu. This led gas-fired resources to be more competitive with baseload coal, particularly in the first half of the year, the report said. Hence, natural gas-fired resources provided 78% more energy in 2012 than they did in 2011, while coal resources produced 10% less.
Coal-fired resources in 2012 still provided over two-thirds of total generation in MISO and set price in 91% of intervals, including almost all off-peak intervals. Congestion frequently caused both natural gas and coal to be on the margin in the same interval in different areas of the footprint, the report explained. Eastern coal prices declined 5%, while Western (e.g., Powder River Basin) coal prices declined 32%.