Consumers Energy seeks Michigan PSC clearance for capacity auctions

Consumers Energy on Oct. 17 requested Michigan Public Service Commission approval of new long-term power purchase auction (PPA) procedures that it wants to use early next year to add capacity and capacity credits.

Consumers Energy, a unit of CMS Energy (NYSE: CMS), periodically conducts competitive solicitations for offers for capacity for seasonal, annual and multi-year periods to meet its capacity reserve requirements as established by Midcontinent Independent System Operator (MISO). Consumers Energy intends to conduct such a solicitation in the form of an auction to acquire capacity to:

  • meet its reserve requirements for MISO Planning Year 2016 (a MISO Planning Year runs from June 1 through May 31 of the following year); and
  • determine if certain capacity acquisitions can achieve a net reduction in PPA, fuel and labor costs for MISO Planning Years 2014 and 2015.

Because the company seeks to have the auction to be open to all interested parties, including both affiliates and non-affiliates, it also filed an application with the Federal Energy Regulatory Commission. FERC issued an order granting the requested relief, with conditions, on June 18.

Consumers sees itself as short on 850 zonal credits for 2016

Under the MISO tariff, Consumers Energy must demonstrate that it has acquired enough Zonal Resource Credits (ZRCs) to meet demand and planning reserve requirements. A ZRC represents the amount of capacity from a planning resource for a specific planning year available to be used in a MISO Resource Planning Zone to supply one MW of coincident peak demand after discounting the capacity for its historical equivalent forced outage rate on demand.

Based upon projected demand, MISO planning reserve requirements and available resources, Consumers Energy currently believes it is short of by 850 ZRCs for MISO Planning Year 2016. To address a portion of the shortfall, the company currently intends to conduct an auction to obtain up to 500 ZRCs for Planning Year 2016.

Consumers told the Michigan commission that it has identified potential fuel and labor savings that can be expected to occur if it is able to remove the gas-fired Karn Units 3 and 4 from service in MISO Planning Years 2014 and 2015. Such savings would be offset by the cost to acquire replacement capacity needed to maintain compliance with the requirements of the MISO tariff. Based on projected short-term capacity prices the company believes it may be possible to acquire replacement capacity at a low enough cost so as to achieve a net reduction in overall costs.

The GenerationHub database shows Karn 3 and 4 each with 638 MW of net summer capactiy.

The company proposes to conduct an auction to purchase approximately 1,100 ZRCs for 2014 at a cost no greater than $5.9m and approximately 1,100 ZRCs for 2015 at a cost no greater than $7.8m. To the extent capacity can be acquired at costs at or below these levels, a net reduction in overall cost of service can be realized for 2014 and 2015.

Consumers Energy noted that its ability to remove Karn Units 3 and 4 from service in 2014 and 2015 is subject to the review and approval of MISO. MISO has indicated that there would be reliability concerns associated with the removal from service of these units during 2014 and 2015. The nature and extent of MISO’s reliability concerns, however, is not yet clear, the utility said. Further, it is not clear when MISO will more fully identify its concerns. Thus, in order to have the option of proceeding with its cost savings efforts, Consumers Energy has included in the Oct. 17 application the request for approval of the auction procedures for 2014 and 2015.

World Energy Solutions picked to run the internet-only capacity auction

The auction will be conducted by an independent Auction Administrator unaffiliated with Consumers Energy. That party is World Energy Solutions, an energy management firm that runs an internet-based auction platform for the purchase or sale of energy-related products. World Energy will conduct the auction through a website in accordance with the terms of a Request for Proposals (RFP).

The independent Auction Administrator will transmit the received offers to Consumers Energy on an anonymous basis. Consumers Energy will not know the identity of the auction participants, and will not know which auction participants made offers, or at what price and volume. After the auction closes, Consumers Energy will review its capacity needs and the overall response of the market to the RFP, and will adjust the amount of capacity it will accept based on its needs and whether the bid prices generally match expected price levels for the product requested.

Consumers Energy believes that it would be prudent to conduct the solicitation for up to 500 ZRCs for Planning Year 2016 on or about Feb. 1, 2014. Current market prices for capacity are at depressed levels, it noted. A significant amount of generating capacity (mostly coal-fired) in the MISO area is expected to be retired in the next several years, which is expected to result in an increase in capacity prices. Thus, conducting an auction on or about Feb. 1, 2014, will allow acquisition of at least a portion of the needed capacity at lower price levels than may be available in the future.

Consumers Energy believes that it would be prudent to conduct the solicitation for 1,100 ZRCs for MISO Planning Years 2014 and 2015 on or about Feb. 1, 2014, to determine if replacement capacity for Karn Units 3 and 4 can be acquired at a cost that is less than the estimated savings in fuel and labor costs associated with the suspension of operations at Karn Units 3 and 4.

Consumers looking to shut other gas-fired units besides Karn 3 and 4

In Sept. 30 power supply cost recovery (PSCR) testimony filed at the Michigan commission, David Ronk Jr., Director for Electric Transactions and Wholesale Settlements at Consumers, testified that the company is evaluating whether it can remove the gas-fired Karn Units 3 and 4 from service for planning years 2014 and 2015 and replace that capacity with ZRCs at a lower cost than the company’s cost of maintaining these units.

Ronk said the company had at one point planned to remove Gaylord Units 1, 2 and 3 and the Straits combustion turbines (as well as other small combustion turbines) from service, effective March 1, 2012. In February 2012, however, the company received notice from MISO that its transmission study showed that by removing these units, it would create a violation of its reliability standards. As a result, these units would need to be designated as System Support Resources (SSRs) until transmission upgrades are made. SSRs get compensation from MISO to stay open between a planned shutdown time, and the end of when MISO needs them for system support.

The company has recently retired the gas-fired Thetford Units 5 through 9 and has, for purposes of the Sept. 30 PSCR plan, modeled Morrow Units A and B, Whiting Unit A, and Weadock Unit A in extended reserve shut down status for the next several years. The company has recently made arrangements to potentially allow Morrow Units A and B and Gaylord 4 to be retired in late 2013 or 2014. It anticipates that Thetford Unit 1 will be placed in extended reserve shutdown status or retired in 2014 as well.

Sara Walz, a General Engineering Technical Analyst in the Electric Sourcing and Resource Planning Section of the Energy Supply Operations Department at Consumers, noted that the company is proposing an addition of 730 MW of gas-fired nameplate capacity at the Thetford Generating Station, assumed to be in-service on June 1, 2017. The company is also proposing to suspend the operation of seven coal units (Cobb 4-5, Weadock 7-8, and Whiting 1-3) in lieu of retrofitting the units to comply with the MATS rule.

This PSCR case reflects the company’s decision to mothball or place in extended reserve shutdown status the following combustion turbine units: Campbell Unit A, Morrow Units A and B, Weadock Unit A, Whiting Unit A, and Cobb Units 1-3. Gaylord Unit 4 has been assumed to retire as of September 2013. Thetford Units 5-9 are assumed to retire as of October 2013. The Thetford Units 1-4 are assumed to be available for Black Start operation only. Gaylord Units 1-3 and Straits Unit 1 are assumed to be designated as SSRs.

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.