Consumers Energy looks to replace gas capacity with outside power

Consumers Energy could remove two natural gas-fired units, Karn 3 and 4, from service for the 2015 Planning Year if it can find acceptable replacement power.

David Ronk Jr., employed by Consumers Energy as Director for Electric Transactions and Wholesale Settlements, supplied Jan. 17 testimony to the Michigan Public Service Commission in support of a recent application with the PSC for approval of a process to buy outside capacity through a bilateral solicitation. The GenerationHub database shows the gas-fired Karn 3 and 4 each with 638 MW of net summer capacity.

Consumers, a subsidiary of CMS Energy (NYSE: CMS), has also said it plans to deactivate and likely retire seven smaller, older coal units in April 2016 in order to comply with a one-year extension of the federal Mercury and Air Toxics Standards (MATS) compliance deadline of April 2015. Those shutdowns also affect its capacity needs under the pending application for replacement power. The seven affected coal units are:

  • BC Cobb Units 4 (156 MW installed) and 5 (156 MW);
  • JC Weadock Units 7 (145 MW) and 8 (145 MW): and
  • JR Whiting Units 1 (101 MW), 2 (99 MW) and 3 (124 MW).

MISO rule changes mean that Consumers needs longer-term solutions

Previously, the Consumers Energy has used a combination of owned resources and capacity purchases to manage its capacity requirements, Ronk noted. Generally it has been able to use a combination of long-term, annual, seasonal, and monthly capacity products to address its capacity needs. Beginning in 2013, however, the Midcontinent ISO’s tariff has changed the capacity market to require load serving entities to have capacity resources that are available for the entire “Planning Year.” Thus, while in the past the company has been able to purchase a monthly or seasonal capacity product to meet its capacity requirements, MISO’s current tariff effectively requires the company to purchase an annual capacity product instead.

MISO conducts a Planning Resource Auction approximately two months prior to the start of each Planning Year. The company is required to participate in the Planning Resource Auction and can obtain its capacity needs from that auction rather than through bilateral contracts.

“By purchasing capacity through a bilateral solicitation the Company has the ability to obtain some price diversity,” Ronk said about the advantages of going this route. “Additionally, in a short market the Company has the ability to secure a specific amount of capacity and avoid potential penalties if the market becomes short at the time of the Planning Resource Auction.”

As for why Consumers Energy has said it needs to purchase approximately 1,100 zonal resource credits (ZRCs) for the 2015 Planning Year, Ronk said: “The Company believes that, if replacement capacity can be acquired at a sufficiently low price, it may be possible to suspend the operation of Karn Units 3 and 4 for the Planning Year, resulting in reduced expense for fuel, labor, maintenance and major maintenance, partially offset by increased costs for replacement capacity and energy. The Company’s proposal to acquire capacity for the Planning Year is predicated on limiting the price to be paid to an amount that will result in a net reduction of expense.”

As for why the company needs to purchase approximately 500 ZRCs for the 2016 Planning Year, Ronk added: “As has been described to the Commission in other proceedings, the Company anticipates that it will be unable to economically maintain certain electric generating units in service after April 15, 2016 as a result of the requirements enacted as part of the federal Mercury and Air Toxics Standards (‘MATS’). As a result, the Company currently anticipates that it will be deficient of capacity by at least 912 ZRCs and may be deficient by as many as 975 ZRCs for Planning Year 2016. The Company proposes to purchase approximately half of that deficiency now so as to limit the amount of deficiency that would need to be purchased at a later date.”

This case is being processed too late for 2014 Planning Year decisions

In its October 2013 application in this case, the company proposed to purchase about 1,100 MW ZRCs for the 2014 Planning Year so as to allow Karn Units 3 and 4 to be removed from service if capacity could be acquired at a low price. “Unfortunately, the scheduling of this case is such that a Commission order cannot realistically be obtained in time to implement the Company’s original plan for the 2014 Planning Year,” Ronk noted. “Thus, at this time the Company is not proposing to acquire additional capacity for the 2014 Planning Year through a bilateral auction.”

Consumers Energy proposes to have World Energy Solutions facilitate the auction. World Energy Solutions is unaffiliated with Consumers Energy and is experienced in operating an internet-based auction platform for the purchase or sale of energy-related products. It will conduct the auction through a website in accordance with the terms of a Request for Proposals (RFP). 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.

With regard to the ZRCs to be purchased for the 2015 Planning Year, Ronk was asked what is the amount of reduced net expense that would be available to purchase capacity if Karn Units 3 and 4 were removed from service? “We estimate the reduced net expense that would be available to purchase capacity to be approximately $7.8 million,” he replied. “Thus, to the extent that replacement capacity can be acquired at a cost that is at or below $7.8 million, a net reduction in overall cost of service can be realized for the 2015 Planning Year. I note, however, that the Company’s ability to remove Karn Units 3 and 4 from service for the 2015 Planning Year is subject to the review and approval of MISO. As of the date of this testimony, MISO has indicated that there may be transmission system reliability concerns associated with the removal from service of these units during the 2015 Planning Year. We are continuing to work with MISO to resolve whether the absence of Karn 3 and 4 during the 2015 Planning Year creates a reliability issue and if so, whether there are alternatives that may resolve any such issue.”

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.