Dynegy says MISO market design issues forcing shutdown of three coal units

Dynegy Inc. (NYSE:DYN) said May 3 that it plans to shut down multiple Illinois coal-fueled units after they once again failed to recover their basic operating costs in the most recent Midcontinent ISO capacity auction.

Units 1 and 3 at the Baldwin Power Station in Baldwin, and Unit 2 at the Newton Power Station in Newton, are expected to shut down operations over the next year. In total, Dynegy is requesting that the Midcontinent ISO remove 1,835 MW from MISO Zone 4. An additional 500 MW are targeted for shutdown, and a final determination is likely later this year.

Earlier this year, Dynegy announced the 465-MW Wood River Power Station would retire in June for similar reasons.

In total, said Dynegy, 2,800 MW of generation from Illinois will be lost – approximately 30% of the power generation capacity in Southern Illinois. According to a 2014 economic impact study by Development Strategies, the Newton and Baldwin stations combined have historically supported nearly 4,000 direct and indirect jobs and $1 billion annually in economic activity for the region.

“This is a difficult decision, and we don’t take it lightly. For 40 years, the employees of the Baldwin and Newton Power Stations have generated reliable and affordable power for the people of Illinois,” said Robert C. Flexon, Chief Executive Officer of Dynegy.

Competitive generating assets in MISO Zone 4, regardless of fuel type, are unable to support their operating costs in the existing MISO market design, Dynegy said. Generators are compensated in two ways – through the capacity market and through the energy market. The out-of-state utilities offer their capacity into the annual auction at little to no cost since they are more highly compensated through their home state regulatory process, putting competitive generators at a tremendous disadvantage, it added.

This same issue also applies to the energy market, where utilities also offer their energy in at no cost and continuously dispatch their baseload plants regardless of price as they are able to pass through their variable costs to ratepayers. Since generators in Zone 4 are not regulated, they rely entirely on the capacity and energy markets which are, in effect, suppressed by the regulated utilities’ offering practices, Dynegy said. MISO’s market design does not penalize or prevent this practice. This dynamic prevents Zone 4 generators from receiving an adequate level of compensation to cover their generating costs. If Newton and Baldwin were located in the PJM Interconnection region, as northern Illinois plants are, or Zone 4 was regulated as the other MISO generators outside of Illinois are, no shutdowns would occur.

“This is a losing model that exports southern and central Illinois jobs and economic base to the surrounding states resulting in a catastrophic economic outcome for downstate Illinois,” Flexon continued. “As has been demonstrated repeatedly, there is a large disparity between how central and southern Illinois competitive generating stations are treated compared to generating stations in northern Illinois and MISO participants outside of Illinois. Central and southern Illinois competitive units in MISO Zone 4 are wrongly grouped with out-of-state utilities rather than the competitive power producers in northern Illinois and PJM. This must change.”

MISO is limited in what they can do to correct the situation, as its membership is overwhelmingly represented by out-of-state utilities that reap the benefits of the existing market design and, not surprisingly, are highly resistant to any design changes, said Dynegy.

“Disappointingly, rather than resolve the market design deficiencies, which has the added benefit of retaining Illinois jobs and economic benefits, the only response from Illinois officials to date occurred last year when the Attorney General’s office filed a complaint claiming that the clearing capacity price received by Dynegy for less than 10% of the Company’s megawatts in MISO Zone 4, that was comparable to prices in northern Illinois and did not even cover Dynegy’s costs, was not just and reasonable. Dynegy has spent more than a year defending itself against this baseless claim,” Flexon added.

“Resolution of this issue in a way that serves Illinois as a whole can only be achieved with the immediate help and leadership of the Illinois state government for which we believe we have solutions, and we urgently need an audience. In the limited time left before closures occur, we are ready to work quickly with MISO, the state of Illinois, union leadership, and all stakeholders to rectify the situation and preserve the jobs and economic base in downstate Illinois, while continuing to provide safe, low cost, and reliable power to the region,” concluded Flexon.

As part of the shutdown process, a notice filed with MISO for each unit triggers a reliability review by MISO. If MISO determines the units aren’t needed for reliability, Dynegy expects to shut down operations at Newton Unit 2 in September 2016, Baldwin Unit 1 in October 2016, and Baldwin Unit 3 in March 2017.

With nearly 26,000 MW of power generation capacity and two retail electricity companies, Dynegy is capable of supplying 21 million homes with safe, reliable and economic energy. In Illinois, Dynegy has 13 power stations serving more than 800,000 retail customers and employing nearly 1,400 people.

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.