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Get ready to rumble again over nukes and coal, Illinois

Crain's Chicago Business

Monday, November 5, 2018  |  Article  |  By Steve Daniels

Coal (20) , Energy, Alternative Energy (93) , Utilities (94)

Two decades after Illinois made headlines by deregulating its electricity industry, odds are growing that the state will take back a crucial price-setting function that determines who wins and loses in the power industry.


Twenty-one years ago, Illinois moved to deregulate its power industry, opting to let the market—not regulators—determine what sources of electricity would keep the lights on.

Don't be surprised, however, if next year the state moves to take that authority back as it aims to promote a clean-energy future that federal regulators seem poised to impede. The odds of this happening are growing given the tacit support of arguably the most politically potent company in the state, Chicago-based Exelon, whose large fleet of Illinois nuclear plants stands to benefit.

A conflict has erupted over how the federal government is responding to states like Illinois, which deregulated years ago but now are trying to boost nonemitting power sources—renewables and nuclear. The clash has the potential to lead next year to a state takeover of the function of paying certain generators for their promise to deliver when power demand is highest. In northern Illinois, that responsibility has lain for 14 years with PJM Interconnection, the wholesale grid manager responsible for ensuring power supplies are adequate in a multistate region running from here to the mid-Atlantic.

PJM this month proposed a new policy that will allow states like Illinois to subsidize generators they want to preserve like nuclear plants while also keeping prices high enough to allow at least some coal-fired power plants to survive. The result, critics say, would be to meaningfully hike electric bills for Chicago-area users in order to preserve far more power sources than the region needs.

The Illinois Commerce Commission, hardly an aggressive regulator during the Rauner administration, is crying foul in uncharacteristically blunt terms. In testimony filed Oct. 2 with the Federal Energy Regulatory Commission, the ICC says the road PJM is traveling "may require revisiting some of the fundamental principles underlying decades-old industry restructuring legislation."

Indeed, observers expect next year's legislative session to feature a potentially acrimonious debate over Illinois' energy future, pitting nuclear generators against coal-plant operators, familiar foes.

The need for a big energy bill, always contentious and highly complex, is surely not what Democrat J.B. Pritzker desires if he holds his big lead in the polls over Bruce Rauner and takes over as governor next year. He has barely mentioned energy issues during his campaign and clearly has bigger priorities. But, thanks to actions at the federal level, he may well not have a choice.

PJM has proposed a major overhaul of its methods for setting the price of "capacity," a charge embedded in all customers' electric bills paid to generators that pledge to be available at times of high demand, like hot summer days. The cost of capacity, determined through an annual PJM-conducted auction among power generators, has risen substantially in recent years and become a crucial source of revenue for power plant owners. That, in turn, has driven consumers' electric bills substantially higher.

With energy prices falling, though, capacity increases weren't enough to keep Exelon from moving two years ago to close two of its six money-losing Illinois nukes. In response, the state enacted the 2016 Future Energy Jobs Act to, among other things, slap a surcharge on all electric bills statewide subsidizing the plants and keeping them open.

Competing fossil-fuel generators protested to no avail in Illinois. They later won an ally of sorts in PJM, whose leadership worried the Illinois subsidies (and similar measures later enacted in New Jersey) would undermine its auction, reducing capacity prices and putting unsubsidized plants out of business. PJM sought to compensate.

'DEVASTATING CONSEQUENCES'

The PJM proposal on the table would permit states like Illinois to "carve out" plants that provide cleaner energy and create systems to set special capacity payments to ensure they can operate. The remaining plants needed to keep the lights on would participate in PJM's auction, but the price would be set as if every power source had participated, including those carved out by the state.

That, critics say, would artificially inflate the capacity price, ensuring both that consumers would pay more and that far too many plants—including polluting sources like coal—would be propped up. PJM's proposal "would have devastating consequences for Illinois consumers," says David Kolata, executive director of the Chicago-based Citizens Utility Board, a consumer advocate. "We're already paying for more capacity than we need. It's aimed at punishing the state for moving to decarbonize."

PJM officials counter that they're trying to allow states like Illinois to promote cleaner fuels while preserving the integrity of their market. FERC still must rule on PJM's plan, and it could change. But it's on a fast track, with a FERC decision expected early next year. PJM's next capacity auction will be this spring, giving state lawmakers little time to react.

In its FERC testimony, the ICC scoffs at PJM's arguments, deriding its current price-setting system as "a market in name only." Instead, "it is a complex, administratively determined mechanism for pricing and procuring capacity that has been subject to almost constant rule changes."

Somewhat unusually, Exelon is aligned with consumer and environmental groups on this issue and says in a statement, "The proposal must be implemented in a way that doesn't unnecessarily burden consumers by forcing them to pay higher capacity prices to polluting resources remaining in the PJM market."

The ICC declines to comment on the potential for legislation next year, since FERC has yet to act. But in an opinion piece published Oct. 2, ICC Chairman Brien Sheahan was harshly critical, describing the 2016 law subsidizing Exelon nukes as being "under assault" by PJM. He suggested several potential state responses, including seizing responsibility for capacity pricing from PJM, which federal law allows states to do.

If that happens, look for Exelon to bolster other of its Illinois nukes that are ailing financially. Both the Byron and Dresden stations near Rockford and Morris, respectively, bid too high to clear PJM's most recent capacity auction, setting prices for the year beginning June 1, 2021, and ending May 31, 2022. Missing out on those payments will cost Exelon as much as $300 million in revenue.

Nukes are particularly ill-suited to compete in a world where historically cheap natural gas sets the wholesale price of power. Unlike plants fueled by gas or even coal, nukes must run round-the-clock, even when their output isn't needed.

A state takeover of capacity, given bipartisan support for promoting and preserving power generation that doesn't contribute to global warming, would almost certainly address the funding shortfalls at those plants. But it could lead to the closure of more coal-fired plants, both in northern Illinois and downstate. Vistra Energy and NRG Energy, the dominant coal generators in Illinois, back PJM's plan.

A move to restore the state's historic task of picking energy-industry winners and losers is almost sure to cause political controversy, particularly in southern Illinois, where coal burning and mining still contribute to the economy.