Powering the Mitten: Report warns of looming electricity capacity shortfall

Electricity shortages, rolling blackouts, and surging electricity prices were the order of the day in California back in 2000 and 2001. California's power crisis, which has been attributed to a "perfect storm" of increased demand, reduced supply, and market manipulation by energy traders such as Enron, drove electricity prices up to as much as $600 per megawatt-hour and eventually cost the state of California between $40 and $45 billion.

The crisis was enabled by 1996 legislation which deregulated the electricity market in California. The law, largely embraced on all sides by Democrats, Republicans, and investor-owned utilities, was touted as a free-market solution for reducing energy prices by increasing competition. Instead, power supplies shrunk and prices skyrocketed. California suspended deregulation in 2003.

Here in Michigan, another perfect storm may be brewing. This one is composed of capacity loss as coal-fired power plants retire, and of a lack of investment in new power generation. That's according to a report commissioned by DTE Energy and Consumers' Energy that was released in November by Lansing-based Public Sector Consultants. The report warns of a potential electricity generation capacity shortfall in Michigan as soon as 2016.

The cause: a pending generation capacity loss of as much as 1.3 gigawatts -- enough to power Lansing, Grand Rapids, and Detroit -- because of the retirement of many of Michigan's coal-fired power plants. The plants are being closed primarily for economic reasons; they are old and costly to operate and are becoming even more costly as a result of new environmental regulations governing carbon and other emissions. At the same time, the report says, Michigan's partially deregulated market, under which up to ten percent of average retail sales can be purchased from alternative energy suppliers, has not provided adequate incentives for utilities to invest in much-needed new generation capacity.

The result: Michigan's power reserves could be getting very tight in the near future.


The "Mighty Marysville," a coal-fired power plant on the St. Clair River, closed in 2011. Photo Credit: Patrick Lapinski/Inland Mariners.

Capacity shortfall

The report bases its warnings on a forecast from MISO, the Midcontinent Independent System Operator, which operates the grid in Michigan and much of the midwest.  MISO advises states to maintain a capacity reserve margin, and it forecasts that much of Michigan's lower peninsula will begin to dip into that margin as soon as 2016.

"MISO sets what is called the 'planning and reserve margin'," says MISO spokesman Andy Schonert. "It's a kind of cushion to ensure we have reliable electric generation on the system. But it really falls to the states and their planning processes to make sure they're bringing the right amount of generation online."

In December, the Michigan Public Service Commission issued new directives for electricity generators, extending the timeframe for which they are required to evaluate and report on their ability to meet future demand from a one-year assessment to a five-year assessment.

"The reason we’ve made this change is to get more information about capacity in light of the coal plant retirements that we know are coming," says MPSC Chairman John Quackenbush. "Having only one year of planning is perhaps adequate when you have excess capacity, but we know we have a significant number of coal plants retiring soon due to environmental regulations from the federal government."

While the MPSC has the authority to require regulated utilities and cooperatives to submit this information, it can only ask for it from the alternative energy suppliers that operate within the state under Michigan's partially deregulated market.

"The difference is that we have the authority to require utilities to provide the information, but we can only request it from alternative energy suppliers," says Quackenbush. "We’re concerned about it. We need to make sure that alternative energy suppliers are arranging for adequate capacity. They can’t just assume it will automatically be there for them; they need to be focused on planning too, otherwise Michigan as a state will be in an unreliable power situation."




2016 Resource Adequacy Forecast, Local Resource Zone Summary
Source: Midwest Independent System Operator via Public Sector Consultants

Who decides Michigan's energy future?

Conflict over the respective roles of state and federal government in ensuring Michigan's electricity generation capacity and reliability is brewing as well.

"The federal role is to make sure that the interstate transmission system operates reliably," says Valerie Brader, deputy legal counsel and senior policy advisor for Gov. Rick Snyder. "It does not regulate where plants get built or what size or anything like that. All of that goes to the states, which have authority over both the rates and the electric generation resources."

Brader believes MISO, a federally regulated body, overstepped its bounds in October when it required a utility to keep the coal-fired Presque Isle Power Plant open for reliability purposes. It had been slated for closure after a loophole in Michigan's electric choice law had allowed a mining customer, who accounted for a majority of the plant's load, to leave for an alternative energy supplier. But because closing the plant would diminish capacity and threaten reliability, MISO ordered the utility to keep it open, with the cost to be borne by remaining customers, forcing high costs onto customers including homeowners and small businesses. Those customers are expected to see steep rate hikes.

"That's something that is really at the heart of what states normally do, which is to figure out what people should get paid to run generation," says Brader. "But because it was threatening that interstate grid, MISO asserted authority to decide that for us. The only way you can appeal their decision is through FERC, the Federal Energy Regulatory Commission. Michigan appealed the decision and is continuing to appeal the initial determination from FERC regarding both the size of the rate increase and the way it's allocated. We know FERC's decisions are likely to cause short-term, sudden rate shocks."

Brader says the federal government is essentially forcing the state to keep an old, dirty, uneconomic power plant open, and is shifting the cost burden onto the people of the Upper Peninsula.

"This is the most expensive, the most unfair and least environmentally protective option," says Brader. "There's just no reason to like FERC's solution.."

According to Schonert, MISO's actions are in line with fulfilling its function to ensure stable operation of the transmission grid.

"We do what we can to help ensure reliability and work with the states to make sure they're seeing what we're seeing as far as future forecasts, and that they're taking that into consideration when they do their work," he says.

According to Brader, the state is working to identify an alternative solution.

"We are actively working to identify a better solution," she says. "We are deeply involved in discussions with private parties to see if we can solve the current reliability issues in the upper peninsula." 

She also warns that the U.P crisis is just a taste of what's to come. 

"What is happening in the U.P. is just the canary in the coal mine for Michigan," she says. "It is absolutely possible to see this kind of federally imposed rate hike happen in the lower peninsula. We're already seeing FERC signalling that it's essentially ready to create the same situation in the lower peninsula that we've been trying to cope with in the Upper Peninsula; it has signaled it might not agree to allow Consumers' Energy to retire a slate of seven coal-fired plants, which it is under federal court order to do. Michigan needs to develop our own solution to avoid the federal government doing it for us."

This piece is part of a series of special reports on Michigan public policy issues made possible through a partnership with Public Sector Consultants.

Source for lead graphic: Midwest Independent System Operator via Public Sector Consultants.