Electricity Prices Plummet as Gas, Wind Gain Traction and Demand Stalls
By Erin Ailworth and Russell Gold
The rapid rise of wind and natural gas as sources of electricity is roiling U.S. power markets, forcing more companies to close older generating plants.
Wholesale electricity prices are falling near historic lows in parts of the country with competitive power markets, as demand for electricity remains stagnant while newer, less-expensive generating facilities continue to come online.
The changing American electricity landscape is pressuring power companies to shed unprofitable plants and reshape their portfolios to favor the new winners. Texas provides a clear example.
Citing low gas prices and the proliferation of renewables such as wind and solar, Vistra Energy Corp., a vestige of the former Energy Future Holdings Corp., said it would retire three coal-fired facilities in Texas by early next year and that it plans to merge with independent power producer Dynegy Inc.
Exelon Corp., the country's largest owner of nuclear power plants, placed its Texas subsidiary under bankruptcy protection earlier this month, saying that "historically low power prices within Texas have created challenging market conditions for all power generators."
The average wholesale power price was less than $25 per megawatt hour last year on the grid that coordinates electricity distribution across most of Texas, according to the operator, the Electric Reliability Council of Texas. A decade ago, it was $55.
Prices have fallen a similar amount on the PJM Interconnection LLC, the power grid that serves some or all of 13 states, including Pennsylvania and Ohio. A megawatt hour there traded for $29.23 last year, the lowest level since 1999, as far back as the grid's independent market monitor tracks prices.
The price drop at PJM reflects the construction of dozens of new gas-burning power plants, spurred by the abundance of the fuel due to the shale drilling boom. In 2006, 8% of the electricity in PJM was generated by natural gas. In 2016, it was 27%.
Weak demand for electricity also has played a role, as Americans purchase more energy-efficient appliances and companies shave power consumption to cut costs. Last year, power demand in PJM grew 0.3% after falling the two previous years.
The resulting competition -- by more power plants to buyers of roughly the same number of megawatts -- has most-acutely impacted older coal and nuclear plants, which are struggling to provide competitively priced power. It has even begun to affect older natural-gas-fired facilities that have higher costs.
"Generators are just fighting for existing market share," said Ari Peskoe, a senior fellow in electricity law at Harvard Law School. "The aging fleet of coal and nuke generators, combined with low prices, makes this intense."
FirstEnergy Corp., an Akron, Ohio-based utility, announced late last year it was exiting competitive power markets. It is selling four natural-gas plants and hopes to sell coal and nuclear plants that provide power in the PJM wholesale marketplace.
This summer, power company NRG Energy Inc. announced a transformation plan that included selling up to $4 billion in power generation.
West of the Mississippi River, power markets also have been upended by the rapid growth of wind, as the cost of generating power from wind turbines is falling.
In 2016, all of the new generation built in the Southwest Power Pool, a grid that covers an area from Louisiana to Montana, was wind, gas and solar. The vast majority of the retirements were coal and nuclear plants.
Wind is the fastest-growing source of power on Texas' grid. Last year, wind generated 15% of the electricity in ERCOT, more than nuclear power, which accounted for 12%. By 2019, researchers at the University of Texas at Austin's Energy Institute expect wind to surpass coal as ERCOT's second-largest source of electricity.
"Solar and wind are now competitive with natural gas-fired generation," said Curt Morgan, Vistra's chief executive. Mr. Morgan said that while he thinks natural gas will be the "workhorse" of U.S. electricity markets for at least the next decade, in Texas "I think it's going to be a while before you see another gas plant built in ERCOT."
Last week, Siemens AG said it was cutting 6,900 jobs, in large part because it has overestimated demand for its giant power turbines.
The changes have primarily been felt in competitive power markets, which exist in many parts of the U.S., including California in addition to Texas and the Midwest. In those areas, wholesale electricity is sold through daily auctions that favor the least-expensive sources of power, and it is subsequently purchased by utilities and others.
By contrast, some regions of the U.S. don't have competitive power markets, and instead have power generated entirely by utilities, which is sold to customers at rates regulated by state officials. Even in regulated markets, changes are afoot. Earlier this week, WEC Energy Group Inc. said it was closing its Pleasant Prairie coal plant in Wisconsin, citing a desire to add more gas and solar generation.
As companies face price pressures, some have sought aid from the government. Exelon has been pushing states to create new subsidies for them.
"Unless we value the zero emission attributes of nuclear, that is going to force the premature retirement of nuclear plants," said Joe Dominguez, an executive vice president at Exelon.
The Trump administration is aiming to provide a lifeline to the ailing coal and nuclear industries through several proposals, including a plan floated by Energy Secretary Rick Perry to assist power plants that provide constant, baseload power to ensure ample energy security.
But that proposal, which has to be approved by the Federal Energy Regulatory Commission, has been assailed by critics as both anticompetitive and unlikely to reverse market trends.
An analysis by investment bank Lazard shows that on an unsubsidized basis and over the lifetime of a facility in North America, it costs about $60 to generate a megawatt hour of electricity using a combined-cycle natural-gas plant, compared with $102 burning coal and nearly $150 using nuclear. By that criteria, Lazard estimates electricity from utility-scale solar and wind facilities is now even cheaper than gas.
"It's too late," David Schlissel, a director at the Institute for Energy Economics and Financial Analysis, said of the Trump administration's proposals. "The lesson is if you don't put your thumb on the scale then gas and renewables will out-compete coal."
Chris Moser, senior vice president of operations at NRG, said the challenge in many parts of the U.S. now is to ensure a diverse mix of power resources so that if one encounters issues, others can fill in.
In PJM, Mr. Moser said cost pressures prompted NRG to retrofit some units to run on gas instead of coal. Meanwhile, it retired a 44-year-old natural-gas plant in Houston known as Greens Bayou Unit 5 earlier this year, as the low cost of gas continues to put pressure on older facilities, even those burning gas. The company also has units slated to retire in California.
"If the market isn't paying us to keep the generation around we want to take it out," he said, adding, "Yes, you could go all wind, but then you have no answers when it's 109 in Dallas and there's no wind."
(END) Dow Jones Newswires
November 30, 2017 07:14 ET (12:14 GMT)Copyright (c) 2017 Dow Jones & Company, Inc.