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May 27, 2013

Cheaper, cleaner power leads to plant closures

Contributed Photo The 340-megawatt Norwalk Harbor plant earned an estimated $10-12 million annually from power markets.

Connecticut’s policy of shifting its electricity toward cheaper and cleaner generation will lead to closure of older and dirtier power plants, much like the planned June 1 shutdown of the oil-fueled Norwalk Harbor Generating Station in Norwalk.

“We are going to see more of these plants come offline. This just happens to be one of the firsts,” said Dan Dolan, president of the trade group New England Power Generators Association. “It is going to happen on a unit-by-unit and a company-by-company basis.”

Connecticut and the five other New England states are pushing for lower electricity costs, and the bulk of price savings over the past five years has come from cleaner fuels — mostly natural gas but also some hydro and renewables. As a result, no new coal or oil plants have been proposed in New England over that time. The older plants using those fuels are becoming less economical because of the lowered revenues from the region’s power markets.

“They are running less often,” said Ellen Foley, spokeswoman for regional electric grid administrator ISO New England. “We are seeing the old fossil fuels units using oil and coal be less competitive.”

Power plants in New England have two primary ways of generating revenue: the capacity market and the much more lucrative energy market.

In the capacity market, basically every power plant connected to the grid gets paid a set amount every month simply for being available to meet the region’s electricity needs. In the energy market, power plants are operating actively and are being paid for selling electricity onto the grid.

In 2012, nearly 900 generator units split $1.2 billion from the capacity market while a smaller number split $5.2 billion from the energy market.

The way ISO operates, the energy market is designed to keep electricity prices cheap. ISO will contract with the lowest-cost power plants first, enough to meet real-time demand, and gradually add the more costly plants as demand rises. The most expensive power generators only operate in the energy market when demand is at its peak, typically in the summer. Some don’t operate at all.

In 2000, coal and oil plants generated 40 percent of New England’s electricity needs. By 2012, that dropped to less than 4 percent.

The capacity market is becoming less lucrative, dropping 11 percent in value in 2012 alone. The region has added 14,400 megawatts of capacity since 1997, so the demand for each individual power plant is dropping. When the capacity market first launched, plants received $4.50 monthly for every kilowatt of potential power; this year, that dropped to $2.40.

“It’s economics 101. There is way more supply than demand,” Dolan said.

The Norwalk Harbor Generating Station almost never runs and relies on the capacity market for revenues, said David Gaier, spokesman for New Jersey-based NRG Energy, which owns the Norwalk station.

NRG did not disclose financials, but based on the current price in the New England capacity market, the Norwalk plant likely receives $800,000 to $1 million monthly to have its 340 megawatts available for the grid. That number was closer to $1.5 million monthly in 2010.

The plant simply is no longer economically, Gaier said, leading to its planned closure.

Norwalk Harbor, first brought online in 1960, is not alone in struggling with the falling prices in the capacity market.

New England’s largest oil-fueled power plant — the 882-megawatt Wyman Station in Maine — was put up for sale in May. Its owner, Next Era Energy Resources of Florida, said the 56-year-old plant can’t compete with the low-cost natural gas plants in the region’s energy market.

Connecticut’s largest oil-fueled power plant — the 500-megawatt Montville Station — also is trying to make up for the decrease demand. Its owner, NRG, does not have plans to shut down or sell, but the company is trying to convert units to run on biomass so it can earn renewable energy credits.

The oil- and coal-plant issues only will accelerate because of Connecticut’s new policy toward electricity, Dolan said. Gov. Dannel Malloy is trying to make large-scale hydro a more significant part of the energy mix, further driving down prices; and the state had a $70 million tax on power plants for the last two years.

“We’ve had a number of challenges in Connecticut,” Dolan said. “That puts tremendous pressure on electricity prices at a time that prices are dropping.”

Coal and oil plants face other challenges as well, such as stricter regulations on greenhouse gas emissions from the U.S. Environmental Protection. Plus, the majority of these plants is aging; New England coal and oil plants capable of generating a total of 8,300 megawatts are more than 40 years old.

Despite the anticipated closures, ISO believes it will have more than enough electricity to meet demand for the foreseeable future. ISO contracts for the capacity market three years in advance to ensure there will be enough generation to meet anticipated demand, setting prices through an auction. The last auction met demand and had excess generation left over, which contributed to keeping capacity prices low.

“We anticipate to have enough supply through at least 2017,” ISO spokesman Marcia Blomberg said.

While the loss of coal and oil plants may not lead to capacity issues, the fuel mix of available power in New England will be less diverse.

Natural gas generates more than half of the region’s electricity; the rest is split among nuclear, hydro, and renewables.

Over-relying on one fuel can lead to problems like in February where the supply of natural gas for power plants and home heat was constrained. This caused the commodity price of natural gas to increase, which led to a tripling of prices in the energy market for that month.

ISO already has expressed concern over plans to expand natural gas home heating — including Malloy’s $7 billion proposal to add 300,000 new customers to the system — and the effect it will have on prices.

Despite not actually generating much power for the grid, oil and coal plants still make up 30 percent of New England’s available capacity, compared to 43 percent for natural gas plants. This availability keeps power reliable even when the supply of natural gas is constrained.

As capacity prices are expected to continue their downward trend and other market forces weigh on oil and coal plants, that available capacity is expected to dwindle.

“The capacity market in New England is competitive,” Foley said. “Those that use a more expensive fuel have not been able to compete with the newer plants that use natural gas.”

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