Last Friday, FirstEnergy filed its plan to sell the 80% of its coal fired Harrison Power Station currently owned by FE subsidiary Allegheny Energy Supply Company to West Virginia utility Mon Power. FirstEnergy called its report a “resource plan,” but it was anything but that. The “plan” was really just a rigged attempt to dump an obsolete piece of equipment on WV rate payers.
To understand why this is such a bad deal, we need to look into FE’s report. Here are the basics:
- FE estimates that demand for electricity in WV at the rate of 1.4% per year for the next fifteen years.
- FE compared the levelized cost of various generation options needed to meet the electricity they estimate they need for the next 15 years. The comparison came down to a levelized cost of $75 per megawatt hour to buy electricity on the open market against $74 per megawatt hour to produce the additional electricity from the 80% of the Harrison plant that they would sell to WV rate payers.
- These levelized costs, the costs of the options over 15 years reduced to a single price per megawatt hour, are based on a number of assumptions about fuel costs and demand, but the assumptions used for the basic figures above come from a “base case” set of assumptions that FE believes represents the best estimates for the future.
There are a couple of things missing from FE’s rigged analysis.
Let’s start by looking at that comparison between buying the Harrison plant and buying power on the open market. When FE talks about selling the Harrison plant to Mon Power, they are really talking about selling the Harrison plant to Mon Power’s WV rate payers. When a WV utility owns a power generating plant, the utility bears little risk of changes in the market. WV law requires that regulated WV utilities are allowed to recover all of what they paid to buy or build a power plant, plus a guaranteed return on equity for that investment of over 10% per year. If the utility presents a good accounting of those costs, and the PSC believes those costs are prudent, then the PSC must grant rate increases to cover those costs, as well as the costs of actually operating the plant.
Allegheny Energy Supply Company, which currently owns the 80% of the Harrison plant that FE wants to unload, is not a regulated utility in WV. That means that AE Supply Co. bears all the risk of owning and operating its 80% of the Harrison plant. If demand for electricity falls, which it has been, AE Supply still has to cover the cost of buying or building the plant. That cost doesn’t go down if AE Supply’s sales go down. By the same token, if coal is not the lowest cost fuel on the market, AE Supply is still stuck with buying coal, because that is the fuel that the Harrison plant requires. Right now, none of this risk is a problem for Mon Power rate payers, because AE Supply can’t collect any of these costs from WV rate payers.
So the first big problem is with the transfer of risk from FE subsidiary AE Supply to WV rate payers through Mon Power, which can recover all of the costs of the Harrison plant “sale” from rate payers. Keep in mind that this is a “sale” from one subsidiary of FE to another one. It is not a sale on the open market. Before it approves the “sale” FE must get approval from the WV PSC. This is the crazy situation created by WV’s regulated system. Mon Power’s rate payers are buying AE Supply’s share of the Harrison plant, but only the three PSC Commissioners have the decision making power.
Now let’s look at the situation with FE’s other alternative, buying electricity on the open market, either by contract or through PJM’s power markets. WV law still says that Mon Power is entitled to charge rate payers for all of the money they spend on “purchased power”. But there is a difference. Depending on the length of the contracts for this power, if demand for electricity falls, Mon Power would just buy less power. If the price of one fuel rose and another fell, that price change would be reflected in the market price, and a fuel shift to the lower cost fuel would automatically be reflected in lower power costs for Mon Power. Unlike with owning an actual power plant, buying power allows for maximum flexibility and no other risk than price risk in the market.
Looking simply at levelized cost, based on expected price and demand trends, does not account for the fact that owning a power plant is much riskier than buying power as you need it. Over the past few years, WV’s coal fired power has generated significant rate increases, while electric rates in neighboring deregulated Maryland have been falling over the same time period. This difference in rate trends exists because WV rate payers are forced to pay for owning and operating obsolete coal fired power plants, while utilities in deregulated Maryland are allowed to purchase electricity from the lowest cost producers.
FirstEnergy uses another fudge factor in their rigged analysis. The company also compares the levelized cost of building a combined cycle gas fired power plant to buying AE Supply’s share of the Harrison plant. When you are comparing different generating systems, the cost of power produced also depends on how much the generating plant actually operates. This number is called the capacity factor and is expressed as the percentage of total time the plant is actually in operation producing power. It is easy to calculate capacity factors for individual plants or for entire electrical systems such as the entire PJM Interconnection region. While there are lots of reasons why capacity factors for individual plants would differ from the general capacity factor of all plants in a given region, the two factors should be generally in line with each other.
When we look at FE’s report, we see FE’s engineers using a capacity factor of 65%-85% to represent the range of time the Harrison plant would remain in operation. We also see in the report that FE’s engineers use a capacity factor of 25% for combined cycle natural gas generation.
Here is the overall capacity factor list for all kinds of generation in PJM taken from PJM’s State of the Market report from August 2012. This report covers the period ending in June 2012.
As I noted above, you would not expect capacity factors of individual plants and regional systems to coincide exactly with each other, but something is going on when FE’s capacity factors are so far removed from the actual capacity factors in PJM. As you can see, the PJM capacity factors for steam turbine plants, such as Harrison, have fallen from almost 50% to a little over 40% in just one year. This is nowhere near the 65% to 85% capacity factor that FE uses in calculating levelized cost for its Harrison plant. By the same token, the capacity factor for combined cycle natural gas plants in PJM has jumped from a little under 42% a year earlier to over 61%. This is a far cry from the 25% capacity factor FE uses to generate a levelized cost for its combined cycle natural gas straw man. Note also that the capacity factor of one type of generating plant over another has no impact on your cost of electricity if you are buying power on the open market.
Pam Kasey published an excellent account of the whole situation over at Grounded. As Cathy Kunkel of Energy Efficient WV notes in Kasey’s story, if the levelized cost difference between the Harrison purchase and buying power on the open market is only $1 per megawatt hour, then any small changes in how you calculate those costs could have a big impact on which is the better choice. What if the capacity factor of the Harrison plant is less than 50% (still a generous assumption given the overall PJM figure)? What if FE’s coal/gas price assumptions are wrong even a little bit? That $1 advantage might as well be zero, considering how many assumptions it is based on.
There is another issue that FE never addresses and which Kasey covers extensively in her article. FE claims that the demand for electricity from the two WV utilities it owns will increase at a rate of 1.4% per year. FE’s engineers simply accept that number as a given. But most states around WV has energy efficiency standards which require their utilities to maintain growth rates well below that 1.4% rate. What if WV imposed the same energy efficiency and demand reduction standards that FE operates under in both PA and OH? Could that number be reduced to 1.2%, or even 1%?
What would be the impact on the Harrison plant deal if demand growth were reduced to 1.2%? Remember my description of risk above? If WV rate payers owned all of the Harrison plant, even if the plant produced less electricity, rate payers would still have to pay the same amount of money for purchasing and maintaining that plant. The plant would use a little less fuel and labor, but WV rate payers would still be stuck for a large part of the costs which would remain the same regardless of how much power they sold. As explained above, if WV rate payers, through Mon Power, did not buy the Harrison plant and Mon Power was just buying power on the open market, Mon Power would just buy less power if demand went down. WV rate payers would capture all of these savings, instead of having to pay for unneeded power plant capacity.
FE’s bogus “plan” shows clearly why WV needs integrated resource planning, overseen by the PSC and not the power companies. Integrated resource planning would require power companies to report on all costs and benefits of all sources of electricity and rate payer savings, instead of cherry picking numbers that let them do what they want to.
WV Consumer Advocate Byron Harris has exactly the right idea. Here is his comment to Pam Kasey:
Harris said he’d like to see the commission require a true integrated resource plan that fully analyzes the costs and benefits of energy efficiency and demand response alongside supply-side resources.
And he’d like to see utilities put out requests for proposal to fact-check their internal analyses of lowest-cost alternatives.
Yes, real facts and real costs and benefits. Then put out requests for any companies that can meet the requirements and see who can do it at the lowest cost.