TODAY’S STUDY: MICHIGAN ON THE VERGE OF POWER PROBLEMS (IS THIS THE FUTURE?)
Electric Reliability in Michigan: The Challenge Ahead
November 19, 2014 (Public Sector Consultants)
Michigan faces a near-term challenge of ensuring an adequate supply of electricity for its residents and businesses. This is not just an issue in Michigan; across the country, potential shortfalls in generation supplies are impacting more that 66 million customers (1). This issue is caused by a lack of adequate resources to meet consumer demand at all times. As soon as 2016, the retirement of aging coal plants (driven by federal environmental regulations and high costs) will cause Michigan’s electric reserve margins to dip below target levels. Federally regulated wholesale markets established over a decade ago have failed to ensure adequate resources to meet customer needs in Michigan, the Midwest, and throughout many parts of the country.
Michigan’s hybrid market structure1 complicates the state’s ability to address its capacity needs. The current regulatory framework creates uncertainty for energy providers as to which customers need to be served and when. Due to the hybrid market structure, some customers avoid paying the utilities’ resource planning costs, which makes it difficult to ensure adequate energy supply. While reforms were made to Michigan’s retail electric market in 2008 to mitigate some of these concerns, a fundamental flaw in the state’s electricity market structure remains: no entity has been clearly assigned the responsibility for ensuring adequate, long-term supplies for customers participating in electric retail open access. An incumbent utility2 is obligated to provide service in a nondiscriminatory manner to customers that return to their service from retail open access.3 But in order to ensure that generating capacity for such customers is actually available when needed (while maintaining reliability), the utility has to purchase or build new capacity—potentially years in advance and at a substantial cost. The planning, permitting, and construction of new base load generation4 could take as long as six years by some estimates (2). Additionally, purchasing capacity may become difficult because the cushion of excess generating supply in the Midwest region will begin to disappear in 2016. The requirement to serve an unknown customer base inhibits accurate planning and causes the regulated utility to operate at a higher cost. Absent reform, the current hybrid market structure will either place reliability at risk (assuming the utility does not plan generation to meet the needs of current retail open access customers) or unfairly shift additional costs of new capacity to the utility’s existing customers, while a small fraction of customers served by retail energy marketers get a free ride.5 This flaw has existed since PA 1416 was enacted, but it has become a more pronounced and direct threat to reliability, given the significant number of imminent power plant retirements in the region and the resulting impact on capacity supplies and prices. The challenges created by Michigan’s market structure is especially evident in the Upper Peninsula (see Issue in Focus on page 17).
Although greater reliance on energy efficiency, strategic reductions in energy demand, out-of-state energy purchases, and renewable sources can help bridge the supply gap, even aggressive efforts in those areas will not eliminate the need for new base load power plants to replace lost capacity. Given the long lead times and large capital investments required to plan and build base load plants, the state needs to establish the policy framework to address this impending supply problem in a way that is reliable, affordable, and fair for Michigan residents and businesses. For a brief summary of highlighted elements of this report, see the policy brief version of “Electric Reliability in Michigan,” available online at www.pscinc.com.
The Importance of Reliability
Electricity is such a fundamental aspect of everyday life that its importance and accessibility are often taken for granted—until it isn’t available. It is during those times of crisis that we can clearly see our dependence on electricity and our expectations about its essential reliability.
Disruptions to the availability of electricity are not mere inconveniences—they can cause suffering, fatalities, and financial losses, as well as lasting effects on the overall economy. The Northeast Blackout of 2003, which originated in Ohio, was caused by a software problem that left operators unaware of the need to redistribute power after overloaded transmission lines hit unpruned foliage. Fifty million people in eight U.S. states—including Michigan—and ten million people in Ontario were affected as 508 generating units at 265 power plants shut down. It resulted in the loss of power to six million Michigan residents for up to two days (3,4). Michigan’s economy also lost an estimated $1 billion when businesses were forced to shut down and industrial production stopped. Detroit Metropolitan Wayne County Airport halted operations; General Motors was forced to close its warehouses; Ford Motor Company’s production offices, engineering, and product development facilities ground to a halt; and Marathon Oil Corporation’s Detroit refinery lost 76,000 barrels per day of output (5).
There are many possible reasons for power outages, as shown in Exhibit 1. Weather-related incidences are the most common cause of electric outages. Michigan residents and businesses recently experienced a series of severe storms in the summer of 2014 that downed local distribution lines, causing outages, as did ice storms in December 2013…
Ensuring adequate electricity supply has emerged recently as one of the most critical issues facing Michigan. The abundant supplies of the past few years—magnified by declining demand due to the economic slowdown of the Great Recession—are rapidly coming to a close as aging coal plants retire in the face of federal environmental regulations. Although changes to the regulatory structure at both the national and state level will impact this issue, the fact remains: the state maintains the responsibility to ensure resource adequacy and address the looming capacity challenges Michigan faces. A number of decisions must be made about the right mix of the available resources and how much to depend on energy efficiency, renewable energy, more generating facilities, and other ways to address the capacity shortfall. The complications presented by Michigan’s current market structure must also be addressed, and the state needs to recognize the lack of success that the federally regulated regional transmission organizations have thus far had in supporting new capacity investments. Finally, the state needs to decide how much to relinquish to the federal government by depending on the regional transmission organization and how much control to maintain over its energy future.