Photographer: Matthew Lloyd/Bloomberg

The Ugliest Power Market in the U.S. Is About to Get a Makeover

  • Market overhaul designed to stem a tide of plant retirements
  • Generators including Dynegy to benefit from higher payouts

The U.S. power market paying generators the least for future supplies is getting a makeover to stem a wave of plant shutdowns.

Generators including Dynegy Inc. stand to benefit from higher and more reliable payments through capacity auctions run for southern Illinois and parts of Michigan, though the changes may come too late to save a plant earmarked for closure by Exelon Corp. Going forward, prices will be set three years in advance, compared with two months at present, and generators will get paid more for excess supplies.

The Midwest’s "weaker capacity pricing and comparatively short-term focus make it less appealing” than other markets, Michael Ferguson, director at S&P Global Inc.’s U.S. Energy Infrastructure Group in New York, said by e-mail. The planned overhaul “could improve the market’s standing, and pave the way for investment in new" plants.

The changes come to a market that has seen the defection of companies including Duke Energy Corp. to grids that feature higher payouts and less competition from subsidized generators. The closures have been driven by stricter environmental regulations and low power prices, tied to cheap and abundant natural gas supplies.

Dynegy, which operates seven plants in the region, said flaws in the way the system works have led to the shutdown of plants that account for about 30 percent of power supplies in downstate Illinois. “This will help ensure power system reliability and lower costs in the long run for consumers," David Onufer, a company spokesman, said by e-mail. 

Payouts in the Midwest’s latest annual auction, which act as an insurance policy for the grid operators to ensure supplies can meet expected demand on the hottest and coldest days of the year, cleared at $72 a megawatt-day for capacity. That compared with prices of $100 in the neighboring mid-Atlantic market.

Change will come too late to save some plants. Exelon said it will press ahead with plans to close the 1,069 megawatt Clinton nuclear power plant southeast of Peoria, Illinois, next year.

“Yet another setback for customers and suppliers alike," Paul Adams, a spokesman for Exelon, said by e-mail.

Potomac Economics Ltd., a market watchdog, said it opposed the proposal because it could result in higher price volatility. Payouts to generators “could clear at unreasonably high prices or at unreasonably low prices,” David Patton, its president, said by phone.

The Midcontinent Independent System Operator Inc., which manages the grid, will submit the plan for federal approval in November, with the aim of putting it into force in 2018. Purchasing supply commitments “three years in advance creates a transparent forward price signal,” Jay Hermacinski, a spokesman, said by e-mail.

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