October 18, 2018 | Barry Cassell
The PJM Interconnection power market is undergoing profound shifts in electricity production, with one bankruptcy case being a major part of that shift, and another bankruptcy case having implications for the market, but little clear impact.
These events are happening at the same time that new gas-fired power plants are getting ready to come online and new pipelines are bringing low-cost Appalachian gas within easy reach of any gas power plant that serves the region.
In this issue of Get the Point, we look in detail at the companies on the power generation side of the business that are driving this change.
The big picture
Let’s start with the big picture. PJM manages the power grid in all or parts of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia. It administers a competitive wholesale electricity market, and also plans regional transmission expansion improvements to maintain grid reliability and relieve congestion.
The mix of power in the region is changing as aging plants retire and more efficient facilities, often powered by different resources, are coming online. Monitoring Analytics LLC, the independent market monitor for PJM, said in a recent report about power plant retirements in PJM: “Between 2011 and 2020, 39,125.5 MW have been, or are planned to be, retired. Of that, 13,201.9 MW are planned to retire after March 31, 2018. In the first three months of 2018, 160.2 MW were retired. Of the 13,201.9 MW pending retirement, 6,296.5 MW (47.7 percent) are coal units.”
The report added: “A significant shift in the distribution of unit types within the PJM footprint continues to develop as natural gas-fired units enter the queue and coal fired steam units retire. As of March 31, 2018, there were 58,962.9 MW of natural gas-fired capacity active, suspended or under construction in PJM. As of March 31, 2018, there were only 108.0 MW of coal fired steam capacity active, suspended or under construction in PJM. With respect to retirements, 6,296.5 MW of coal-fired steam capacity and 1,471.8 MW of natural gas capacity are slated for deactivation between March 31, 2018, and December 31, 2021. The replacement of coal-fired steam units by natural gas units will significantly affect future congestion, the role of firm and interruptible gas supply, and natural gas supply infrastructure.”
One company, a bankrupt subsidiary of FirstEnergy Corp., is responsible for a large share of those projected retirements.
FirstEnergy Corp. a few months ago put wholesale power subsidiaries like FirstEnergy Solutions (FES) and FirstEnergy Generation into bankruptcy protection as the parent company shifts its focus for the future to regulated utility subsidiaries. That has helped push thousands of megawatts of generation in PJM to the brink of shutdown. That generation was mostly orphaned earlier this decade when Ohio deregulated the power generation end of the utility business, leaving these plants to compete in a low-priced power market that is increasingly dominated by new combined-cycle gas plants.
FES and other wholesale power subsidiaries of FirstEnergy Corp. went into Chapter 11 protection on March 31 at the U.S. Bankruptcy Court for the Northern District of Ohio. FES on Aug. 29 announced that it is closing a new series of plants due to a PJM market environment that fails to adequately compensate generators for the resiliency and fuel-security attributes that the plants provide. (FirstEnergy has made an open plea to the Trump Administration to enact policies to protect such plants, particularly coal-operated, with no firm policy like that in place yet.)
That new slate of FES plant closures, plus others that were previously announced, would proceed on the following schedule:
Pleasants is currently controlled by a FirstEnergy Corp. subsidiary, Allegheny Energy Supply, that is not in bankruptcy. But a deal with FES creditors was recently struck to transfer this coal-fired plant into the bankruptcy case by Jan. 1 of next year, if it isn't sold first. The plant became a shutdown target when an effort failed earlier this year to transfer plant ownership to Monongahela Power, a regulated utility subsidiary of FirstEnergy Corp.
Meanwhile, NRG Energy subsidiary GenOn Energy has been reorganizing in recent months in Chapter 11 bankruptcy protection. GenOn has power plants both within PJM and outside of it. While the FES bankruptcy case is more about the after-effects of utility deregulation in Ohio, GenOn’s case is more about the fundamental poor economics for many power generators. Also unlike FES, GenOn has mostly been reorganizing around what it has, with some strategic power plant sales made, through a workout of debt issues with lenders.
Recently, GenOn worked out a deal with creditors to put its NRG REMA LLC subsidiary, which has not been in Chapter 11 up to now, through what should be a quick “pre-packaged” Chapter 11 reorganization. That deal with creditors is mostly about NRG REMA getting rid of burdensome leases on minority stakes (16%-17% in each case) in two coal-fired power plants, Keystone and Conemaugh in Pennsylvania.
The company also restructured its lease for 100% of the Shawville power plant in Pennsylvania, which underwent a coal-to-natural gas conversion earlier this decade. "The Shawville Facility Lease will be amended to enhance the lessee’s flexibility to monetize some or all of the portfolio and/or renew the Shawville Facility Lease upon expiration in 2026, without modifications to the cash rent obligations thereunder," said a bankruptcy support document. Shawville has 597 MW of gas-fired capacity, plus 6 MW of oil-fired generation.
The companies subject to this new bankruptcy case are NRG REMA, GenOn Northeast Management Co., GenOn REMA Services Inc. and NRG Clearfield Pipeline Co. LLC. After the reorganization, GenOn would pull NRG REMA's subsidiaries into the GenOn corporate structure, a place where they aren't currently.
"The Plan will significantly reduce long-term rent obligations and preserve the REMA Debtors’ existing liquidity, resulting in a stronger, de-levered balance sheet," said a bankruptcy document about the overall goal of this pre-packaged Chapter 11 plan.
NRG REMA has 15 power generation assets and conducts operations in Pennsylvania and New Jersey, in the PJM region. It owns 12 of those plants outright. Among them are:
Again, the GenOn/NRG REMA bankruptcy cases involve relatively little in the way of power plant shutdowns in PJM. Even those minority stakes that NRG REMA is giving up in Keystone and Conemaugh probably will keep running when back in the hands of the current owners.
And more power plant shutdowns are in the works in PJM outside of the FirstEnergy and GenOn bankruptcy cases.
For example, there is a recent decision by American Electric Power (AEP) to retire by May 2020 the last coal-fired unit at the Conesville power plant in Ohio. AEP told plant employees on Oct. 5 that the company intends to close the 1,590-MW Conesville plant by May 31, 2020. There are market conditions that could result in two of the generating units at Conesville (Units 5 and 6) closing as soon as May 2019. AEP had previously announced that it would close those two units in 2022. AEP expects Conesville Unit 4 to operate until May 2020.
AEP, like FirstEnergy, has been severely impacted by utility deregulation in Ohio. But it is pursuing power plant shutdowns outside of bankruptcy, including a big slate of them in 2015 to comply with the federal Mercury and Air Toxics Standards. It has also since sold the merchant 2,600-MW Gavin coal plant in Ohio and sold its stake in the merchant Zimmer coal plant, also in Ohio.
AEP in its Feb. 23 annual Form 10-K report showed only three coal plants in the merchant category still left under its AEP Generation Resources subsidiary, one of which, the Big Stuart plant in Ohio, was retired earlier this year. They are:
Stuart is a good example of a “run to failure” policy for owners of targeted power plants. One unit there suffered a mechanical failure in 2017 that wasn’t considered worth fixing because it was due to be retired a year later. Consequently, it was retired at that time, ahead of the other three coal units at the plant. “Run to failure” could have an impact on the timing of this next round of power plant shutdowns.
While the slate of FES shutdowns dominates the pending deactivation list in PJM, other notable examples of recent or planned closures are:
Facility starts keep region in balance
There are a number of gas-fired projects in the PJM region that are coming on-line to help take up the slack of all of these closures, continuing a trend over the last several years. As the graph from the Energy Information Administration shows, natural gas power plants have been replacing closed coal capacity.
More is coming, including:
These facilities represent a continuation of the shift in the resource mix in the PJM and a major opportunity for Appalachian-sourced gas. Read OPIS PointLogic for the latest developments on new power projects and pipelines serving the PJM, as well as how market conditions are affecting prices at key hubs serving the region.