Electricity choice on the chopping block in Michigan as state debates reliability, renewables

Clean energy and efficiency could be the key to unlocking a bitter dispute over reliability and choice in the Great Lakes State.

As the Michigan Senate takes up energy law reforms this fall, the future of the state's utility sector is up in the air.

Only one thing is clear: The state faces an energy transformation, but what role the state's electric utilities and alternative energy suppliers will play is the subject of intense debate.

Two expansive proposals — Senate Bills 437 and 438 — are moving together through the chamber along with companion legislation in the Michigan House. Both are still undergoing revisions, and have very different aims.

SB 437 focuses on managing the state’s regulated electric utilities and the deregulated alternative electricity suppliers (AESs) who provide electricity to the 10% of customers enrolled in Michigan’s Electric Choice program.

SB 438, meanwhile, centers on updating Michigan’s renewable energy and energy efficiency standards, along with its solar net metering policy.

DTE Energy and Consumers Energy, the state’s two dominant investor-owned utilities, have focused their lobbying efforts on SB 437, worried that electric reliability could be threatened without its passage.

The utilities face vehement opposition from Energy Choice Now (ECN), a nonprofit group that advocates for energy choice, including the AES companies and their customers. The group accuses the utilities of trying to “kill” the electricity choice mechanism.

The utilities, however, have shown less engagement with the renewable energy debates in SB 438, which some stakeholders think could prove politically pivotal for both bills. Though prospects for a grand bargain are dimmed by election year tensions, observers say there could be a deal to be done if clean energy and efficiency are seen as solutions to the state’s mounting reliability concerns.

SB 437 and reliability concerns

The Electricity Reliability Act (SB 437), sponsored by Republican Senator and Energy and Technology Committee Chair Mike Nofs, has two key proposals among its utility regulation and electric rate provisions.

There is broad support for provisions that authorize the rate basing of power purchase agreements (PPAs) by the utilities. There is similarly little debate about decoupling, a provision allowing regulated utilities to offer new programs and services, or a study by the Michigan Public Service Commission (PSC) of performance-based ratemaking.

More contentious are provisions that would require Michigan’s utilities to periodically submit an integrated resource plan (IRP) to the PSC, and a requirement that AESs to show proof of their ability to meet 100% of customer supply needs for two years in the future. Both are associated with a rising concern about the state’s need for new generation capacity.

The requirement that AESs either own or contract for supply for two years ahead is the most controversial issue. Critics argue it would kill the state’s energy choice program.

Michigan’s Electric Choice program allows customers to select a retail electricity provider over their incumbent utility. It was opened to 100% of Michigan’s electricity customers in 2000 with substantial ratepayer compensation to the utilities for expected revenue losses. No more than 18% of consumers ever selected retail suppliers.

In 2008, Democratic Governor Jennifer Granholm convinced the utilities to accept a 10% renewables mandate by 2015 in exchange for reducing the choice program to 10% of state customers. Enrollment was only 3% at the time.

The recession and historically low natural gas prices have helped push the program to full subscription, and there is a waiting list made up primarily of overhead-conscious commercial and industrial customers.

SB 437 “will kill electric choice,” the Energy Choice Now website declares. The bill’s requirement that AESs guarantee their supply over two years in advance imposes a financial burden that destroys their value proposition, ECN argues.

The longer-term supply requirement is necessary, its advocates argue, because many of Michigan’s in-state generators are retiring, threatening a shortfall.

Aging coal plants, built to power Michigan’s industrial expansion in the postwar years, are now closing down due to age or the inability to meet contemporary pollution standards. Many more are scheduled to follow.

“We have a utility sector in transformation,” DTE Government Affairs Vice President Renze Hoeksema told Utility Dive. At least seven plants representing 5,200 MW or more of capacity will be closed through 2023 and more capacity may be lost to unscheduled closures, he said.

Recent PSC assessments of Michigan’s lower peninsula, which holds most of the population, show there may be some concern about meeting its Resource Adequacy (RA) requirement in the near term. RA is the amount of generation required to ensure reliable electricity service by the Midcontinent Independent System Operator (MISO).

Michigan is in Zone 7 of MISO, the largest U.S. grid operator. The nonprofit oversees reliability and grid planning for 195,000 MW of capacity in $24.7 billion regional wholesale market from Manitoba to Louisiana and from Indiana to Eastern Montana.

Back in June, MISO warned of potential generation shortfalls as soon as 2018 due to retirement of older coal-fired generators in the state’s lower peninsula. Its survey of generators projected a 300 MW shortfall by June of next year that would need to be covered by power imports. The shortfall could double by 2021, MISO said.

Several notices from MISO this summer announced Michigan demand was nearing alert events requiring contracted-for usage reductions, Hoeksema said.

The alerts were also a concern for Consumers Energy, Spokesperson Daniel Bishop told Utility Dive. They were “just one step shy of a public appeal [for demand reductions] that would have meant factories closing and people being sent home from work.”

As the system operator, MISO takes ultimate responsibility for reliability. The most recent study from the Michigan PSC shows over 3,500 MW of transmission line capacity available to import generation from other states in a peak demand emergency.

“Michigan is a peninsula. It has limited transmission into the state,” Hoeksema said. “As the region’s capacity is retired, the increasing load either must be met or use has to be cut. It is just simple math,”

While it represents a relatively small part of the state power market, the state’s thin resource adequacy margin has brought the Electric Choice program into the debate.

Michigan’s Choice market represents almost 2,000 MW of the state’s approximately 22,500 MW total load.

Regulated utilities own or contract for their generation and are granted guaranteed returns through ratepayer bills. Retail providers supply customers by trading in wholesale electricity markets and buying from independent power producers (IPPs). They would meet any resource adequacy requirement in the same way.

If the alternative suppliers are “relying on excess [capacity] that was previously there,” Hoeksema said, a shortfall could result even if the regulated utilities meet the demands of the 90% of the market they serve.

Energy Choice Now argues the reliability concern is a red herring, and that alternative electric suppliers would be undercut if they were forced to prove customer supplies for two years in the future.

Many AES companies currently contract with MISO to provide resource adequacy, ECN notes, but MISO capacity contracts are only for one year ahead. The ISO’s Competitive Retail Solution (CRS), now in development, will be a three-year-ahead contract that could resolve the issue. But it won’t be ready until 2018 or 2019.

SB 437 would allow AES companies to use the new MISO contracts to verify their ability to meet customer needs, said Nofs, who authored the 2008 bill to reduce the choice program to 10%. ECN argues lawmakers should delay imposing the requirement until the product is ready, but Nofs said the situation is too urgent.

“Plants are shutting down and we can’t wait,” Nofs said. “We will need more power in two years to four years and every energy provider in Michigan has to take care of the local requirement for their own customers.”

Both Nofs and the utility representatives expressed concern that AES companies not covering their commitments could result in shortfalls.

“437 presumes that if you are an electric supplier, you will meet your responsibility,” Hoeksema added. “Utilities invest over decades. This asks AESs to demonstrate firm supply commitment, either by contract or some other arrangement.”

The sentiment echoed recent comments from Consumers CEO Patti Poppe, who said the reliability threat is like “a warning light flashing on the dash of our car” and AES companies are “uninsured drivers on our highways.”

The AESs have several options, Nofs said. They can contract for supply from another AES, build their own generation, form a joint venture with other AESs to build generation, or contract for utility- or IPP-owned supply. But they “don’t want to take the responsibility for their own customers because it will cost so much.”

Choice advocates: reliability a red herring

“There are different AESs,” 5 Lakes Energy’s Jester said. Most probably sell their own generation. A few AESs are merchant plant operators or affiliates of utilities regulated in other states and sell generation from plants outside Michigan. A few are “re-marketers” and buy in the wholesale market.

ECN and other energy choice advocates say MISO and the Michigan PSC are not unequivocal that reliability must be addressed immediately.

The MISO notifications of extreme weather events touted by the utilities as indications of reliability threats were not limited to Michigan, but covered much of the MISO footprint, said Jay Hermacinski, a spokesperson for the grid operator.

MISO reliably met load throughout the day for each of the events, he added.

Rather than meet a genuine and imminent threat to reliability, “[SB 437] would advance the agenda of the utilities to kill the choice market,” according to State Senator Michael Shirkey (R).

Postponing the requirement for the two-year supply guarantee until the MISO CRS product is available would resolve the entire conflict, he said, “but the utilities trying to use the reliability excuse to make major changes.”

“It is easy for the utilities to cloud the facts,” added ECN Executive Director and former Michigan legislator Wayne Kuipers. “They are using the longer-term need for new capacity as a bogeyman without a clear understanding of what MISO is and the role they play.”

It is not wrong to ask AESs to make longer term commitments, Shirkey recently wrote in a Detroit News op-ed, but “jettisoning regionalization and all the good things that go with being part of MISO to satisfy the agenda of the utilities” is misguided.

MISO can meet Michigan needs but it needs time to develop the three year contracts, he added. “There is no emergency but the utilities are offering doomsday scenarios.”

A recent fire at DTE’s St. Claire Shores coal plant took 17% of the utility’s supply offline, Shirkey pointed out. “They went out to the MISO market and other markets and procured it. That’s what the reserve margin is for.”

Besides the “complex and onerous requirements and restrictions” SB 437 imposes on AES companies, added former PSC Chair Laura Chappelle, it is “openly protectionist to in-state utilities at the expense of similarly-situated out-of-state providers.”

That protectionism is likely to result in lawsuits, Chappelle said. A 2013 decision on Michigan’s renewable energy law from the U.S. Court of Appeals for the 7th Circuit found that “Michigan cannot, without violating the commerce clause of Article I of the Constitution, discriminate against out-of-state renewable energy,” she noted.

Hoeksema does not concur. It is “pure politics of language to say we are part of a region and we should not have to worry,” he said. “If you want reliability, you have to build generation in the state. Electrons go to the load. As the region gets tight, there will be less for Michigan.”

Regional reliability debates

Opponents of SB 437 generally do not deny Michigan faces generation shortfalls sometime in the future, but they say utilities are exaggerating the urgency and ignoring MISO’s ability to help.

“The grid is complex,” Union of Concerned Scientists Senior. Energy Analyst Mike Jacobs told Utility Dive. “In simple terms, Michigan plants retiring cannot be perfectly and completely replaced by plants outside Michigan,” he said. “But there is also more to the grid.”

Publicly available MISO transmission planning information clearly shows significant new lines that will likely be in service by 2019, he added.

The July 5, 2016, testimony of energy consultant Alexander Zakem to the PSC is also important in the reliability debate, Chappelle said.

“The results of the MISO Planning Resource Auction in March 2016 for the Planning Year of 2016-17 show that Zone 7 imported 872 MW, while the transmission Capacity Import Limit was 3,521 MW – far above the import amount,” Zakem told the commission.

“Zone 7 had a technical ‘deficit’ of 872 MW, there in fact was adequate capacity available to Zone 7 from outside the zone – up to 3,521 MW total,” he went on. “Actual usable capacity considers both the resources within Zone 7 and the amount that can be imported via the transmission system.”

In support of their claim that reliability is at imminent risk, Nofs and the utilities cite an August 9 letter to MISO from Michigan Agency for Energy Executive Director Valerie Brader and PSC Chair Sally Talberg requesting “a study to help the State of Michigan better understand the effects of declining reserve margins in emergency situations.”

A study would help “understand the effects of declining reserve margins in emergency situations,” they wrote. But they do not say emergencies are at hand.

“With system-wide capacity shortfalls in MISO anticipated as soon as 2018,” the letter explains, “it is critical for Michigan to understand whether our system still can support the level of reliability it was able to show a few years ago.”

“MISO is in the process of reviewing both requests,” Hermacinski said. “It is too soon to comment.”

The MISO region “is projected to have adequate resources to meet its Planning Reserve Requirement for 2017,” he added. “Additional action will be needed to ensure sufficient resources are available going forward.”

Brader and Talberg are “looking ahead to prepare for every eventuality,” Shirkey wrote recently. “To hold up their letter as an argument in support of the massive new costs and regulations in SB 437 is questionable.”

A June PSC order found no anticipated “local reliability problems in Michigan ‘in the foreseeable future,’” he added.

Zone 7 is not likely to fall short of its Local Clearing Requirement (LCR) in the 2017/2018 planning year, the PSC Staff reported in June.

The lower peninsula can expect to import approximately 270 MW during the peak demand period, which is “well below” the zone’s Capacity Import Limit (CIL) of 3,521 MW, staff added.

There is, however, uncertainty over the longer term “due to announced plant closures between 2020 and 2023,” staff wrote.

“If a significant mechanical failure event should occur in the near-term at a DTE unit slated to retire by 2023,” it added, “it is likely that DTE would suspend operation of the unit, rather than repair it and return it to service.”

Staff found “a major risk to resource adequacy in Michigan” from a tightening of the MISO region’s overall capacity. “Heavy reliance on transmission import capability, and a tightening capacity outlook throughout the MISO, would only exacerbate the local reliability issues.”

There is not an “imminent threat” for Michigan, Staff emphasized, but “prudency requires evaluating a multitude of supply options to meet capacity obligations in the near- and long-term.”

There is one other important, though imprecise, factor, Chappelle pointed out.

The ISO’s surveys of its system, including the most recent one, consider all "publicly-announced potential retirements or suspensions," but do not include “that vast majority of ‘planned’ or ‘potential’ generation additions,” she said.

This over-emphasis on capacity losses and under-emphasis of new capacity is likely why the ISO’s survey results show continuously improving resource over time, she added.

Renewables: the key to a deal?

In contrast to SB 437, SB 438, The Clean and Efficient Energy Act (SB 438), is much less controversial and more wide-ranging legislation.

Its most-discussed provision would increase the state’s 10% renewables by 2015 mandate to 30% renewables and energy efficiency by 2025. But it would also change the mandate to a voluntary goal — one that critics say would be met with a combination of market forces and efficiency gains even if no legislation existed.

The bill would also significantly reduce the value of the state’s current retail rate net energy metering (NEM) credit by making it a wholesale rate, buy-all, sell-all arrangement. Under the program, solar owners would be unable to get the retail rate for solar energy-generated electricity, even if it is consumed onsite.

Both DTE’s Hoeksema and Consumers Energy Spokesperson Daniel Bishop showed little interest in getting into the details of 438, saying their utilities are generally supportive of renewables.

The increase in the mandate was made largely to attract enough Democratic support, Shirkey said, but the effect of the legislation would be “neutralized” by turning it into a goal.

If the GOP leadership and utilities would push for stronger renewable energy and efficiency provisions, observers said there could be a deal struck to advance clean energy in exchange for changes to the choice program in SB 437.

“With Democrats,” Nofs said, “we should have more than enough votes to pass.”

The Democrats will likely support a deal if it includes a stronger energy efficiency and renewables mandate and leaves the retail rate net metering in place, Jester said. Margrethe Kearney, attorney for the Environmental Law and Policy Center in Michigan, concurred, but neither would speculate on exact numbers for a mandate.

Michigan Senate Minority Leader Jim Ananich (D) declined to comment on a possible deal, referring Utility Dive to Sen. Hoon-Yung Hopgood, the ranking member on the Senate Energy Committee. Hopgood did not return requests for comment.

Even if the potential of the deal is there, there is still “substantial possibility that nothing will happen this year” because of the uncertainty surrounding the national election, Jester said.

But the utilities and some Republicans are willing to support an increased mandate, he added. “There is a deal to be made, though maybe not this session.”

“Sen. Nofs may want to prove he can get legislation done but even if he pushes it through, the bills still have to pass the House and House Democrats may want to delay to see the election’s outcome,” Kearney said.

“Reliability is incredibly important but we would do better if utilities thought about renewables as part of the solution instead of as something that threatens business as usual,” she added. “There is a distinction between being committed to reliability and using reliability as your shield.”

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