The deregulation of Ohio’s electricity sector, the results of PJM's 2016 capacity auction and the overhaul of its capacity market have put AEP’s generation portfolio in regulatory limbo.
American Electric Power, which owns 38,000 MW of capacity, is looking to “mitigate the impacts of the—for lack of a better description—growing pains of dealing with the negative circumstances of the 2016 PJM capacity auction and Ohio deregulation-induced financial impacts,” AEP Chairman, CEO and President Nick Akins told analysts last week on an earnings call.
20% of investor-owned Ohio generation will be retired by mid-2015, according to AEP Ohio president and COO Pablo Vegas, and "current market conditions are such that even viable plants that are environmentally compliant may be forced to shutter for economic reasons."
“There will be shortages” in the coming year, Akins said. “This is … a sore subject for me because—as we look at the retirements that are occurring in 2015—if we do have a hard, hot summer or, even worse, a cold winter in '15, we're going to have serious issues.”
“[W]ill the system actually operate the way it was intended to operate?" Akins wondered. “I think it's going to be on the ragged edge of its ability to do that.”
AEP wants to bring stability to generation in Ohio by improving the economics of generation and guaranteeing some of the costs to run power plants. In order to do that, AEP filed a proposal with state regulators for a power purchase agreement rider for four merchant power plants owned by the Ohio Valley Electric Corporation (OVEC). AEP owns 39% of the company while FirstEnergy, Duke Energy, and Dayton Power and Light Company also own shares.
AEP recently expanded the proposed rider to include nine other generating units totaling 2,700 MW.
The rider would allow AEP Ohio (the company's regulated utility in Ohio) to take the output of the plants and bid them into the PJM market, passing on the resulting costs—or benefits—to its customers. While the proposal has its critics, AEP believes it is legal and will help "take volatility out of the equation," particularly in the capacity market.
“The PPA is somewhat of a Band-Aid approach to maintaining existing generation,” Akins said.
Regulators have yet to make a decision on the proposed PPA rider. Many, including Akins, believe the commission will wait until after the upcoming election to decide.
“[The proposal] raises the question of, 'What does the future mean for Ohio in terms of the building of new capacity within the state?'” Akins said. “[Y]ou still have further issues to define within Ohio because clearly they were depending upon the PJM market construct to provide … for capacity to be built, but that's not happening.”