Michigan's crisis: Can the coal-heavy state embrace renewables and efficiency?
Michigan officials and electric utilities are rushing to solve the state's power difficulties ahead of significant expected capacity shortfalls.
Last week, Gov. Rick Snyder (R) unveiled a broad strategy that calls for significantly more renewables and energy conservation programs in a state traditionally fueled by coal and known for its inefficiency.
The reliance on coal is one factor behind the state's precarious energy landscape. Ten plants are scheduled to be retired as new federal regulations on air toxins like mercury and dioxins force older, less-efficient facilities offline. Combined with the state's partially deregulated retail market, the situation has Michigan potentially facing a 3 GW energy shortfall next year. And in the Upper Peninsula residents are still hoping to avoid about $100 million in rate increases to keep a vital generator running.
“In the past few years we've made tremendous progress on Michigan's energy policy,” Snyder said in a measured, chart-filled presentation where he sketched out his plan to meet the state's energy needs. “But there is a big problem. It's really simple, and it's called coal.”
More than half of the Michigan's generation mix will come from coal this year. That's compared to gas, which makes up just 13%, and renewables which clock in at less than 10%. "Reducing energy waste" — Snyder's commonplace phrase for efficiency and demand side management programs — is expected to help meet about 7% of the state's demand.
Michigan is also finally growing economically after years of stagnation and stubbornly high unemployment. That growth will make it necessary to plan for at least some increase power demand.
Under Snyder's plan, Michigan would look to reach at least 30% clean energy in the next 10 years through a mix of renewables and efficiency. And that number could reach as high as 40%, depending on market conditions and how much waste can be eliminated — a remarkable shift for a state typically in the top-10 of coal consumption.
“We know that renewable energy has dropped significantly in cost, making it cost competitive or close to cost-competitive. We are now hearing firm 20-year price quotes for wind that are less expensive than coal or natural gas,” Snyder said.
The plan includes multiple price scenarios, but if renewables beat natural gas on cost then Snyder's plan would have Michigan targeting 40% of its energy needs from the cleanest sources.
Energy shortfall looms next year
Michigan faces a potential 3-GW shortfall beginning 2016 — the result, according to MISO, of Tenaska Capital Management's decision to connect a power plant located in the region to the PJM Interconnection grid. And officials from DTE Energy and Consumers Energy have warned lawmakers that the state's shortage next year could meaning power prices spike and send markets into disarray — with the situation poised to get worse.
Already, the state's residents use 38% more energy than the national average, and pay on average 6% higher rates on heat and electric bills.
The shortfall — which could power about 2 million homes for a year — will increase over time as some 100 coal-fired units in MISO go offline by spring 2016, largely due to the EPA's MATS rule and low natural gas prices. In the coming years, utility executives have estimated Michigan will retire 60% of it's coal-fired plants and 30% of its overall generation.
Irene Dimitry, vice president of business planning and development for DTE, told a Michigan House energy committee that the shortfall “greatly increases the chances that we will be forced to take emergency actions during peak times.”
By 2023, the capacity shortfall could reach 24 GW.
Shrinking reserve margins have spiked power prices, Dimitry said. And while the utility has worked to contract for lower-cost power when it can, retail marketers appear to have relied on the short-term wholesale market. That potentially exposes their customers to large price spikes, which in turn could send those choice customers back to the regulated utilities.
“While the excess capacity that these customers have historically relied on is disappearing, their electricity needs are not,” Dimitry told the panel.
Consumers Energy Vice President of Energy Supply Operations Tim Sparks gave a presentation which painted a similar picture: Up to 16 GW of projected Midwest coal retirements. “Michigan's energy supply is hardest hit within MISO,” he said, but cautioned the grid operators market signals are “insufficient to provide long term investments.”
The utility's plan to meet demand includes 900 MW of peak demand side management, of which 460 MW is expected from efficiency reductions.
More on the governor's plan
Snyder's plan to increase renewables and draw down coal usage is not as ambitious as the 20% renewable portfolio standard by 2022 proposed by Michigan Democrats, but still represents a significant step for a GOP governor in an industrial state. And given that the Democrats are a minority in both legislative houses, any serious opposition to the plan would have to be at least somewhat bipartisan.
Snyder's plan banks hard on reducing demand, saying the state needs to eliminate energy waste to meet an additional 15% of its energy needs by 2025. The governor said the plan encourages a discussion with the state Legislature about programs that help people replace older, wasteful items like furnaces, and allow utilities to help with methods like on-bill financing for new devices.
The governor also made a push for smart meters, saying power can be made more reliable by helping utilities locate outages and restore power more quickly. Michigan has a goal of less than one power outage a year per resident on average, and to have those outages last less than two and a half hours.
Snyder also outlined in his talk a method of addressing the state's customer choice issues, as well as changes to the plan to solve the state's Upper Peninsula power crisis. That region's power market was thrown into disarray last year when We Energies lost Cliffs Natural Resources as a customer. The mine operator accounted for more than 80% of the plant's output, meaning it buying power from an out-of-state source would potentially mean residents would pay millions more for power.
We Energies had reached a agreement to sell the plant, but a power purchase arrangement between Cliffs and the Upper Peninsula Power Co. could not be reached, scuttling the deal. But Snyder said We Energies has now agreed to provide service, as long as Cliffs remains a customer, until the plan closes.
“Just as before, the new plant to replace [Presque Isle Power Plant] will be constructed no later than 2020, and will be supported by a series of business agreements,” Snyder said. “We look forward to working with legislative partners and the utilities to further cement Michigan’s energy independence, by enabling the creation of Michigan-only utilities when that is in the ratepayers’ best interest.”
Snyder also addressed the state's energy choice law, passed in 2008. The law allows 10% of a utility's customers (like Cliffs Natural Resources) to opt to purchase power from out-of-state sources, rather than Michigan utilities. Earlier this month, Republicans in both of Michigan's legislative houses introduced legislation to eliminate the law, while others want a return to full regulation.
Snyder, for his part, said for now he will recommend keeping the 10% cap. However, he is also proposing that retail providers be required to guarantee they have sufficient generation to meet customer loads on a rolling five-year basis, ensuring a more stable market.
“Our current system does not work particularly well,” Snyder said. “I'm not suggesting eliminate the program … [but] the utility provider needs to guarantee capacity.”
Lingering issues with energy choice
Snyder's plan to keep the choice program capped at 10% frustrated advocates who want the state's energy markets fully deregulated. Energy Choice Now, a Michigan advocacy group pushing for more electric competition, noted the 10% of customers who are able to shop saved $200 million last year.
“Allowing just 10% of Michiganders to enjoy massive savings over the utilities by choosing their electricity supplier is wrong,” said Wayne Kuipers, executive director of ECN. “Since 2008, Michigan lawmakers have imposed of system of winners and losers in this state, with 90% of us being the losers.”
According to ECN, there are more than 11,000 job providers, schools, and residents in the queue, who signed contracts to leave the utilities for lower cost providers but are prevented from doing so by Michigan law. Had those customers been able to choose their electricity supplier rather than the state-mandated utility, Kuipers estimated they would have saved an estimated $265 million last year alone, about a quarter of Michigan consumers a part of the electric choice program today.
“There are just two entities that benefit under Michigan’s monopoly: Utilities and their shareholders. This monopoly that has resulted in Michiganders paying $10.5 billion over market rates since 2009,” Kuipers said.
Follow Robert Walton on Twitter