High power prices in the Midcontinent region could last years and could go higher, driven by natural gas prices and soaring capacity costs, according to panelists on a webinar hosted Monday by Voltus, a demand response company.
“This isn't a short-term thing that's just going to last into next year or the year after,” Neil Chatterjee, a senior advisor at Hogan Lovells and former chairman of the Federal Energy Regulatory Commission, said. “I think this could be something that we have to deal with and will persist for a few years.”
Electricity prices largely depend on gas prices, Chatterjee said.
Costs for consumers will continue to rise as gas plants become marginal resources that set electricity prices or are displaced by less costly coal, he said. Interconnecting new generating sources can take years, he said.
The problems in the Midcontinent Independent System Operator’s footprint are simple: a lack of generation, Chatterjee said.
In MISO’s last annual planning resource auction, capacity prices across the central and northern regions jumped to $236.66/MW-day from $5/MW-day a year ago, driven by an uptick in projected electricity use and a dip in power supply.
A capacity shortfall triggered “cost of new entry,” or CONE, pricing across MISO’s seven northern and central zones. MISO uses CONE as the maximum clearing price in its planning resource auction.
The CONE for MISO’s next capacity auction in its central and northern zones ranges from $270.11/MW-day to $300.22/MW-day, according to a presentation by grid operator staff.
For years, some states and load-serving entities believed they could buy low-cost capacity in MISO’s auctions instead of building power plants, according to Chatterjee.
“The end result of that is that badly needed generation has retired, and now the entire region is going to be at an elevated risk of load loss for the foreseeable future,” he said.
U.S. liquefied natural gas exports are resulting in higher domestic gas prices by linking domestic supplies to international markets, leading to increased power prices, according to Jon Wellinghoff, Voltus chief regulatory officer and another former FERC chairman.
“There's going to be more and more LNG exports from the U.S., and what that's going to do is drive up our natural gas prices here and drive up our electricity prices,” he said. “Prices absolutely are going to continue to skyrocket.”
Electricity prices haven’t topped out yet, according to Ted Thomas, senior market advisor for Recurve and former Arkansas Public Service Commission chairman.
MISO is considering switching to a sloped demand curve from a vertical demand curve to help set capacity prices, Thomas said. A vertical demand curve leads to low capacity prices until there is a capacity shortfall. A sloped demand curve results in gradually rising capacity prices before a shortfall.
Demand response can ease capacity shortfalls, according to Thomas and Chatterjee.
States are allowed to opt out of aggregated DR participation in wholesale markets, however. Under Chatterjee’s leadership, FERC in September 2020 issued its Order 2222, which opened up wholesale markets to distributed energy resource participation.
Nine months later, the agency paused its requirement that states allow aggregated DR to participate in wholesale markets. FERC still hasn’t acted on the state opt-out issue, Chatterjee said.
“We're seeing FERC drag its heels on the DR opt-out. We're seeing resistance at the state level,” he said.
Chatterjee warned that policymakers often fail to respond to problems until after a calamity.
“I think there's real risk in MISO right now of not having enough capacity on one or two very, very hot days,” Chatterjee said. “Sadly, it will take a trigger event like that to, in my view, lead to the policy changes that are necessary.”