Natural gas-fired generators are going to find it increasingly difficult to be profitable as lower cost coal-fired generators continue to beat them to the market, and overcapacity of low-cost gas generation keeps power prices depressed, a new report looking at Midwest power markets concludes.

The report also finds that there are opportunities for coal to move ahead in the energy industry as new technologies enable generators to take advantage of its attractive pricing and availability. The economic assessment, which covers the time period of 2002 through 2012, was recently completed by Maryland-based Hill & Associates and Virginia-based BlueWave Resources.

Coal-fired power generation in the Midwest has certain embedded advantages over gas-fired plants “because of the volatility issue and the overhang of surplus generation,” said Glenn Williams, a partner at BlueWave Resources, in an interview with NGI last Tuesday.

Williams said that the study raises a cautionary note related to FERC’s standard market design (SMD) notice of proposed rulemaking (NOPR) that was issued this summer. “The NOPR, if it goes through as written, will have a tendency to mitigate volatility in the marketplace through some rules in terms of having generation tied to load-serving entities,” he said.

“I think we all would like to avoid a California-type of thing, but when it comes to recovering costs, fixed costs…volatility isn’t all bad — it’s somewhat good,” he said. “So the notion of taking volatility out of the marketplace is something that could be very harmful to power merchant plants or people who are depending on non-regulated assets for revenue purposes.”

Another key finding in the study is that fixed-price contracts on the retail side present an issue related to volatility as well, albeit a different one. “What we would like to see for generators is a more gradual increasing of prices, more of a rolling wave type of thing, as opposed to spikes that last for a short period of time and then go away,” Williams said.

What a Hill & Associates model illustrates in the study is consistent with what federal regulators desire, Williams went on to say: “And that is low volatility and low prices for a long time” in the Midwest.

Meanwhile, the report also finds that nuclear power “plays a very critical role” in the Midwest because nuclear facilities are also base merit. “Obviously, the production costs for nuclear power and coal are comparable,” Williams said. “That’s what, again, conspires against a lot of gas generators being successful on a pure market-based approach.”

The study also addresses transmission constraints facing the region. “The mental picture we have is that ECAR [East Central Area Reliability Coordination Agreement] and MAIN [Mid-America Interconnected Network] represent a pool that has a wall around it and there are constraints all around,” Williams told Power Market Today.

But Williams said that if a proposed 765-kV line is put in place “in the study period, it alters the power flows into PJM East significantly.” He said that the power line, which is being developed by American Electric Power, “could be very helpful to resolving some of the constraint issues, but not entirely, as it turns out. What it does is it introduces other constraints.”

A recent report issued by staff at FERC found that congestion along the Midwest’s transmission lines remains a “serious issue” thanks to a lack of price signals continuing to hang over the region as a key barrier to new transmission projects. However, price signals in the Midwest are expected to appear two years from now when the region’s grid operator implements locational marginal pricing, the FERC report said.

Other key findings of the study include:

James Torgerson, president of the Midwest Independent Transmission System Operator (MISO), recently said that stakeholders are telling MISO that if adequate transmission were in place in the region, new developments of both coal-fired and wind-powered generation would occur, but for now there is insufficient transmission to keep up with new generating plants coming online.

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