It would appear that the announced merger of Vistra Energy and Dynegy is an outgrowth of a well-established trend, as coal-reliant power providers continue to scramble in the face of unrelenting market pressure.
After all, there’s no shortage of eye-popping numbers that document the precipitous downfall of coal-fired power generation. Just last month, Vistra’s subsidiary, Luminant, announced it would retire two major Texas coal plants early next year. The move marked a national milestone, with 262 of the country’s coal plants facing shutdowns since 2010, while 261 — now less than half — remain in operation, according to the Sierra Club.
And even before those announced closures, Texas — the home state for both Vistra’s and Dynegy’s headquarters and by far the nation’s biggest coal-burning state — was expected to see its wind generation exceed that from coal by the end of 2018.
But Dynegy says that, at least in Southern Illinois, it faces a unique set of problems.
The company argues that its struggling fleet of coal plants in the region contends with more than the usual market challenges presented by cheap natural gas and other mounting competition. Instead, it claims operations are disadvantaged by a double whammy of bad rate designs from the region’s grid operator and by new state subsidies for nuclear plants that have further undercut coal’s local competitiveness.
The company warns that the bleak outlook for its plants could mean uncertainty in terms of cost and reliability for Southern Illinois electrical customers.
“The system is becoming dangerously short on capacity, and added retirements will put much more pressure on that,” said Dean Ellis, Dynegy’s executive vice president of regulatory affairs.
Already, the company reports that approximately 20 percent of its downstate Illinois power generation has shut down in the last two years, with another 30 percent set to close in the next three years “due to an inability to cover operating costs,” according to a recently released statement. The company declines to speculate on the future plans awaiting specific plants in the area.
Dynegy, which bought five Southern Illinois coal plants from Ameren in 2013, has long criticized the market structure implemented by the regional grid operator, the Midcontinent Independent System Operator, or MISO. Southern Illinois is one of the only places in MISO’s expansive territory where electricity is deregulated, and not provided by regulated monopolies assured of certain fiscal returns.
Being surrounded by regulated utilities, Dynegy argues, is a bad fit. Ellis says MISO’s annual capacity auctions, which determine rates for power put onto the grid to meet peak demand, get “distorted” by neighboring utilities that don’t rely on the auctions to recover costs, allowing them to send artificially cheap energy into Southern Illinois at Dynegy’s expense.
John Moore, a Chicago-based energy expert for the Natural Resources Defense Council, agreed that Southern Illinois presents Dynegy with a complicated situation.
“They’re facing the same pressures as other coal plants ... but they don’t have enough of an upside in the current market structure,” Moore said.
That “broken market design in Southern Illinois” remains the biggest hurdle facing the company’s plants in the area, according to Ellis. But he says the Future Energy Jobs Act, Illinois’ major energy bill passed late last year, compounds challenges for Dynegy’s coal fleet by extending subsidies to the state’s nuclear plants.
“We can compete in a low-priced natural gas environment. We can’t compete with subsidies,” Ellis said.
To find relief, the company is now pinning its hopes — and endorsement — on legislation introduced in the statehouse that would have the Illinois Power Agency run its own competitive bid for power capacity.
“A reasonable, competitive market design will at least allow these plants the opportunity to compete in the marketplace going forward,” said Ellis, emphasizing that no fuel type would be favored over another, and Dynegy’s assets wouldn’t specifically be advantaged.
“It basically gives Dynegy more price certainty over a longer period of time,” said Moore, assessing the legislation. He expects that the area’s electricity customers, though, “would see higher rates with the legislation passing.”
With only days remaining in Illinois’ legislative session, Moore expects the issue to be revisited early next year if it fails to garner approval this week.
Moore disagreed with Dynegy’s suggestions that Illinois nuclear subsidies affect the company’s competitiveness in the state, saying that only one nuclear power plant rests in MISO’s territory in Southern Illinois. And unlike Dynegy, he expressed confidence that, amid future coal plant closures, Southern Illinois would not have difficulty bringing in excess power from surrounding areas.
“I don’t think anyone else is saying there’s urgency,” he said. “Of course, if your business is selling coal energy, you’re trying to hang on to everything you’ve got.”