Fundamental change needed in Northeast power markets to avoid future ‘energy cliff’

The decision to shut down Entergy’s Vermont Yankee merchant nuclear plant has generated a lot of attention – much of it correctly focused on the need for changes in the design of the ISO New England and New York ISO power markets. Those changes involve leveling the playing field, ensuring diversity of energy sources and recognizing environmental impacts.
 
If we do not change direction, we may end up facing an energy cliff in the future that would have significant economic and environmental consequences.
 
A confluence of three key factors led to the Vermont Yankee shutdown decision:
•    A natural gas market that has undergone a game-changing shift in supply due to shale gas, resulting in sustained low natural gas and wholesale energy prices;
•    A high cost structure for this single unit plant whose only sin was being small – making it more vulnerable to the financial impact of cumulative regulation in these market conditions; and
•    Wholesale market design flaws that have resulted in artificially low energy and capacity prices in the region – and that prevent merchant nuclear plants from receiving adequate compensation for their fuel diversity benefits. 
 
Simply stated, we were not able to run this long-term asset in what has become a short-term market.
 
A relevant question is whether the current markets are flawed and unfair or simply unfavorable to some generation sources. A compelling case can be made for the former.
 
An electric market must meet the following long-term objectives:
1)      Ensure reliable service to customers,
2)      Be environmentally sustainable, and
3)      Be economically sustainable for both investors and customers.
 
Under the current market design, these long-term objectives are just not achievable in the Northeast.
 
The Northeast has experienced several major changes in recent years that were never contemplated in the original market design: the advent of shale gas and a substantial and increased reliance on natural gas, the rapid addition of renewable energy resources, and the addition of a significant amount of demand side management resources.
 
All of these resources belong in a diversified, long-term power supply portfolio. But just like your 401(k) portfolio, balance is the key for long-term success. And balance is something the Northeast markets are lacking. 
 
Another thing lacking is a consistent valuation of the environmental benefits of the respective energy resources. Renewables such as wind and solar contribute to carbon reduction goals, but those goals simply cannot be met without nuclear generation as a long-term resource in the region’s supply portfolio.
 
Shutting down Vermont Yankee, a virtually carbon-free source of electricity, will make it harder and costlier to meet tighter greenhouse gas emission caps announced by the states as part of their Regional Greenhouse Gas Initiative.
 
Finally, if an electricity market is going to be economically sustainable for investors and consumers, it must be truly competitive. Northeast power markets have drifted away from being competitive and have become “hybrid markets,” with some high-cost resources entering the market tied to state-sanctioned, long-term contracts. This method looks like traditional cost-based utility models and makes it nearly impossible for existing resources to compete.
 
It would be one thing if those market prices reflected true market fundamentals.  They don’t. Prices are artificially lower than those of a true competitive market, which makes it very difficult for the existing generators to sustain operations and receive a fair return on the ongoing capital investments needed for reliability and fuel diversity. When existing generation resources are forced to retire, consumers will be exposed to even higher prices in the long run when additional out-of-market resources are built to maintain grid reliability.
 
It’s too late for Vermont Yankee, but independent system operators should step back and reassess the current market design. They should work with federal and state regulators as well as other stakeholders to make changes that result in a balanced, diversified energy resource mix. 
 
A good place to continue this discussion is the Sept. 25 technical conference on “Centralized Capacity Markets,” convened by the Federal Energy Regulatory Commission.
 
Without decisive action to address energy market shortfalls, we will look back – in the not too distant future – and long for the day when our Northeast energy supply was reliable, diverse and environmentally and economically sustainable.
 
And – to paraphrase a Lao Tzu parable – we will know the sound of no hands clapping.
 
Mohl is president of Entergy Wholesale Commodities. Entergy owns the Vermont Yankee Nuclear Plant.