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Market monitor warns of power supply issues in the Midwest

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Market monitor warns of power supply issues in the Midwest

Potomac Economics, the market monitor for the Midcontinent ISO power grid, warned of possible supply shortages in the grid operator's 15-state region given market design issues, low capacity prices and pending retirements.

David Patton, President of Potomac Economics, said MISO is losing much of its surplus capacity, citing a 2018 survey conducted by MISO staff and the state regulators in the MISO region.

Patton noted that the 2018 survey found the MISO region will have around 600 MW of surplus capacity in 2019, compared to 3,900 MW in 2017. The estimates are based on committed resources, which include capacity that utilities have incorporated into their electric rates, new generation resources that have signed interconnection agreements, and resources that have firm contracts to sell into MISO. When including new builds and "potential" resources that may not be available, the surplus for 2019 is higher at 6,600 MW, the 2018 survey showed.

To explain the drop in surplus, Patton said, "We're retiring generation at a much faster cliff than we are building generation. The generation that you heard that we are building in the south we can't really use because it is trapped behind the transfer constraints." He was referring to the import and export limits in MISO's southern region, which includes Entergy Corp., Cleco Corporate Holdings LLC, and Cooperative Energy, the supplier of a dozen cooperatives in Mississippi.

Patton said the supply issues are also unique to MISO's capacity market design, which procures supply one year before it is needed and uses a vertical demand curve instead of the sloped curve used for the PJM Interconnection's capacity markets. MISO's design has produced relatively low capacity prices, causing several merchant generators to sell into PJM instead or retire, Patton said in a presentation. The clearing prices produced by MISO's 2018-2019 planning resource auction was $10/MW-day for most of MISO's 10 zones except for Zone 1, which cleared at $1/MW-day. Zone 1 covers all or parts of Wisconsin, Minnesota, the Dakotas and Montana.

Though most of the 2018-2019 auction clearing prices were higher than the $1.50/MW-day that cleared for all zones the previous year, Patton said they are still far below what is needed to encourage new construction.

Given the past two auctions, Patton said "our markets are telling us that we don't want anybody to build anything. In fact, they are telling our merchants to retire if they have any going forward costs that they have to invest in a unit to keep it in operation."

Patton said market conditions have resulted in demand response resources playing an increasing role in ensuring system reliability during shortage conditions. He noted that 950-MW more demand response resources cleared the 2018-2019 auction than the 2017-2018 auction. Without demand response resources, Patton said MISO would have been short of supply twice since April 2017.

Patton said some supply issues arise because MISO only gives between one and four hours advanced notice of an emergency event. Potomac Economics will therefore recommend in an upcoming state of the market report that MISO offer enough advanced notification to allow resources to start before an emergency.

Some stakeholders are skeptical of Potomac Economics' warnings given about 90% of the MISO's capacity comes from regulated entities and only 10% is provided by competitive generation. MISO in 2016 proposed a three-year forward capacity auction to address supply issues for areas on its grid served by competitive suppliers, but Federal Energy Regulatory Commission rejected the proposal in 2017.