No one would have predicted a few years ago that the very same company fighting our policy makers for the opportunity to live or die by the market through electric deregulation would be the same company succumbing to Chapter 11 bankruptcy restructuring, mainly due to the effects of an open market. The company which once had the largest market share of electric-shopping customers in Ohio has been lobbying everyone, even President Trump, for a life preserver to keep its high-cost power plants operating. When one hears about a perceived utility going bankrupt most immediately think “Get out the candles, honey, the power is going out” but what are the real impacts of this bankruptcy on Ohio’s people, policy and the price we pay for power?
Let’s first understand who the heck is going bankrupt. FirstEnergy Solutions (FES) is a subsidiary to FirstEnergy Corp. Other subsidiaries include the regulated utilities such as Toledo Edison, Ohio Edison and Cleveland Electric Illuminating, which are not included in the bankruptcy action. FES is NOT the utility. It does, however, own the fleet of power plants formerly owned by First Energy Corp. and it does market this power to customers through its deregulated retail operations.
FES has indicated that possibly within the next three years it will close three power plants, two of which are the infamous Perry and Davis-Besse nuclear plants on the shores of Lake Erie; the third a nuclear plant in Pennsylvania. If this actually occurs, the closing will undoubtedly impact the employees of those plants which have been reported by FES at 2,300 and will reduce the power available by 4,000 MW. The bankruptcy filing requests that the plants continue to operate while FES goes through the bankruptcy process which some experts are saying it could take five years at a minimum. All the while, the company will be looking for a buyer of the assets. In the short term, FES indicated that it is business as usual for employees.
The economic challenges of these power plants date back decades with enormous construction cost overruns but the final nail in the coffin was the extreme market pressure from natural gas plants which can produce power at significantly less cost than nuclear power. Here is the evidence: 11,000 MW’s of new natural gas plants in various stages of planning and construction in Ohio.
The news of these plants closing has been expected. The company missed the optimum window to sell them, placing all its bets on the ability to lobby for market rule changes and subsidies. Over the past three years, lobbyists for the company have hit up policy makers like a swarm of locusts. They have been active en masse at the Ohio General Assembly, the Public Utility Commission of Ohio and now the Trump Administration. The efforts have not produced any measurable policy changes as there is little data supporting the need for changes other than the viability of FES. Additionally, customer groups, environmental groups and independent power producers have stepped up in to be actively engage in the discussion.
Despite many policy roadblocks, FES is throwing the Hail Mary in the policy fight arguing for an 83-year law that would declare a state of emergency to keep the plants open. Pointing to grid reliability, FES has requested that the federal government give the plants preferential economic treatment to maintain operation. PJM, the grid operator in charge of reliability, refutes the claims that closing those plants will result in reliability issues. Additionally, PJM has mechanisms already in place to provide increased revenue to these plants if they are needed for reliability.
The bankruptcy declaration is not a shock to those close to the energy markets, but it does not ease the pain to the 14,000 FES creditors. The FirstEnergy Corp. stock price did very little on the news and the forward energy markets moved up only a few percentage point. From a short-term perspective, the price to watch is the upcoming PJM capacity auction. This auction determines the price paid to generators by load for committing to meet the system’s peak demand. If FES does not include the 4,000 MW contributed by its nuclear plants in the next auction one would think these auction prices will increase. The auction will be held next month for delivery in June 2021 to May 2022. (Customers may remember a similar plant closure announcement which occurred right before the 2015 – 2016 PJM capacity auction. The auction cleared three times the historic average auction price resulting in customer bills increasing by over 25% for that year.)
That being said, the new gas-fired power plants under development will more than make up this lost capacity but it is all about the timing. If all the projects are built by the time of these nuclear plants fully retire, there will be enough power to supply two times the demand of every resident in the state of Ohio. This fundamental is very bearish to long term prices. Replacing these nuclear plants with nearly double the capacity and at a production price significantly less leads us to speculate that prices will remain low for the long term.