Would shutting down We Energies' coal plants in Oak Creek save customers money?

Guy Boulton | Milwaukee Journal Sentinel

The Sierra Club recently contended that We Energies’ two coal plants in Oak Creek — including its plant opened less than a decade — have lost an average of $98 million a year.

Is the contention valid?

The question touches on the costs and challenges in replacing coal plants with cleaner sources of power, such as solar and wind projects. It also touches on why utilities throughout the country have been shutting down coal plants.

The Sierra Club's claim — made in the recent We Energies rate-setting case before state regulators — evoked a strong response from the utility.

The Sierra Club’s figures, We Energies says, are based on incorrect estimates and assumptions about the power market.

“The numbers they use to support their position are completely false,” said Robert “Bert” Garvin, executive vice president of regulatory affairs for the utility.

And the Sierra Club did back off on its initial argument that shutting down both coal plants — the older Oak Creek Power Station and the Elm Road Generating Station, completed in 2010 and 2011 at a cost of $2.3 billion — would immediately lower customers’ electric bills.

But it raised questions about whether the Oak Creek Power Plant, consisting of units built in the late 1950s and 1960s, could be shut down in coming years, initially replaced by buying excess power on the grid and eventually with a mix of solar and wind power.

“The biggest problem right now is Oak Creek,” said Gregory Wannier, a staff attorney with the Sierra Club Environmental Law Program. “So that’s why we’ve focused there. But that doesn’t mean to say that we don't think there are problems with Elm Road.”

The Sierra Club noted that We Energies invested $162.2 million from 2013 through 2017 in the Oak Creek Power Plant. The utility also must spend millions of dollars to eliminate water discharges from its bottom ash handling system by the end of 2021.

The information supporting or refuting the Sierra Club’s position is confidential. Large blocks of the testimony filed in the rate case were blacked out. Parts of the PSC hearings also were closed.

This is because We Energies and other utilities sell their power into the regional grid, and knowing the cost of operating specific generating units could give competitors an advantage.

A significant source of carbon

Burning fossil fuels — particularly coal, but also natural gas — to generate electricity is the second largest source of carbon emissions, behind transportation, according to the Environmental Protection Agency.

There is almost complete acceptance by scientists that carbon emissions are the primary cause of global warming and will result in catastrophic changes in the planet’s climate unless checked in the decades ahead.

For that reason, the Sierra Club has been pushing for utilities to replace coal plants with solar and wind power.

That is happening.

The Energy Information Administration projects that power generation from renewable sources, primarily wind and solar energy, will surpass coal after 2025.

We Energies itself plans to invest roughly $130 million in a solar project in Iowa County, west of Madison.

And Alliant Energy announced last month that it would add up to up to 1,000 megawatts of solar power — enough electricity for about 260,000 homes — in Wisconsin by the end of 2023.

Alliant did not release any information on the projected costs. Annemarie Newman, a company spokeswoman, said the utility would have more information next year. But adding that much generating capacity to its system is likely to require shutting down a coal plant given the projected demand for power.

Without question, coal plants are becoming increasingly uneconomical.

“It is not unusual for coal plants to be marginally profitable or losing money,” said Glenn McGrath, team lead for electricity statistics at the Energy Information Administration.

BloombergNEF estimates that half of the country’s coal plants are losing money.

But that doesn’t mean that they can be replaced at a lower cost.

Moving from coal is not easy

Solar and wind power now are less expensive than building new coal plants and, depending on the region and utility, cost competitive with new gas plants.

The economics of replacing coal plants with renewable energy get more complicated, particularly when a utility needs so-called baseload capacity — the power plants that are almost always available to generate electricity.

The cost of operating coal plants averaged about $25 a megawatt hour — the cost to generate one megawatt of electricity for one hour — excluding operating and maintenance costs, in 2018, McGrath said.

New utility-scale solar power cost $48.40 a megawatt hour that year, according to the Energy Information Administration. That is before the investment tax credit available for solar power projects.

The Solar Energy Industries Association, a trade group, puts the cost of utility-scale solar power at $28 to $45 a megawatt hour.

The cost is lower in states such as Arizona and higher in states such as Wisconsin.

The cost of solar power has dropped about 90% in the past decade and is expected to continue to fall. And solar projects have no fuel costs and lower maintenance costs than coal plants.

Further, the comparison — the cost of generating one megawatt of electricity for one hour — isn’t exactly apples-to-apples. The cost estimates for solar power take into account that solar projects don’t produce power during the night.

That isn’t necessarily a problem, because utilities have excess generating capacity during those hours when demand is low. But solar power projects also produce less electricity on cloudy days, and that’s a drawback in Wisconsin on those gray days in January.

The economics are much better for generating capacity that is needed only to meet the peak demand for power. Solar power is ideal for this in Wisconsin because demand peaks on hot summer days.

What all this means is being able to produce 1 megawatt of solar power isn’t the same as being able to generate 1 megawatt of power from a coal plant.

The comparison is worse for wind power.

Wind power is relatively inexpensive but far less reliable than solar power, particularly in states such as Wisconsin. (In Iowa, in contrast, about 40% of its power now comes from wind.) Wind farms also tend to generate more power at night when demand is low.

The organization that oversees the Midwest power grid requires utilities to have reserves of 10% to 15% of their generating capacity to ensure reliability during times of peak demand.

“It makes everybody carry their share of the load,” said Jeff Knitter, director of planning in the wholesale energy and fuels department of WEC Energy Group, the parent company of We Energies.

The organization gives coal plants a so-called capacity credit — a measure of how often the plants are available to generate power — in the range of 80% to 85% and sometimes higher, Knitter said. Solar power projects are given a capacity credit of 70% to 75%.

The capacity credit for wind power is 15.7%.

It makes wind a poor substitute — at least in Wisconsin — for power plants that are almost always available to generate power.

Proponents of renewable energy contend that the wind is always blowing somewhere, but the amount of power that can be moved through the transmission system is limited.

Battery storage could change all this. For now, it is expensive. But the cost is falling — dropping by 76% since 2012, according to BloombergNEF — and is expected eventually to transform the economics of renewable power.

“It’s still small, but it’s not going to be for long,” said McGrath, of the Energy Information Administration.

So, if solar and wind power remain more costly than power from existing coal plants, and battery storage is expensive, how can We Energies’ coal plants in Oak Creek be losing money?

Paul Chernick, the Sierra Club’s expert witness in the We Energies rate case, contended that the total cost of running two plants — when including fuel costs and the cost of operating and maintaining the plants — exceeds their revenue.

For its part, We Energies says that it doesn’t operate any of its power plants at a loss.

“He just did not use the right figures,” Knitter said in his testimony filed with the PSC.

Here is how this works:

We Energies and the utilities in 15 states, ranging from Louisiana to North Dakota and Michigan, sell their power into the grid run by the Midcontinent Independent System Operator, known as MISO.

Each day, the utilities put in bids for what price they will sell power the next day from their power plants and other sources of generation.

MISO, which has been likened to an air traffic controller for the regional grid, dispatches those plants from the lowest cost to the highest cost to meet the demand on a given day.

The price increases as the higher-cost plants are dispatched, and everyone receives the same price at any given hour.

We Energies’ bids are based on the cost of operating the plants, Knitter said.

“That way we don’t operate at a loss,” he said.

Who is right? The Sierra Club or We Energies?

The information that would settle all this is confidential.

Coal plant must always be running

For most of the year, utilities have excess generating capacity by a wide margin. In Wisconsin, demand is lowest in October or April. On one day last month, We Energies’ system was running at about half its capacity.

Yet coal plants must operate at a minimal level to limit the wear and tear from ramping them up and down. The minimal level for We Energies’ coal plants is confidential. As a general rule, though, coal plants must run at 50% of their capacity.

This means that when an abundance of cheap wind power comes onto the market on a windy day — or windy night — a utility must continue burning coal at a higher cost instead of buying the low-cost power.

Chernick, the Sierra Club’s expert witness, notes that We Energies must operate its coal plants at a minimal level when less expensive power is available on the grid.

We Energies does run some of its coal units at a loss overnight, but this is true for all coal plants, Knitter said. The loss is made up during the day.

There are almost no days, he said, when the price doesn’t cover the fuel costs of the coal plants.

The PSC staff also audits the utility’s fuel costs every year. (Those costs are passed onto customers; We Energies doesn’t make a profit on its fuel costs.)

“If we were doing anything other than what I’ve saying, the commission’s staff would have a problem with it,” Knitter said. “I have no idea where Chernick came up with the idea that we would sell at a loss.”

Chernick contended that two of the four units of the Oak Creek Power Plant could be shut down, with We Energies' buying power through short-term contracts until it could add solar or wind power.

He acknowledged that shutting down both coal plants would take years — and that We Energies would need approval from MISO to shut down any plants.

That said, the Sierra Club said that We Energies should begin doing the studies or analyses needed to replace the coal plants given the lead time that would be needed.

“The economics of electricity generation have shifted dramatically since Elm Road and Oak Creek were built,” said Wannier, the Sierra Club attorney. He added, “We believe we have identified a problem that the utility should address.”

Nicholas Steckler, head of U.S. Power for BloombergNEF, said that a wholesale price of $25 for a megawatt of electricity for one hour is a good reference point for the MISO market.

That price would need to cover the cost of fuel as well as the cost of operating and maintaining the plants. Given its age, the Oak Creek Power Plant could be close to that threshold.

There also is the question of how much baseload capacity — the power plants that are always available — We Energies needs.

“The power grid in the future is going to look different,” Wannier said.

That, though, is in the future.

The key question is whether other sources of power would be less expensive than operating the coal plant.

Steckler said utilities still need baseload capacity. Renewable energy can contribute to meeting that need. But he said, “You are not going to pull the plug on two plants at once.”

Guy Boulton joined the Journal Sentinel in 2005 and covers health policy and utilities. He specializes in the Affordable Care Act, health care reform, insurance, Medicare and Medicaid, heath care systems and dental and behavioral health care. He previously worked at The Tampa Tribune, Cincinnati Enquirer, The Wichita Eagle and The Salt Lake Tribune, and has covered economics, airlines, technology companies, utilities, the oil and gas industry and other beats.



Email him at joined the Journal Sentinel in 2005 and covers health policy and utilities. He specializes in the Affordable Care Act, health care reform, insurance, Medicare and Medicaid, heath care systems and dental and behavioral health care. He previously worked at The Tampa Tribune, Cincinnati Enquirer, The Wichita Eagle and The Salt Lake Tribune, and has covered economics, airlines, technology companies, utilities, the oil and gas industry and other beats.Email him at Guy.Boulton@jrn.com and follow him on Twitter: @BoultonGuy