Putting Michigan’s energy future in safer hands

DTE Energy has retired four coal units over the past three years and announced plans to retire eight more by the early 2020s, reducing its coal capacity by 40 percent. In April of this year, Consumers Energy retired its “classic seven” coal units, cutting its coal capacity by more than 30 percent. Clearly something unprecedented is happening in our state.

Michigan is not alone. Across the United States, more than 360 coal units have been retired since 2011, and many more are slated to be shut down by the middle of the next decade. The way in which Michigan and the country produce electricity will undergo the most profound transformation seen in the last 50 years.

Coal plants will make way for natural gas and renewables, both of which – thanks to technological innovation – have become much more cost competitive than they were just a few years ago. And because gas plants can produce highly reliable, 24/7 power with ~70% lower CO2 emissions than coal, and because we will substantially expand the role of wind and solar, carbon emissions will decline fundamentally in the years ahead.

But as we embark on this transition, Michigan has a problem that is putting the reliability of the state’s electrical system at risk. Energy marketers, who have the right to sell electricity to generally large companies that use 10 percent of our state’s power (the deregulated portion of the market), are not being held to the same standards as utility companies when it comes to ensuring reliability.

It is time for the debate over Michigan’s energy future to move away from ideological posturing and misleading “one liners.” For example, those in the debate who favor deregulation would have you believe that Michigan’s electric rates are not competitive – this is demonstrably false. They would also tell you that deregulation helps reduce electric rates – 15 years of experience in our country makes clear that this is also untrue.

This fall, we need a serious policy discussion that is grounded in facts and thoughtful analysis because the stakes are simply too high. History has shown time and time again how serious the consequences of bad energy policy can be.

Current law puts state at risk

The change in the generation mix over the next 10-15 years will be significant, as a full 30 percent of Michigan’s sources of energy will need to be replaced by 2030. All of this capacity will be critical to the reliability of the electrical system, as was evident during this year’s very hot summer days in which every DTE plant was running to meet our customers’ needs. Thoughtful planning will be needed to ensure new power plants come on line at the right time to replace retiring ones. Because it can take up to five years to site, permit and build a new plant, DTE has already started planning for the plants it will need by the early 2020s.

Against this backdrop, we are in the middle of a critical debate over how to strengthen existing energy legislation to ensure that the state will have enough power in the future. The debate is critical because of Michigan’s unusual “hybrid” structure in which energy marketers who serve 10 percent of the market do not own physical generation capacity – they simply buy excess power from the market and resell it. This excess power will not be available for much longer because of the plant retirements. And under the current law, these marketers are under no obligation to ensure that sufficient capacity will be built to serve their customers in the future. They can simply walk away.

And to top this off, Michigan’s hybrid regulatory structure has resulted in a $300-million yearly cost shift from the customers served by the marketers to the customers served by the utilities. Utility customers end up paying all the fixed costs for the plants that produce the extra power the energy marketers have been reselling in the first place.

Not only is this unfair, it is also dangerous given the coming plant retirements. After having profited for years from partial deregulation, energy marketers are lobbying hard not to be held to the same reliability standards as other electric providers in the state – in fact, they have lobbied hard not to be held even to de minimis standards.

Energy legislation that is on the table today would simply require energy marketers to demonstrate that they will have under contract physical capacity to generate electricity in the future. The reasons they should be required to do so are simple:

  • Large numbers of power plants will be retired.
  • It takes years to replace them.
  • If no one plans for the 10 percent of the market that is deregulated, as we retire the utility-owned plants that currently produce the excess power bought and resold by marketers grid reliability will be threatened for all Michigan citizens.

At DTE and Consumers Energy we are carefully planning new generation for our own customers, but not for the 10 percent of the market that is deregulated. We will not ask our customers to once again pay $300 million a year or more to produce excess power that energy marketers can buy at a discount and then resell to large users for a profit.

The myth of high rates

One of the arguments those who are lobbying to let energy marketers continue to skirt their responsibilities have been making is that Michigan’s electric rates are not competitive. This argument is undermined by two facts.

First, bills for our residential customers – a better measure of affordability of electricity than rates because a bill reflects what a homeowner actually pays each month – are nearly 20 percent below the national average and in the lowest quartile in the nation, as can be seen in Figure 1, below.

figure-1

Second, industrial rates for DTE customers are competitive and are below the national average. Since 2012, DTE’s rates have declined by 16 percent, while rates across the country and in the Great Lakes have increased, as can be seen in Figure 2, below. Only one Great Lakes state has industrial rates lower than DTE’s, and the difference is small.

figure-2

The failed promise of deregulation

Proponents of maintaining or increasing the level of deregulation in Michigan also argue that deregulation has helped lower electric rates elsewhere in our country. The evidence from over 15 years of experience makes it clear this is simply untrue, as can be seen in Figure 3. Electric rates in deregulated states have been higher than those in regulated states since deregulation was first introduced in the late 1990s and remain higher to this day. Deregulation has done nothing to reduce rates – rates have increased at the same pace over the past 15 years in regulated and deregulated states, and rates in deregulated states have been more volatile to boot.

figure-3

The reason rates in deregulated states have not declined when compared to those in regulated states is straightforward. States that deregulated typically did so because their rates were higher than the national average. Those states hoped deregulation would eliminate perceived cost inefficiencies inside the utilities, thereby bringing rates down toward the national average.

The reality is that rates in these states were higher than average primarily because of structural factors, such as low electricity usage [Because a significant portion of a utility’s costs are fixed – the infrastructure needed to bring electricity to a home or small business is roughly the same regardless of how much electricity is used – states that have high usage tend to have lower rates than states that have low usage] and limited access to hydroelectric power or low-cost fuel. Deregulation could never have overcome these realities.

Holding all accountable

We have seen many examples in other states and other countries of what can happen when energy policy is misguided. And yet, our own energy policy dialogue in Lansing has been filled with too many ideological arguments and misleading sound bites. We need to rely on sound engineering and economic analysis to develop energy policy that puts full control of reliability in the hands of the state; the stakes are simply too high.

As Michigan embarks on a fundamental transformation of its electric sector that will sharply improve sustainability, all companies that provide electricity, including the energy marketers that control a critical 10 percent of sales, must be accountable for ensuring reliability. Introducing common sense rules that require everyone in the state to ensure the availability of adequate generation capacity is necessary to accomplish this. And, contrary to what some contend, Michigan’s energy prices are competitive. If well managed, the transition to a cleaner energy future will ensure they remain that way.

Bridge welcomes guest columns from a diverse range of people on issues relating to Michigan and its future. The views and assertions of these writers do not necessarily reflect those of Bridge or The Center for Michigan.

About The Author

Gerry Anderson

A guest author for Bridge Magazine.

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Comments

Stephen C Brown
Thu, 09/15/2016 - 10:04am
Thanks for these comments about energy reliability. Just to be clear, do these data come from the US energy information administration website? If DTE is concerned about electricity generation and reliability, why is it lobbying against net metering laws that would open up competition for electricity generation, allowing a more diverse and distributed system? As it stands I am not allowed, by existing law, to install enough solar panels on my home to provide my own electricity at peak demand times, and DTE is actively lobbying in the MI legislature to restrict my freedom to operate here even further. Since some renewables are already cost competitive with natural gas, in many circumstances, this attitude of DTE will only drive many customers to cut themselves off from the grid entirely. Do they want to maintain their monopoly on generation, distribution, or both? Maybe, if DTE is really concerned about electricity generation capacity, they should spend their capital on a smart grid and open the market for production. Maybe the days of centralized energy generation are over, especially for remote rural areas.
Kevin Grand
Thu, 09/15/2016 - 12:01pm
I'm still a little fuzzy on why it was ever agreed upon, eliminating a proven and reliable means of generating electricity (read: coal), without first having an alternative at the ready. Wind & solar sound great on paper. Until there is no wind to power the windmills and/or the sun sets on the arrays. Mention nuclear, and the environmentalists begin to lose it. Even if using Thorium is a promising alternative. On that same note, if people have a problem with burning coal to generate power, it's a safe bet that they'll be targeting natural gas next, regardless of its emissions. I honestly have no idea what the protesters were thinking when they lobbied against coal. I've kind of grown attached to the idea of turning on a light-switch whenever I felt like it and have something go on without paying an arm and a leg to do so. I agree with Mr. Brown, something will have to give here. You can either change the law and disappoint the environmentalists, or you can have large chunks of Michigan looking like North Korea from space.
Stephen C Brown
Tue, 09/20/2016 - 11:57am
Dear Kevin Grand: I'm glad you care about this too. My perspectives are: 1) Coal is dirty, has poisoned all our lakes with Mercury, Lead, and Cadmium that concentrate in fish 2) Natural Gas produces only 1/4 of the CO2 compared to coal, in equivalent BTU's, so some environmentalists like me feel that's a good tradeoff, as a bridge to a total renewable future. 3) Coal plants were retired because they were old and considered uneconomical. The issue was whether to build more coal plants, or consider alternatives like natural gas, nuclear, etc. for base load demand 4) Gridliance, a private equity company (Blackstone) is presenting tomorrow to the MI Senate committee. They want to install a HVDC cable under Lake Erie to provide Canadian renewable energy to USA distributors. Most of this is hydroelectric power, destined for base load demand. 5) Lake Michigan has the highest persistent winds east of the Great Plains. Current technology would allow construction of large wind turbines in the middle of Lake Michigan, out of sight of land, and provide enough energy, at lower costs than solar PV, to power much of the adjacent states. 6) Storage of renewable energy is the biggest challenge. Compressing air in the abandoned salt mines under Detroit, pumping water uphill, and large-scale flow batteries are all being pursued as economical, efficient means of storing peak renewable power for later use. Many other technologies can be used near points of use, like freezing water on site that is used later to cool air. The most accessible means of storage is the batteries in electric cars, while they are not being driven. This is called V2G-see https://en.wikipedia.org/wiki/Vehicle-to-grid
Frank Zaski
Thu, 09/15/2016 - 9:12pm
Mr. Anderson cherry picked statistics in his article. Looking at only the dollar amount of home electric bills and concentrating on industrial rates tells a rosy story. We have to look at our total heat and light rates and expenditures. According to this analysis, residential electric bills (in dollars) in Michigan are lower than average, ranked 43rd, but our heating bills are high, ranked 2nd nationally. (And it appears this study did not include propane.) Overall, Michigan is ranked 21st in total monthly energy bills (hardly an advantage). https://wallethub.com/edu/energy-costs-by-state/4833/#methodology Our residential electric bills need to be low to off-set our high heating bills. DTE should not raise electric rates based on a limited viewpoint – but DTE (and CMS) did raise residential rates – and gave all the benefits to big industry. DTE Over the past 10 years, DTE’s smallest residential users (250 kWh per month) experienced a rate increase of 62%. Rates for the residential users who use the most electricity (1,000 kWh/m) rose 39%. In sharp contrast, rates for the largest industrial users increased only 3%. http://www.dleg.state.mi.us/mpsc/electric/download/rates1.pdf CMS CMS is piling even more on to their smallest electric users. Over the past 10 years, rates for their smallest residential users (250 kWh/m) increased 78%. Rates for the residential users who use the most electricity (1,000 kWh) rose 56%. But, rates for the largest industrial users increased only 15%. http://www.dleg.state.mi.us/mpsc/electric/download/rates1.pdf Rate mix favors big users Even the mix between small, medium and large residential ratepayers now favors residents who use the most electricity and punishes those who use the least. Ten years ago this month, DTE’s small users had lower rates than big users (10.46 cents per kWh vs. 11.15), the same for CMS (9.64 vs.10.46). In September 2016, the opposite is true with the frugal user paying a higher rate than big electric user for DTE (16.94 vs.15.53) and CMS (17.12 vs. 16.35). At the same time in 2016, the lowest industrial rates for DTE is 7.28 and CMS 7.89. While there is a cost of service factor, government must realize the basis of our economy is consumer spending. Taking money out of residential pockets hurts our economy more than the addition of a few hundred industrial jobs helped by their disproportionately low rates. Overall Michigan Rates (DTE and CMS account for roughly 90% of total Michigan electric sales.) In June 2016, Michigan had the highest residential electric rates in the US except for 12 coastal states. http://www.eia.gov/electricity/monthly/ http://www.eia.gov/electricity/monthly/epm_table_grapher.cfm?t=epmt_5_06_a In June 2016, residential rates in Michigan were 18% above the US average. Ten years ago, residential rates in Michigan were 3% below the US average. Total Michigan electric rates increased 35% in the past10 years vs. 13% nationally and are now higher than in most states. Michigan’s residential rates increased 50% since 2006 while median family incomes declined 6% during this period. Note, Michigan incomes are below the national average. http://www.deptofnumbers.com/income/michigan/ There has been a major skewing of residential rate payers in favor of the more vocal industrial ratepayers and aided by the pro-business state government. Michigan residential rates were 64% higher than Industrial in 2006 - this was comparable to the US average. In June 2016, Michigan residential rates were 120% higher than industrial rates (vs. 81% nationally). Only New York State has a greater rate skew in favor of Industrial (+166%). Residential ratepayers account for 32% of Michigan’s electric sales but contribute 44% of utility electric revenues. Industrials account for 30% of electric sales but pay only 19% of utility revenues. Proportioning this relationship for all 50 states reveals Michigan utilities place a substantially higher revenue burden on their residential ratepayers. http://www.eia.gov/electricity/monthly/epm_table_grapher.cfm?t=epmt_5_04_a Michigan electric use is low Per the EIA, “residential electricity sales [usage] per person in Michigan are below the national average, in part because fewer (less than one-tenth) Michigan households rely on electricity as their primary source of energy for home heating.” (Lower A/C bills also help.) https://www.eia.gov/state/print.cfm?sid=MI However, Michigan heating fuel usage is well above the US average. “Driven largely by the residential sector, Michigan's natural gas consumption is high. The state routinely ranks among the top 5 in residential use of natural gas.” https://www.eia.gov/state/print.cfm?sid=MI
Chuck Jordan
Fri, 09/16/2016 - 11:20am
Thanks for the information Mr. Zaski. Monopolies don't like competition. Duh. How much does DTE owe our state legislators? Or vice versa?
Stephen C Brown
Tue, 09/20/2016 - 12:36pm
Thanks Mr. Zaski for this information, and especially for citing your sources, something this article itself did not do. What I'd heard years ago is that DTE and CME reduced their rates for large users specifically because it was already cheaper for them to generate their own electricity and cut themselves off from the grid. Was this a compromise the PSC brokered, or what? We would all appreciate hearing from someone who knows about the truth here. The grid benefits everyone, so transmission and distribution should be a regulated monopoly, but perhaps not generation, which could become more distributed, responsive to market forces, and reliable since there are more sites of generation. Net Metering would be the crux for this evolving system, so why is the MI Legislature peeling backwards? Is this a case of regulatory capture by the major utilities? FERC is broadcasting a webinar soon on such topics, which should be widely viewed. See: http://info.aee.net/a-ferc-challenge-webinar-ud-modal
Deem Boldyreff
Thu, 09/15/2016 - 9:28pm
Deregulate generation, regulate distribution like natural gas. Eliminate the "green" tax subsidies and the energy improvement funds that are charged the regulated customer. Most of the 300 million would disappear.
Stephen C Brown
Wed, 09/21/2016 - 8:34am
Mr. Boldyreff-see this business report: https://www.ceres.org/investor-network/resolutions/dte-distributed-gener... for a closer look at the problem DTE is having responding to changing market conditions. "Green Energy" requires no more subsidies than fossil fuels have enjoyed over the years, with much less damaging effects to "externals" like the Kalamazoo River, Ozone respiratory alerts, etc. Moreover, the sun and wind are very predictable over the long run, and have no risk of price increases or temporary shortages.
Fri, 09/16/2016 - 8:29am
Gerry Anderson's myth of low residential electric rates in Michigan: Anderson says, "One of the arguments those who are lobbying to let energy marketers continue to skirt their responsibilities have been making is that Michigan’s electric rates are not competitive. This argument is undermined by two facts." Anderson is clearly correct in saying that deregulation - one of his facts - does not lower our electric bills. His other "fact" is not supported by the very source he cites as the basis for his "2015 Residential Electric Bill" chart. The Electric Power Monthly report from U.S. Energy Information Administration - the agency Anderson cites - [ https://www.eia.gov/electricity/monthly/epm_table_grapher.cfm?t=epmt_5_6_a ] has consistently shown, month after month, that Michigan's residential electric rate is higher than anywhere else in the U.S. except New England, the Mid Atlantic, California, Alaska, and Hawaii. The latest report for June says Michigan residents averaged 15.38 cents per kilowatt hour. The national average was 12.73 cents. Anderson's concern over whether Michigan will have enough power in the future is pure self-serving alarmism. His claim that it "takes years to replace" the state's retired coal-fired power plants ignores the fact that they're already being replaced by clean energy sources. In fact, the fast-falling cost of solar power is part of the reason why coal plants are going out of business. Coal's inability to meet emission standards isn't the whole reason. The most effective way to replace those shut-down coal plants would be for Michigan's utility companies to call off their legislative offensive against home solar. Of course, this won't happen. Home solar is on the verge of becoming serious competition for DTE and Consumers.
Stephen C Brown
Tue, 09/20/2016 - 2:43pm
Thanks Bruce! More information that clarifies instead of obfuscates! I've already been offered to purchase PV solar, at competitive prices, using DTE as a pass-through. See Arcadia Power: http://www.arcadiapower.com/solar?utm_source=dormant&utm_medium=email&ut... website, and others. I've been a DTE Green Currents subscriber for years, but I've heard its all spent on marketing, not renewables.
Vince Caruso
Fri, 09/16/2016 - 1:11pm
DTE: 'Don't confuse me with the facts.' Fact is that most folks including businesses would love to be on renewable energy, not polluting fossil fuels. Michigan has great potential for wind and solar. We could be exporting energy to other states. Businesses will flock to states with stable moderate cost energy in droves. Go ask any CFO about stable energy rates, they will tell you it would be wonderful to be able to plan for decades to come not months to come. Michigan exports $1,000's of Millions each year for energy, which could stop in a few years time if the current utilities and politicians they support would either get out of the way or be pushed out of power. We have the technology, skills and training to do it now if it were allowed to progress at a natural rate, right here in Michigan. This is the future and we are being left behind by the day. Utilities are paying near 18% interest, is like a licence to print money, no wonder the investors don't want it stopped. That is until they think about their own kids effected by the pollution they are helping to generate, effect health outcomes of their own families and the job losses associated with this needless waste of Michigan dollars and pollution. Time to move on like the buggy whip makers of old, so sad but time waits for no one, even the ultra rich invested in hugely polluting technologies. Lead, follow or get out of the way of real progress.
Vince Caruso
Fri, 09/16/2016 - 1:20pm
Oh ya, DTE, ... when are you going to cleanup the old DTE site on the Huron River in the City of Ann Arbor full of polluting hydrocarbon waste? Polluting the river and groundwater for decades with little effort to mitigate the pollution. This site is in the Huron River floodplain and floodway and, the next big flood will all at once wash most of this pollution into the Huron River and Lake Erie with disastrous effects on the ecosystem. It is so old it is a former coal gasification plant you own and abandoned, in case you forgot.
Fri, 09/16/2016 - 4:59pm
Re: "This fall, we need a serious policy discussion that is grounded in facts and thoughtful analysis because the stakes are simply too high. ... The change in the generation mix over the next 10-15 years will be significant, as a full 30 percent of Michigan’s sources of energy will need to be replaced by 2030. All of this capacity will be critical to the reliability of the electrical system ..." -- DTE Energy Co. Notice that the CEO ignores the promise and potential of energy efficiency improvements and demand side management to offset future capacity needs. DTE is in business to generate and maximize shareholder profits, not to advocate for sustainable energy policy in Michigan.
Barry Visel
Sun, 09/18/2016 - 11:24am
Net Metering: Last I knew, small generators want to sell excess power to the grid for the highest price they can get, BUT, they don't want to pay the fixed cost (distribution grid) of getting their power to the end user. This means all other customers are subsidizing them, which is not right. (And they don't pay utility investors a dividend to make up for the loss). Wind and Solar: Where does the power come from when the sun isn't shining and the wind isn't blowing? I would like to see some recent statistics on comparative availability factors for alternatives vs coal, natural gas and nuclear. How much base load is required to back up wind and solar, and is this cost figured into the numbers when we're told about how the cost for alternatives is becoming competitive? Residential Rate Increases: I believe if one were to call the Michigan Public Service Commission and ask the question "Are residential rates going up because for years industrial rates were subsidizing residential rates, and that subsidy is now being reduced?", the answer would be "Yes". Demand Side Management and Energy Efficiency: We've been doing this for 20 years now and rates still go up. Two problems...as we save in usage by changing light bulbs (for example) we increase usage by plugging in more devices...and, don't forget those fixed costs, like the grid, that don't go away. My Solution: In the short term, build nuclear, which is non-polluting, and has an availability factor of over 90% (small package plants are being developed to better size and distribute generation based on need). At the same time, spend the money being invested in low efficiency wind and solar in a Manhatten-like research and development initiative to make solar truly efficient, and use the sun to produce hydrogen from water (electrolysis) to drive fuel cells for our homes, cars, etc.
John R
Mon, 09/19/2016 - 12:30pm
I love how Mr. Anderson demonizes "energy marketers" when the true targets of SB 437 and 438 are ratepayer choice and the renewable energy sector. If this were really about the reliability of our energy future, wouldn't we expect to hear something about how these energy marketers present a threat to the security of the grid? And if the issue is not the security of the grid, but the ability of DTE to make long-range plans, where is the strong case showing that this tiny sliver of market choice is a threat there? Instead, Mr. Anderson offers a disingenuous pivot to rates, trying to convince me that my bills aren't rising when I can plot them month to month on my statements. I guess the one upside is that in raising the issue, he invites actual sound economic analysis from the other posters on this thread. Mr. Anderson, I know you've got a nearly $10 million annual salary that you understandably want to protect. So please don’t take our responses personally: I, at least, would expect you to fight for as much market share as possible, up to and including the crumbs. However, adopting the rhetorical stance of some neutral policy expert guided by science, or worse, the best interests of your customers, comes off as cynical. I have no idea what percentage of DTE customers I'm speaking for, but I know I represent everyone on my block: we hate being DTE customers and wish we had alternatives. We also wish our legislators had the guts to pass a decent energy efficiency and renewable energy standard. Apparently not. Looks like Michigan is poised to make another bad energy bet, all in the name of protecting two monopolies as they square over a dismal business landscape they helped create. But as the one who is actually on the hook for building DTE’s future generation, along with increasing the value of your stock awards, I'm thrilled that those nefarious energy marketers out there, even if their role in spurring competition is marginal at best.