A $15 billion wave of energy infrastructure spending is headed to Michigan, so says the head of the state’s largest electric utility.
DTE Energy Co. CEO Gerry Anderson said the Environmental Protection Agency’s recent carbon emissions proposal will usher in “the largest power sector renewal” the industry has seen since the oil shocks of the 1970s led utilities to move to coal and away from oil.
“This will be the biggest investment in power generation since that period,” he said.
Anderson estimates about $15 billion will be spent on changes to Michigan’s power infrastructure to meet the EPA rules, $8 billion of it coming from Detroit-based DTE, the larger of the two utilities in the state.
The bulk of the spending wouldn’t begin until about five years from now, and it’s still too early to plan the details, he said.
But such a large-scale restructuring would mean everything from investments in energy efficiency to new power plants.
“Compliance is going to fundamentally transform and modernize the power generation fleet in Michigan, and that’s true across the U.S.,” Anderson said.
Dennis Dobbs, vice president of generation engineering and services at Jackson-based Consumers Energy, wouldn’t go as far in describing the scope of the likely investment, nor did he have estimates on how much it will cost to meet the regulations in Michigan. But he did say the EPA’s proposal puts the industry into uncharted territory.
“It’s unprecedented, let’s put it that way. The EPA is stretching out further than they ever have in terms of their control,” Dobbs said.
Coal plant retirements
The EPA proposed in June that power plant carbon emissions be cut 30 percent by 2030. The proposal, coupled with previous rules that aren’t friendly to coal, put natural gas front and center as the new leading candidate for a base-load fuel.
A fracking-induced glut of it has soaked the markets, and natural gas produces half the carbon emissions as coal from a power plant, according to the EPA, making it a natural choice for utilities as a coal replacement.
Wind is cheap and available in Michigan, making it the top choice for renewable energy power, industry executives said.
Even without the new EPA proposal, utilities had reason to move away from coal. They have been adjusting their power generation arrangements to meet existing EPA rules, such as Mercury and Air Toxics Standards that utilities must meet by April of next year, unless granted extensions. At the state level, Gov. Rick Snyder in December went on the record saying Michigan should become less reliant on coal, which makes up more than half the fuel used to produce power in the state.
The utilities say they are working on it. Consumers plans to shutter seven coal-fired units in 2016, leaving its five largest units in operation. DTE is also weaning itself away from coal. (See map, below.)
Power plant shifts and upgrades
Consumers signed an agreement in December to buy a 540-megawatt natural gas plant in Jackson for $155 million from private operators AlphaGen Power LLC and DPC Juniper LLC, affiliates of J.P. Morgan Chase & Co. That put on hold a previous plan to build a $700 million, 700-megawatt natural gas plant in Thetford Township, near Flint. But the Thetford plan is only on hold, not dead, the company has said.
Consumers sought a natural gas plant to make up for the anticipated 950-megawatt drop in production when its seven coal units are shut down. The difference between that and the Jackson plant’s 540 megawatts will be made up by market purchases in the short term.
But at some point, Consumers almost certainly will need more capacity, Dobbs said, as the state’s economy and energy needs grow. Plus, the company’s energy purchasing contracts expire in about 10 years.
Consumers made a similar deal as the Jackson one when it bought a 930 MW natural gas plant in Zeeland in 2007.
“We’re going to be shutting down coal. We do believe the state will need new capacity. It’s just a matter of when and who’s going to build it,” Dobbs said.
Wind is the most economical source of renewable power in Michigan, he said, but is too intermittent to be relied on alone and would have to be coupled with natural gas.
“Based on how clear our crystal ball is today, which isn’t very clear, that seems to be the way forward,” Dobbs said.
“If you ask me today what we’re going to build out that far, I’d say gas and/or wind.”
Consumers plans to spend $7 billion over the next five years on capital investments, most of it going toward general maintenance and upgrades to existing infrastructure. No new gas capacity is expected in that time, apart from the newly bought Jackson plant.
“But in five to 10 years, I do think we’re going to need new capacity and we have plans to add capacity to that space,” Dobbs said.
In pipeline: Decades of investment
Michigan utilities will have to retire “on the order of 50 percent or more” of their coal-fired generation, Anderson said.
“We’ll be backfilling those retirements with natural gas and wind,” he said, but it’s too early to say by how much and where.
DTE’s annual report estimates it will spend $6.7 billion on capital outlays from this year through 2018. Much of that is for regular upgrades and maintenance. The period after that is when more money will begin to flow as DTE puts its moves toward natural gas and wind into play to meet the 2030 requirements, Anderson said.
The money planned through 2018 will “just begin to touch what I was describing,” Anderson said, referring to the sweeping infrastructure changes he predicts. “The vast majority will fall after that, 2018 to 2020 and beyond. These large plants at minimum will take three to four years to land on the ground.”
DTE already has made moves to dial down its coal-based production. It issued an RFP in June to solicit offers to buy a natural gas plant in the Midwest. It shut down a coal-fired plant in Harbor Beach in November.
As the changes occur, “we’ll be putting in place the infrastructure for the next 50 years, with improved environmental outcomes,” Anderson said.
Both utilities also are part of the state’s Pure Michigan Business Connect initiative, which encourages large companies to satisfy their purchasing needs through smaller Michigan-based companies. Their executives said they plan to continue to do as much business as possible with in-state companies.
“We’re going to work hard to make sure we maximize the use of Michigan suppliers wherever we can,” Anderson said.
Shuttered plants
Beyond these moves, DTE said it’s too early to say which plants will be affected by the 50 percent cut in coal-generated power. But a few plants would appear to be likely candidates for shutdowns.
Its coal-fired River Rouge plant could be retired, switched to gas or retrofitted with environmental controls to keep it on coal, DTE said in a report filed with the Michigan Public Service Commission in March.
The units at the River Rouge plant have been in service since the 1950s, making them among the oldest in the fleet, along with Trenton Channel and St. Clair in East China Township. DTE already has said it plans to shut down two of three units at Trenton Channel in 2016.
The remaining Trenton unit and the St. Clair plant, whose units were put into service in the 1950s and 1960s, are getting upgraded to keep them running on coal.
But not all upgrades are created equal. Because utilities are required to meet capacity demands and to meet tighter environmental standards at the same time, plants sometimes receive expensive upgrades just to keep them limping along for a few more years. So upgrades to older plants like the St. Clair, Trenton and River Rouge don’t necessarily mean a stamp of renewed longevity, especially when talking in the long time frame Anderson referenced.
DTE’s other coal-burning plants are newer. The Belle River plant in St. Clair County was put into service in the 1980s and also has upgrades underway. That leaves the Monroe, the company’s largest, which was put into service in the 1970s. Its capacity is more than the next two largest (St. Clair and Belle River) combined, and it just underwent a $2 billion makeover to clean up its coal production.
Arthur Siegal, chair of the environmental practice group at Jaffe Raitt Heuer & Weiss PC in Southfield, said the utilities’ infrastructure improvements will be significant, especially since Michigan has an older fleet of coal plants and is one of the more coal-dependent states in the Midwest.
The utilities, Siegal said, have to plan far in advance when it comes to capacity and building plants, and they knew the Obama administration sooner or later would be sending down more stringent regulations on greenhouse gases.
“The utilities knew this was coming. They’ve been making plans for this, no doubt about it,” he said.
Looking at the ages and capacities of the plants in DTE’s fleet, Siegal said it would make sense for DTE to shutter River Rouge and Trenton first, followed by St. Clair and then Belle River, during a major push to cut coal.
“Logically, Trenton Channel and River Rouge are very much on the bubble,” he said.
New energy sources
Since wind can only fill so much of the gap, that leaves natural gas production a leading option. Buying energy on the spot market leaves utilities in populous states vulnerable to market volatility and therefore is a less desirable option.
“I can’t see us putting our eggs in someone else’s electricity basket,” Siegal said.
Nuclear is another option. “There’s been talk of a Fermi 3,” he said. “But unless more nuclear comes on line, natural gas seems the logical approach.”
James Neal, an attorney at Lansing-based Loomis Law Firm who represents oil and natural gas exploration and production companies, said he expects to see more natural gas plants built in Michigan.
“Natural gas is plentiful and cheap. It’s by far the best hydrocarbon going, environmentally,” Neal said.
Utilities are required to apply to the MPSC when planning to build new plants.
No applications are pending at the moment, said Judy Palnau, media relations specialist at the commission. That suggests the utilities don’t have any immediate plans to build plants, since the application process is lengthy, and that’s before the shovels ever hit the ground.
“The process takes a while. Even if you get approval, the groundbreaking and building takes years,” Palnau said.
But the utilities already have made moves toward wind with more wind farms in the works. Energy production costs from wind have dropped significantly in the last six years, putting wind in the same economic viability sphere as natural gas, Siegal said.
Consumers is spending $255 million to build Cross Winds Energy Park, a 105-megawatt wind farm in Tuscola County, scheduled for operation by the end of the year. In 2012, Consumers opened the $250 million, 100-megawatt Lake Winds Energy Park in Mason County.
Since 2009, DTE has built about 400 megawatts of wind generation capacity, in Gratiot, Tuscola, Huron and Sanilac counties. It also has contracts to buy another 450 megawatts of capacity from third-party suppliers.
The two utilities also jointly own — Consumers has 51 percent, DTE 49 percent — a facility in Ludington that uses stored water to release energy at peak times. The water is pumped into a reservoir at night and then released to turn turbines during the day when extra energy is needed. The Ludington Pumped Storage Plant is undergoing an $800 million overhaul that will boost output from 1,872 MWs to 2,172 MWs by 2019.
“If we handle this well, it can be a very positive thing for the state,” said Anderson of the overall utility infrastructure plans.
Source: MEDC
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