June 2015

Dustin Tripp

Generation Capacity Cost Explained

An auction was conducted on April 14, 2015 to secure generation capacity for consumers in Illinois and fourteen surrounding states that are all part of the Midwest Independent System Operators (MISO).  The results of this auction will cause electric rates in Illinois to increase significantly for customers of investor-owned utilities and other entities but not for electric cooperative members in Southern Illinois and other parts of Illinois as well.

In 2014 the generation capacity auction for Illinois cleared at a price of $16.50 per MW-day.  This was the price paid for generation capacity from June 2014 thru May 2015.  On April 24, 2015, this same capacity auction for Illinois cleared at a price of $150 per MW-day which represents an increase in capacity of almost 800% in one year.  This new price has been set for generation capacity from June 2015 thru May 2016.

It is important to point out that the generation capacity cost is a smaller portion of a consumer’s total electric bill, however the drastic increases in capacity prices will certainly create significant increases in the overall price paid by customers of investor owned utilities and other entities in the coming years.  Your electric cooperative was not adversely affected by this auction and will not have to raise rates due to these capacity auction prices.

Many of you may wonder why your electric cooperative and your electric rates will not be impacted by the increases resulting from this most recent auction.  The answer is that your electric cooperative, along with other electric cooperatives in Southern Illinois, owns a not-for-profit generation and transmission cooperative, namely Southern Illinois Power Cooperative (SIPC) located at the Lake of Egypt.  SIPC operates and contracts a variety of generating units including coal, natural gas, hydro and wind.  This means that while other investor owned utilities and other entities had to go to this auction and purchase their generation capacity for the coming year from other for profit companies at much higher prices, your electric cooperative already owns the generation capacity and was not required to pay these significantly higher prices.

For over fifty years, your electric cooperative has experienced the strategic advantage of owning a not-for-profit, member-owned, member-controlled generation and transmission cooperative (SIPC).  As you can see from the results of this auction where capacity prices increased over 800% in one year, the strategic advantage of owning generating units is very clear.

While this was one capacity auction with drastic increases for the coming year and next year’s auction may not have the same results, it is important to review the state of the electric generation industry.  The United States EPA has been and is continuing to publish new regulations at an alarming rate that increase the cost of coal-fired generation even to the point of closing numerous coal plants around the Midwest.  As this continues, there will be less and less generation capacity available to serve the demand for electricity.  Simple economics would certainly indicate that if there is less generation available to serve the demand for electricity, the cost of electricity will continue to increase. 

In addition, the reliability of electricity may be threatened during times of high energy demand.  In fact, a recent study by the North American Electric Reliability Corporation (NERC) indicated that the most recent United States EPA Clean Power Plan does not provide sufficient time for the construction of new gas-fired generating plants to provide the needed generation lost from coal-fired generating plants.  In addition, the NERC report revealed that the Clean Power Plan’s conversion from coal-fired generation to natural gas fired generation and the necessary transmission construction will significantly increase overall costs.

While the most recent auction can be considered a “shock to the system” which will lead to higher energy prices for investor-owned customers and other entities, the result of this auction should have greater strategic, economic and legislative implications as all leaders look to the future and attempt to address the needs of our nation’s energy supply.


See you next month and as always, "We'll keep the lights on for you."