Putting Michigan’s energy future in safer hands

Gerry Anderson is chairman and CEO of DTE Energy

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.

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.

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.

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.