If it ain't broke, don't fix it. But if it is, let it die and look elsewhere. This might seem wasteful, stupid, or downright mean, but the second saying is quickly becoming the new mantra of the U.S. energy system – and Ohio's leading the way. With major changes in store for energy stocks, here's what you need to know.
Every system needs a backup plan, and PJM, the world's largest competitive wholesale electricity market, is no different. FirstEnergy's (NYSE:FE) decision to retire an astonishing 1,400 MW of capacity in 2012 erased a significant chunk of PJM's spare change power, and the market has been on the search for a different energy source to fill the gap as additional closures stack up. Exelon's (NYSE:EXC) PECO Energy knocked off 169 MW of aging oil and diesel capacity, while its BGE business cut another 118 MW . Calpine Energy (NYSE:CPN) also closed the doors on seven oil-powered plants total 284 MW of capacity .
FirstEnergy can hardly be blamed for axing its extra energy – natural gas has been killing coal's competitiveness , and expensive environmental regulations made the move even more crystal clear. Oil and diesel have been on their way out for a while. But with a 13% drop in PJM's Ohio capacity from FirstEnergy alone , what's a wholesale market to do?
With significant electricity demand and no supply to be found , PJM is relying increasingly on transmission to bring supply to its front door. Faced with rising energy prices at its annual capacity auction , PJM identified 35 different transmission projects costing at least $5 million each to successfully offset the region's generation shortfall .
And according to PJM, FirstEnergy may have a chance to make nice for cutting capacity. Two of the most important transmission lines are part of FirstEnergy's $400 million future plans, creating Ohio connections to Canada and Pennsylvania . The utility is also considering converting two coal-fired power plants to "synchronous condensers," a $120 million undertaking that would push power further through the existing transmission grid .
PJM's solution may seem temporary, but it's actually paving the way for an increasingly interconnected energy system. The closures haven't stopped since 2012, further proof that PJM's plans are a necessary next step. In January 2013, PJM received formal notice from PSEG (NYSE:PEG) that it would deactivate a whopping 24 different facilities totalling 1,040 MW of generating capacity . And FirstEnergy's not finished either, adding another 400 MW to its retirement plan less than two weeks after PSEG's announcement .
Electricity still has to come from somewhere – but an improved transmission network reduces our dependence on local energy sources and expands our power potential. Utilities offering these alternatives are finding themselves in increasingly profitable positions, and wise investors would do well to follow suit.
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