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Two 1950s coal plants defy financial gravity along the Ohio River
An Ohio law that took effect last week ended a decadelong subsidy program buttressing a pair of Rust Belt coal plants from volatile power markets.
But the Kyger Creek and Clifty Creek plants along the Ohio River — each of which turns 70 this year — show no sign of giving in to financial pressures that have claimed dozens of similar generators in the region in past years.
Their endurance is partly a sign of the times. The plants, owned by a consortium of eight utilities known as the Ohio Valley Electric Corp. (OVEC), sell their output into the nation's largest power market operated by PJM Interconnection, which is expecting a tsunami of new demand from data centers. And the coal industry, which faced headwinds under President Joe Biden, again has an ally in the White House.
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Most importantly, OVEC companies are bound by a contract that calls for the plants, still saddled by nearly $1 billion in debt, to continue operating for 15 years. Any decision to pull the plug, or change how the plants are operated, must be the consensus of all the owners — a reason that utility lawyers and lobbyists have worked relentlessly to recover every dollar they can.
The nature of the operating agreement has frustrated environmental groups because the plants are major sources of air pollution in the region. And while many of the area's large coal-burning power plants have been forced offline by failing economics — including the 2,000-megawatt Conesville plant, 2,200-MW Sammis plant and 1,300-MW Zimmer plants in Ohio — the OVEC plants keep going.
Even critics agree there's likely to be little change in the future despite the loss of the subsidies in Ohio, a provision still stained by a connection to the state's largest-ever public corruption scandal.
Devi Glick, senior principal with Synapse Energy Economics, has analyzed OVEC's economics as an expert witness in Ohio and Michigan over the past few years on behalf of groups ranging from the Sierra Club to the Michigan attorney general's office. She doesn't see the plants' owners taking any steps to shut them down.
'Given the current political climate and how tight the (PJM) capacity market is right now … I don't see the pressure being enough in the next couple of years,' Glick said.
Columbus, Ohio-based American Electric Power has the largest stake in the plants with more than 43 percent. An AEP executive is OVEC's president.
In an email response to questions, AEP spokesman Scott Blake said the state of the power market demonstrates a need for the plants. He cited soaring clearing prices in the recent PJM auction for power plant capacity — the cost of guaranteeing there will be power available at peak times — as proof there's increasing need for generating capacity.
The PJM auction 'demonstrates that resources like the Clifty Creek and Kyger Creek facilities serve a critical reliability function,' Blake said. 'Customers and the communities around the facilities have benefited from reliable power produced and [the] economic contributions of the plants.'
Neil Waggoner, who spent a decade working to help shut down coal plants as an Ohio-based member of the Sierra Club's Beyond Coal campaign, said the subsidies authorized by state utility regulators in 2016 and later embedded in statute were never about preventing the plants from closing or protecting jobs.
Waggoner, now part of Sierra Club's federal policy team, said the issue centered around protecting the bottom lines of three Ohio utilities contractually obligated to help pay the costs to operate the OVEC plants.
It is that contract, known as the inter-company power agreement, that has kept the plants running and will continue to do so, he said.
'That is the No. 1 driver of what happens,' said Waggoner, who said some of OVEC's owners such as Kentucky Utilities, Louisville Gas and Electric, Centerpoint Energy, Indiana Michigan Power and Allegheny Energy operate in coal-friendly states where there's little if any scrutiny of the costs to operate the plants.
The 1,304-MW Clifty Creek plant in Indiana and the 1,086-MW Kyger Creek plant in Ohio trace their roots back to the Cold War era.
OVEC was founded in the early 1950s to supply power to the Atomic Energy Commission's uranium enrichment plant in Piketon, Ohio. OVEC's contract with the AEC's successor, the Department of Energy, ended in 2003.
Bleeding red ink
Rather than shutter their coal plants, OVEC's owners twice extended an agreement among themselves to continue operating and selling power into PJM's regional grid. The last extension in 2010 was necessary to help finance more than $1 billion in pollution controls and calls for the plants to operate until 2040, when they would be 85 years old.
It was a decision that years later would send the utilities to the Public Utilities Commission of Ohio (PUCO) in search of financial help, and ultimately lead them to lobby the Legislature to entrench the subsidies in state law.
The provision worked like this: The share of OVEC's output that was assigned to three Ohio utilities was sold into the PJM market. If revenues were less than the plant's cost of producing electricity, utility customers made up the difference. If revenues exceeded costs, customers got a credit.
The mechanism helped OVEC weather ups and downs over the past decade, from surges and dips in natural gas prices, a global pandemic and, most recently, a projected surge in demand for electricity — one not seen in generations — to help power AI data centers.
While prices in PJM are on the rise, so too are OVEC's costs.
'These plants are not getting any less expensive to operate, it's just that the supply of alternatives is becoming more constrained,' said Glick. 'At some point the supply will catch up, and these plants will still be old and expensive.'
Fitch Ratings, in a December report, concluded the plants are likely to bleed red ink even with improvement in power demand and prices.
'While regional demand growth (especially from data centers) might tighten energy markets, Fitch expects OVEC's all-in costs to exceed prevailing merchant power prices, making the plants uneconomical for the foreseeable future,' the ratings company said.
Regulators in at least one state have already taken notice.
The Michigan Public Service Commission has three times disallowed recovery of more than $1 million in power costs by Indiana Michigan Power, which supplies electricity to about 133,000 customers in the southwest tip of the state.
In those cases, Michigan regulators agreed that the utility, a unit of AEP, violated the state's code of conduct for affiliate transactions by paying above-market prices for power from OVEC.
The PSC previously had made similar rulings that were upheld by the courts. And the commission had warned the utility to manage existing contracts to provide value for ratepayers, or regulators would be hard-pressed to consider more ratepayer recovery.
The contract supersedes everything
The utility's response: It found a more willing buyer in Indiana.
The company told Indiana regulators that the state had a need for energy and capacity as large new electricity users, primarily data centers, began taking service, and that the OVEC plants provided an 'economically competitive resource.' The company further argued that the proposal was consistent with state policy to support existing coal plants.
Despite Michigan regulators repeatedly slapping the utility's hand for trying to pass on above-market costs for power to consumers, Indiana's Regulatory Utility Commission bought in and approved the plan.
'It's just sort of indicative of Indiana being this incredibly favorable regulatory environment for energy holding companies,' said Kerwin Olson, executive director of the Citizens Action Coalition, an environmental and consumer advocacy group. 'It's just a big cash cow for these guys.'
Glick, who provided testimony in the Michigan case, compared it to a child gaming their parents to get what they want.
'They asked mom and didn't like mom's answer, so they went to dad and got a better answer,' she said.
Just as they did in Indiana this year, AEP promised big benefits to Ohio consumers in 2016 if utility regulators would approve a mechanism to insulate OVEC against higher natural gas prices, which strongly influenced power costs.
The utility estimated that customers of AEP's Ohio Power Co. would see $110 million in benefits over eight years. The Public Utilities Commission of Ohio was convinced and approved what was effectively a revenue guarantee for the plants. They also approved similar requests by Duke Energy and Dayton Power & Light.
Consumer groups, however, say the provision was no hedge. It was a financial albatross.
An analysis by the Ohio Manufacturers Association estimates the subsidies approved by PUCO and later the Ohio Legislature cost utility consumers almost $600 million. The group projects the amount would have topped $1 billion by the time the law was supposed to sunset in 2030.
In just one of the eight years that the mechanism was in place did the plants produce a net benefit to ratepayers, the report said.
Meanwhile, efforts by OVEC utilities to sell their stake in the plants have received no takers. And when Akron-based FirstEnergy filed for bankruptcy protection in 2019, the utility unsuccessfully sought to get out from under its OVEC commitment, a request that the coal plants' other owners balked at because it would have required them to increase their ownership stake.
While the meter has stopped running on OVEC subsidies in Ohio, the legal and regulatory battle over millions of dollars collected from Buckeye State consumers continues.
Environmental and consumer groups are seeking to claw back hundreds of millions of dollars in OVEC charges already paid by customers — claims that the utilities are challenging.
The groups are before the Ohio Supreme Court challenging an audit approved by the PUCO that determined the OVEC subsidies charged in 2020 were appropriate. A similar case for charges in 2021 to 2023 is currently pending before Ohio regulators. And the groups have petitioned the commission to audit charges for 2024 and part of 2025.
At the core of the argument is the claim by advocates that OVEC's owners operated the coal plants more frequently than were justified by economics because the utilities knew they could pass on any losses to Ohio ratepayers.
Typically, to minimize costs to consumers, grid operator PJM dispatches power plants according to their cost to operate. More costly units come online as a last resort to keep the lights on. By contrast, units designated as 'must run' or self-scheduled units are operated according to the owners, regardless of economics.
The consumer groups say that's not what's happened with OVEC.
Once again, critics say, the contract among the plants' owners supersedes everything.
'One of the really challenging things,' said Glick, is that 'nobody can really practice oversight on them because of how complicated their ownership structure is.'
