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New plan will help ensure reliable power

Keeping the lights on, safely and reliably, is Exelon's primary responsibility to customers. Part of that is planning ahead to make sure we have enough power to meet our region's needs for years to come. So, starting this month, grid operators for northern Illinois will be securing power supply for the next three years - and there are a few changes customers need to know about.

Over the past decade, the power generation system has dramatically changed. The grid was once powered almost entirely by highly reliable power plants like nuclear and coal, which have fuel on site and can run 24/7 in all weather conditions. Today it has moved toward natural gas, which is subject to supply disruption if home heating becomes critical or the gas delivery system freezes, and renewables, which only run when the sun shines or when the wind blows.

In fact, natural gas and renewables made up 25 percent of the energy mix in 2000, and will nearly double to 49 percent by 2040.

While this shift has helped provide cleaner power, it has led to a major unintended consequence - the system is no longer sufficiently reliable, especially during extreme weather.

The challenges became clear during the 2014 polar vortex, when PJM, which operates an electric grid from northern Illinois to the mid-Atlantic, lost 22 percent of its power generation and came dangerously close to a large-scale blackout. A recent decision by the Federal Energy Regulatory Commission (FERC), the agency charged with ensuring the reliability of the grid, will help avoid such a crisis.

Recognizing this challenge, and that the PJM region is increasingly vulnerable, FERC approved critical reforms that will increase generation capacity and strengthen reliability of the region's power supply.

The plan, known as capacity performance, only pays power plants that deliver power when promised - especially in the hottest or coldest weather - and imposes financial penalties on those that don't.

PJM makes sure there will be enough electricity to meet demand. It's a regional approach that is far less expensive and more efficient than each state doing it alone.

Over the coming weeks, PJM will hold the first capacity auctions under the new plan to ensure enough supply for customers' needs in years to come.

This will not come without some additional cost, but the long-term value significantly outweighs the costs and comes at a time when the region is seeing the lowest wholesale energy prices in 10 years - 30 percent below prices in 2005.

Importantly, any auction proceeds will be reinvested in improving the reliability of our power plants and are not enough to offset losses at our unprofitable nuclear plants, for a couple reasons.

First, generators will have to invest hundreds of millions of dollars to harden their power plants against extreme weather and ensure they have sufficient fuel on hand to run in all conditions.

Exelon is constantly investing in its nuclear power plants, spending nearly $1 billion annually to add the latest technologies and keep them operating safely and reliably. In addition, we anticipate re-investing $350 million to $400 million in our fossil-fired plants over the next several years to improve reliability, depending on whether the units are chosen in the auction.

Second, there's significant risk exposure with these new reforms: The penalties we face if our plants do not perform are steep. We plan to invest capital in our plants to meet the strict standards and avoid getting hit with non-performance fees, but risks remain.

Finally, power prices have dropped substantially and are expected to continue to decline, further challenging the economics of our nuclear plants.

Reliability is the bedrock of our commitment to customers, and we have a responsibility to ensure a dependable electric supply today and into the future. Now is an opportune time to implement these reforms for a more reliable grid that will keep homes lit and warm, businesses running, and our economy growing.

Christopher M. Crane is president and CEO of Exelon Corporation.

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