© 2013 Platts, McGraw Hill Financial. All rights reserved.

Do Capacity MarketsSend a Signal for New-build Generation?

Peter Maloney, Senior Writer, Platts Power Group

Platts Commodity Week, Houston

October 9, 2013

Do Capacity MarketsSend a New-build Signal?

• What are capacity markets and why were they created?• To ensure reliability by providing the “missing money”

• The “missing money” problem • In markets with capped energy prices and mandated adequacy

requirements, returns from energy and ancillary services will not provide sufficient compensation to support the cost of new generation. – Dr. Roy Shanker

2

Do Capacity MarketsSend a New-build Signal?

There are two types of electricity:

• Energy – keeps the lights on

• Capacity – makes sure they stay on

3

Do Capacity MarketsSend a New-build Signal?

• How do you pay for something that is not used, i.e., capacity?

• Assign a value to capacity via a competitive auction

• There are four organized capacity auctions:– ISO-NE

– NY ISO

– PJM Interconnection

– Midcontinent ISO

4

Do Capacity MarketsSend a New-build Signal?

5

Do Capacity MarketsSend a New-build Signal?

6

• Peak Load (MW – 7/2011) 163,848

• Capacity (MW) 185,600

• Energy (GW - 2012) 832,331

• Members 800+

• Generation Sources 1,365

• Millions - people served 61

• Area Served (Sq Miles) 214,000

• States served 13 + DC

• Transmission Lines (Miles) 62,000+

Do Capacity MarketsSend a New-build Signal?

7

• Peak (7/23/12) 98,576 MW

• Capacity 131,522 MW

• Annual billing 526 TWh

• 11 states, one Canadian province

Do Capacity MarketsSend a New-build Signal?

8

• Peak demand (7/19/13) 33,956 MW

• Capacity 37,925 MW

• Transmission 11,005 miles

• Total power usage (2012) 162,842 GWh

• Peak demand (8/2/06) 28,130 MW

• Capacity 32,000 MW

• Generators 350

• Customers served 6.5 million

• RTO population 14 million

• Interconnections to N.Y., Canada 13

• High voltage transmission (miles) 8,000 miles

Do Capacity MarketsSend a New-build Signal?

• Distinctive features of capacity markets:

– Demand curves

– CONE (cost of new entry)

– Mitigation

9

Do Capacity MarketsSend a New-build Signal?

10Demand Curves for PJM, NYISO, and ISO-NE (Source: Brattle Group)

Demand curves: vertical vs. sloped

Do Capacity MarketsSend a New-build Signal?

• CONE

– The levelized capital costs and annual fixed O&M costs for a hypothetical gas-fired combustion turbine or combined-cycle unit in the delivery year for that capacity market.

11

Do Capacity MarketsSend a New-build Signal?

• Mitigation

– Supply side:

pivotal supplier test (PJM, NYISO)

de-list bids (ISO-NE)

– Demand side:

MOPR (minimum offer price rule)

(& exemptions to MOPR)

12

Do Capacity MarketsSend a New-build Signal?

Capacity market comparisons

`PJM NYISO ISO-NE MISO

Auction name base residual market (BRA) installed capacity market (ICAP)

forward capacity auction (FCA)

planning resource auction

(PRA)

Type uniform price uniform price descending clock uniform price

Forward commitment period three years six months three years two months

Delivery period one year one month or six months one year one year

Unit price MW-day kW-month kW-month MW-day

Replacement auction three annually no annual & monthly no

Demand curvedownward slope downward slope vertical vertical

Generation must offer? yes only pivotal suppliers only new resources only previously cleared resources

Do Capacity MarketsSend a New-build Signal?

14

Capacity Clearing Prices in Each RTO and Select Sub-Regions for Commitment Periods between 2006 – 2017

Do Capacity MarketsSend a New-build Signal?

15

NERC 2013 Summer Reliability Report

NYISO MISO PJM ISO-NE

projected demand (MW) 33,279 91,532 145,029 26,690

anticipated resources (MW) 39,592 108,742 187,531 32,458

anticipated reserve (%) 18.8 18.8 29.3 21.6

NERC reference reserve (%) 17 14.2 15.9 15

Do Capacity MarketsSend a New-build Signal?

16

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

2007 2008 2009 2010 2011 2012 2013

Installed Capacity

Forecast Peak

Reserve Margin

PJM Interconnection reliability metrics

Do Capacity MarketsSend a New-build Signal?

17

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

2010 2011 2012 2013

18,665 18,645 18,538 18,705

33,452 33,86532,439 33,279

38,97037,782 38,622 38,936

41,898 42,159 43,68641,452

Megaw

atts

Average Demand

Peak Load

Required Resources

Available Resources

New York ISO reliability metrics

Do Capacity MarketsSend a New-build Signal?

18

PJM and ISO-NE: new generation additions (MW)

0

1,000

2,000

3,000

4,000

5,000

6,000

ISO-NE

PJM

Do Capacity MarketsSend a New-build Signal?

19

Capacity Additions in PJM auctions, 2014-15 (Source: Brattle Group)

Do Capacity MarketsSend a New-build Signal?

20

• PJM’s 2016-17 Base Residual Auction drove investment in:

– New generation

– Imports

– Retirements

– Demand Response

Do Capacity MarketsSend a New-build Signal?

21

0

20

40

60

80

100

120

140

160

180

200

2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17

MW

-day

PJM price signals

Do Capacity MarketsSend a New-build Signal?

22

• Panda-Moxie Liberty 829 MW gas plant in Bradford County, Pennsylvania

• Based on $2/MMBtu nat. gas in Marcellus vs. $4/MMBtu at Henry Hub

New Generation

Generation Uprates

Imports Demand Response

Energy Efficiency

2016/2017 4,282 1,181 7,483 12,408 1,117

2015/2016 4,899 447 3,935 14,833 923

2014/2015 416 341 3,017 14,118 822

New generation in PJM’s 20116-17 BRA

Do Capacity MarketsSend a New-build Signal?

23

Capacity imports into PJM, 2016-17 BRA

2015-16 2016-17

west of PJM 3,621 7,070

other 314 413

total 3,953 7,483

• Only 4,788 MW (64%) of the cleared imports

had confirmed firm transmission service

• MISO auction: $1.05/MW-day

• PJM auction: $59.37/MW-day

• Ameren increased exports to PJM 100 to 900 MW

• Dynegy is looking to export up to 3 GW into PJM

Do Capacity MarketsSend a New-build Signal?

24

Retirements

• FirstEnergy to close another 2,080 MW of coal plants in

PJM

• A second wave of retirements?

• NRG Energy to close Norwalk Harbor plant in Connecticut

• Another 6 GW of plants at risk of retirement?

Do Capacity MarketsSend a New-build Signal?

25

• Issues facing capacity markets:

– Demand Response

– Gas-electric integration

– Imports

– Mitigation (MOPR)

Do Capacity MarketsSend a New-build Signal?

26

Issues: Demand response

• PJM is looking at changes to its demand curve

Do Capacity MarketsSend a New-build Signal?

27

Issues: Gas-electric integration• ISO-NE – gas used for heating; lack of natural gas pipelines

• MISO – looming coal retirements

Issues: Capacity imports• Ameren increased 100 MW to 900 ME

• Dynegy looking to export up to 3,000 MW

• Will PJM limit imports?

Issues: MOPR• New Jersey – 2,000 MW LCAAP program

• Maryland – PSC solicitation for in-state generation

Do Capacity MarketsSend a New-build Signal?

28

Panda in Texas

Temple: 1,200 MW

Sherman: 1,200 MW

ERCOT’s footprint

2014 13.80%

2015 11.60%

2016 10.40%

2017 10.50%

2018 9.40%

2019 7.40%

2020 6.50%

2021 6.00%

2022 5.20%

2023 4.50%

ERCOT’s dwindling reserve margins

© 2013 Platts, McGraw Hill Financial. All rights reserved.

Questions?