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1 Office of Policy
U.S. Electricity Generation Market Trends
IEA/METI Expert Workshop VIII
June 15, 2018
Eric Hsieh, Department of Energy
2 Office of Policy
Generation investment trends: growing diversity
• Overview of generation procurement methods in the U.S.
• Examples of recent generation investment decisions – Regulated
– Qualifying Facility/Power Purchase Agreement (PPA)
– Capacity Merchant
– Full Merchant
– Preferred Merchant
• Macro market trends: more players, smaller projects
• The “art” of regulation
3 Office of Policy
Risk Allocation of Generation Procurement Mechanisms
Regulated Qualifying
Facility (QF) Renewable PPA Conventional
PPA Merchant in Capacity Mkt
Preferred Merchant
Merchant Energy-Only
CapEx (i.e. construction, land acquisition)
Ratepayers Asset Owner Asset Owner Asset Owner Asset Owner Asset Owner Asset Owner
Interest Ratepayers Asset Owner Asset Owner Asset Owner Asset Owner Asset Owner Asset Owner
O&M Ratepayers Asset Owner Asset Owner Asset Owner Asset Owner Asset Owner Asset Owner
Fuel Ratepayers Ratepayers or Asset Owner
n/a Ratepayers Asset Owner Asset Owner Asset Owner
Taxes Ratepayers Asset Owner Asset Owner Asset Owner Asset Owner Asset Owner Asset Owner
Capacity Ratepayers Ratepayers Ratepayers Ratepayers Ratepayers Ratepayers Asset Owner
Energy Ratepayers Ratepayers Ratepayers Ratepayers Asset Owner Asset Owner Asset Owner
Ancillary Services Ratepayers Ratepayers Ratepayers Ratepayers Asset Owner Asset Owner Asset Owner
Policy Payment Taxpayers Taxpayers
Approval (who can credibly commit to build)
Regulator Congress, FERC Regulator Regulator Asset Owner Regulator, Legislature
Asset Owner
←Cost-Based Market-Based→
4 Office of Policy
Geography of Procurement Methods (In-Service Plants)*
Regulated Qualifying Facility Renewable PPA Conventional PPA Merchant in Capacity Mkt Preferred Merchant Merchant Energy-Only
Map: DOE/OP Staff based on ABB/Velocity Suite Data (2018)
*Nearest categorization based on reported ownership, QF status, fuel, geography, PPA, and other publicly-available data
ISO/RTO Region Non-Market Region
5 Office of Policy
Recent Generator Procurement Methods
Capacity Merchant 36.2%
Conventional PPA 6.0%
Full Merchant 5.1% Qualifying Facility
0.1%
Regulated 31.6%
Renewable PPA 20.9%
Procurement Type for Units Under Construction, 2018 Q2
Chart: DOE/OP Staff based on S&P Global Data (2018)
Nearest categorization based on reported ownership, QF status, fuel, geography, PPA, and other publicly-available data
6 Office of Policy
Regulated
Map: DOE/OP Staff based on ABB/Velocity Suite Data (2018)
7 Office of Policy
Regulated: Nuclear Retirement and Replacement
• Diablo Canyon – 2240 MW nuclear in California
– Online 1985
– License expiration in 2024-2025
• License extension scenario
– 2025: $102/mwh-$211/mwh1
– 2030: $107/mwh-$219/mwh1
– NPV: ~$17b2
• Replacement energy scenario – 2025: proposed cost cap of $98/mwh3
– 2025 NPV: $12b-$15b2
– Energy efficiency, renewables, storage
– Retain Helms Pumped Storage plant
• Support for labor and San Luis Obispo4
• CPUC approved retirement, Jan. 20184
1. Pacific Gas and Electric Company, “Diablo Canyon Power Plant Need Analysis,” Page 2-22, August 6 2016
2. Caldwell, Marcus, White, Anthony, “A Cost Effective and Reliable Zero Carbon Replacement Strategy for Diablo Canyon Power Plant,” 2015
3. Pacific Gas and Electric Company, “Replacement of Diablo Canyon Power Plant,” Page 3-9, August 6 2016
4. CPUC, “Decision Approving Retirement of Diablo Canyon Nuclear Power Plant,” A.16-08-006, January 11, 2018
Image credit: flickr/dsearls (cc-by-sa-2.0)
8 Office of Policy
QF/Regulated: Coal Retirement and Replacement
• Calypso Indiantown
– 330 MW coal cogenerator in Florida
– Online 1995
• Qualifying Facility Power Purchase Agreement Terms (1991)
– Energy indexed to coal price
– Capacity fixed based on 1990 IGCC
– 2015 operations:
• 24% capacity factor (min gen floor)
• All in cost: $264/mwh
• FPL avoided cost: $18/mwh
• Buyout terms
– FPL buys Indiantown for $451m
– FPL avoids PPA payments: $594m through 2025
– Indiantown closes after new NG pipeline is built
• FL PSC approved in 2016
Image credit: Google Maps (2018)
Source: FPL, “Petition for Approval of Arrangement to Mitigate Impact of Unfavorable Indiantown Cogeneration Power Purchase Obligation,” June 20, 2016, FL PSC Docket 160154-EI
9 Office of Policy
Capacity Merchant
Map: DOE/OP Staff based on ABB/Velocity Suite Data (2018); J. Kennedy and E. Hsieh, “Assessing the Economics of Newbuild Gas Plants in the PJM Market,” Electricity Journal, Forthcoming
New natural gas combined cycle under construction in PJM, 2018 Q1
10 Office of Policy
Capacity Merchant: New Natural Gas Combined Cycle
• 2018 PJM System – 2018 summer peak: 152 GW1
– 2018 capacity: 189 GW1
– 2018 reserve margin: 32.8%1
• 2018 PJM Queue – ~20 GW of NG CC categorized as
“advanced development” or “construction begun”2
– $20b total construction cost2
– Estimated Equity IRR: 15.3% avg
• 8.85% (min) to 20.05% (max) 2
• Major Sensitivities – Gas/energy/capacity prices2
– Debt/equity ratios and costs2
0%
5%
10%
15%
20%
25%
Sew
aren
Gas
Po
wer
Pla
nt
Wild
cat
Po
int
Gen
erat
ion
…
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mb
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le P
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airv
iew
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ergy
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Car
roll
Co
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arle
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ity
CC
Pro
ject
(C
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Gre
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Po
wer
Sta
tio
n
Hic
kory
Ru
n E
ner
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tati
on
Lord
sto
wn
Gen
erat
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Stat
ion
Mid
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tow
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ner
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ente
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Mo
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ille
Po
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Pro
ject
Sou
th F
ield
En
ergy
St. J
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-…
St. J
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En
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-…
Estimated IRRs for New Natural Gas Combined Cycle Generators in PJM
Bull Base Bear
1. NERC “2018 Summer Reliability Assessment,” June 1, 2018 2. J. Kennedy and E. Hsieh, “Assessing the Economics of Newbuild Gas Plants in the PJM
Market,” Electricity Journal, June 2018, https://doi.org/10.1016/j.tej.2018.05.001 3. Chart: DOE/OP Staff based on S&P Global Data (2018) 4. Goldman Sachs, “Historical Distributions of IRR,” Vol. 11 (2001) 5. Preqin, “Preqin Special Report: Conventional and Renewable Energy,” New York (2017)
Median “Conventional Energy Fund” IRR5
Private Equity IRR Target4
11 Office of Policy
Merchant Energy-Only
Map: DOE/OP Staff based on ABB/Velocity Suite Data (2018)
X – Retired in 2017 O – Restarted in 2018
12 Office of Policy
Merchant: ERCOT Retirements and Restarts
1. S&P Global, “Operating costs of Luminant coal plants run generally higher than ERCOT prices,” October 17, 2017
2. S&P Global, “With recent retirements, new scrutiny on ERCOT supply,” October 30, 2017 3. RTO Insider, “ERCOT Board of Directors Briefs,” April 10, 2018” S&P Global, “ERCOT
summer power prices dip after plant restart announcements,” Thursday, April 19, 2018 4. ERCOT, “Final Seasonal Assessment of Resource Adequacy for the ERCOT Region (SARA)
Summer 2018”, April 20, 2018
20
17
Low wholesale prices1
PPA Terminations
20
17
Q4
4.6 GW in announced retirements2 2
01
8 Q
2
900 MW in restarted capacity3
728 MW in new capacity4
20
18
Su
mm
er
Forecasted Peak: 72.8 GW4
Forecasted Capacity: 78.2 GW4
[A]nticipated record demand, combined with recent plant retirements…is expected to result in tight reserves that could trigger the need for… contracted Emergency Response Service[.] - ERCOT4
13 Office of Policy
Preferred Merchant
Large Map: DOE/OP Staff based on ABB/Velocity Suite Data (2018) Inset Map: S&P Global, “NY nuclear credits boost upstate nuclear plants,” August 19, 2016
14 Office of Policy
$0.0 m
$1.0 m
$2.0 m
$3.0 m
$4.0 m
$5.0 m
$6.0 m
$7.0 m
$8.0 m
$9.0 m
$10.0 m
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Rev
enu
es a
nd
Co
sts,
$m
/day
Nine Mile Point Modeled Revenues and Costs
Capacity Energy ZEC Modeled Cost
Preferred Merchant: Greenhouse Gas Attribute Payment
• NY Zero Emissions Credit – “…ensure the proper
valuation of carbon-free power from nuclear plants.”1
– A “bridge to a renewable future”1
– Eligible resources: nuclear generators in upstate NY
– 6 tranches, two years each, through 2029
• ZEC Payments – Calculation: subtract RGGI
effect and market revenue index from carbon
– 2017-2018 Tranche 1: $17.48/mwh
• Active legal challenges 1. NY PSC, “Order Adopting a Clean Energy Standard,” August 1, 2016 2. S&P Global, “NY nuclear credits boost upstate nuclear plants,” August 19, 2016 3. Chart: DOE/OP Staff based on S&P Global Data (2018)
15 Office of Policy
Macro Market Trends: More Owners, Smaller Units
0
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3000
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4000
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mb
er o
f U
niq
ue
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ner
s
Unique Owners by Plant First Online Year
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Ave
rage
Un
it S
ize
(MW
)
Average Unit Size by Online Year
Charts: DOE/OP Staff based on S&P Global Data (2018) and ABB/Velocity Suite Data (2018)
16 Office of Policy
Conclusion
• Diverse methods for generation capacity decisions in the U.S. – Overseen by a regulator (risks allocated to ratepayers)
– Mixed structures
– Medium-term capacity markets
– Short-term energy markets (risks allocated to asset owners)
• Increasing variety of approaches
U.S. Generator Procurement, USDOE
Or is it policy?
Obliteration Room, Yayoi Kusuma
Is it art?
Image via flickr/Alan Teo (CC BY-NC-SA 2.0)
17 Office of Policy
Appendix
18 Office of Policy
Renewable PPA
19 Office of Policy
Qualifying Facility
20 Office of Policy
Conventional PPA