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

…

Bir

dsb

oro

Co

mb

ined

Cyc

le P

lan

t

PSE

G K

eys

Ener

gy C

ente

r (K

EC)

Cai

thn

ess

Mo

xie

Free

do

m…

CP

V F

airv

iew

En

ergy

Cen

ter

Lack

awan

na

Ener

gy C

ente

r

Pan

da

Hu

mm

el S

tati

on

…

Wes

tmo

rela

nd

Gen

erat

ing…

York

2 E

ner

gy C

ente

r

Car

roll

Co

un

ty E

ner

gy C

ente

r

Ch

arle

s C

ity

CC

Pro

ject

(C

4G

T)

Gre

ensv

ille

Po

wer

Sta

tio

n

Hic

kory

Ru

n E

ner

gy S

tati

on

Lord

sto

wn

Gen

erat

ing

Stat

ion

Mid

dle

tow

n E

ner

gy C

ente

r

Mo

un

dsv

ille

Po

wer

Pro

ject

Sou

th F

ield

En

ergy

St. J

ose

ph

En

ergy

Cen

ter

-…

St. J

ose

ph

En

ergy

Cen

ter

-…

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

01

-05

-20

17

15

-05

-20

17

29

-05

-20

17

12

-06

-20

17

26

-06

-20

17

10

-07

-20

17

24

-07

-20

17

07

-08

-20

17

21

-08

-20

17

04

-09

-20

17

18

-09

-20

17

02

-10

-20

17

16

-10

-20

17

30

-10

-20

17

13

-11

-20

17

27

-11

-20

17

11

-12

-20

17

25

-12

-20

17

08

-01

-20

18

22

-01

-20

18

05

-02

-20

18

19

-02

-20

18

05

-03

-20

18

19

-03

-20

18

02

-04

-20

18

16

-04

-20

18

30

-04

-20

18

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

500

1000

1500

2000

2500

3000

3500

4000

19

70

19

72

19

74

19

76

19

78

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

20

14

20

16

Nu

mb

er o

f U

niq

ue

Ow

ner

s

Unique Owners by Plant First Online Year

0

50

100

150

200

250

19

70

19

72

19

74

19

76

19

78

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

20

14

20

16

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