Do RTOs Need a Capacity Market?

Do RTOs Need a Capacity Market? ELCON Fall Workshop & State Industrial Group Meeting October 25, 2011 Ezra D. Hausman, Ph.D. www.synapse-energy.com 2011 Synapse Energy Economics Inc. All rights reserved.

Topics Covered (not necessarily in order) The past vs. the future What is Resource Adequacy today? Capacity markets mismatch Environmental compliance planning and energy costs Flawed capacity market paradigm and its costs Alternatives www.synapse-energy.com 2011 Synapse Energy Economics Inc. All rights reserved. 2

The Past vs. the Future Planning requirements with environmental regs, CO 2, RPS, Average cost vs. marginal cost where are we? Growing coordination More opportunities, including opportunity for conflict Portfolios vs. individual assets Load growth and environmental constraints www.synapse-energy.com 2011 Synapse Energy Economics Inc. All rights reserved. 3

Some things have not changed Capital-intensive nature of electric sector investments Requirement for access to fuel, natural resources, and transmission Siting constraints Profit motive Benefits of demand resources www.synapse-energy.com 2011 Synapse Energy Economics Inc. All rights reserved. 4

Capacity Markets Context Source: Integrated Resource Planning in Restructured States, Presentation by Sam Newell of the Brattle Group, EUCI Conference, October 17, 2011 www.synapse-energy.com 2011 Synapse Energy Economics Inc. All rights reserved. 5

Capacity Markets Context Capacity prices were expected to typically be around a generator s net Cost of New Entry (net-cone) When capacity prices rise above net-cone, developers should see that as a signal to invest in new generation Prices below net-cone indicate oversupply Capacity prices remain well below net- CONE in all three capacity markets www.synapse-energy.com 2011 Synapse Energy Economics Inc. All rights reserved. 7

Capacity Markets Context $400 $350 $300 RPM Clearing Price PJM Calculated Net-CONE $250 $/MW-day $200 $150 $100 $50 $0 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 Auction Year www.synapse-energy.com 2011 Synapse Energy Economics Inc. All rights reserved. 8

Capacity Markets Context $8.00 $7.00 $6.00 $/kw month $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 FCM Clearing Price ISO NE Calculated Net CONE 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 Auction Year www.synapse-energy.com 2011 Synapse Energy Economics Inc. All rights reserved. 9

Capacity Markets Context Source: James F. Wilson, Wilson Energy Economics, Forward Capacity Market CONEfusion, June 2010. www.synapse-energy.com 2011 Synapse Energy Economics Inc. All rights reserved. 10

Capacity Markets Context In PJM, most of the capacity market revenues go to baseload generators. Oil, 8% Coal, 29% Nuclear, 21% Hydro, 5% Demand Response Energy Ef f iciency Imports Coal Natural Gas Hydro Nuclear Oil Solid Waste Solar Wind Natural Gas, 33% www.synapse-energy.com 2011 Synapse Energy Economics Inc. All rights reserved. 11

Vermont s Historical GHG Emissions, GHG Reduction Goals, and Draft Forecast of Future GHG Emissions Source: Vermont Department of Public Service. Vermont Comprehensive Energy Plan 2011: Facts, Analysis and Recommendations, Volume 2. Public Review Draft. Page 14, Exhibit 1-1. 2011. www.synapse-energy.com 2011 Synapse Energy Economics Inc. All rights reserved. 12

Average Retail Prices of Electricity (left) and Cost of Fossil Fuel Receipts at Electric Generating Plants (right) Average Retail Prices of Electricity (Cents per kilowatthour), by sector, 1973 2010 Cost of Fossil Fuel Receipts at Electric Generating Plants (Dollars per million Btu, including taxes), costs, 1973 2010 Source: U.S. Energy Information Administration / Monthly Energy Review September 2011 www.synapse-energy.com 2011 Synapse Energy Economics Inc. All rights reserved. 14

Net capacity installed (or retired) in the U.S. by fuel Source: Memorandum: Using Existing Natural Gas Capacity to Displace Coal Generation, 2011 Update. Synapse Energy Economics. August 2011. Page 3. www.synapse-energy.com 2011 Synapse Energy Economics Inc. All rights reserved. 15

Coal (a) and CCNG (b) generation by capacity factor 2008, 2009, and 2010 Source: Memorandum: Using Existing Natural Gas Capacity to Displace Coal Generation, 2011 Update. Synapse Energy Economics. August 2011. Page 7. www.synapse-energy.com 2011 Synapse Energy Economics Inc. All rights reserved. 16

Capacity factors for CCNG units by season and region for (a) on-peak and (b) off-peak hours Source: Memorandum: Using Existing Natural Gas Capacity to Displace Coal Generation, 2011 Update. Synapse Energy Economics. August 2011. Page 9. www.synapse-energy.com 2011 Synapse Energy Economics Inc. All rights reserved. 17

Upcoming EPA rules 2011 2012 2013 2014 2015 2016 2017 2018 Cross State Air Pollution Rule (SO2/NOx) Beyond Coal Combustion Residuals (Ash) Hazardous Air Pollutants (including mercury) Cooling Water Intake Effluent Limitation Guidelines CO2 Prevention of Significant Deterioration CO2 New Source Performance Standards NAAQS Review for PM 2.5 NAAQS Review for NOx and SO2 Secondary Standards NAAQS Review for Ozone Proposed rules Final rules Compliance period/naaqs designations effective Source: Economics of Existing Coal Generation and Opportunities for Clean Electricity. Prepared by Synapse Energy Economics. May 2011. Slide 9. www.synapse-energy.com 2011 Synapse Energy Economics Inc. All rights reserved. 18

Projected coal capacity at risk under various regulatory policies 140 120 100 80 60 40 Estimate Coal Capacity "At Risk" (GW) 20 0 Ash only CATR only MACT only 316(b) only CATR and MACT CATR, MACT, water CATR, MACT, Ash, Water, CO2 CATR, MACT, Ash, Water NERC CCR NERC CATR Bernstein CATR Sargent & Lundy CATR NERC MACT ICF/INGAA MACT Bernstein MACT NERC 316(b) ICF/EEI Scenario 1 MJ Bradley (from PIRA) CRA MACT Brattle (Scrubber & SCR) Credit Suisse Scen 1 Credit Suisse Scen 2 Credit Suisse Scen 3 Brattle (Scrubber, SCR, & Cooling) ICF/EEI Scenario 2 NERC Combined ICF/EEI Scenario 3 Source: Economics of Existing Coal Generation and Opportunities for Clean Electricity. Prepared by Synapse Energy Economics. May 2011. Slide 10. www.synapse-energy.com 2011 Synapse Energy Economics Inc. All rights reserved. 19

Observations Based on Coal-at-Risk Studies Comprehensive regulation (analysis?) results in more coal at risk Natural gas prices within the bandwidth modeled do not explain differences in study results regarding plants at risk Regulatory details (e.g., flexibility) have a big impact on plants at risk Only one analysis included CO 2 cost, a significant omission! Take Home: Demand comprehensive analysis! www.synapse-energy.com 2011 Synapse Energy Economics Inc. All rights reserved. 20

U.S. coal units affected by environmental regulations (non-economic with respect to existing natural gas) All Units Units > 200 MW 0 50 100 150 200 250 Capacity Non Economic (GW) FGD SCR Baghouse ACI Cooling CO2 @ $21/tCO2 Source: Economics of Existing Coal Generation and Opportunities for Clean Electricity. Prepared by Synapse Energy Economics. May 2011. Slide 14. www.synapse-energy.com 2011 Synapse Energy Economics Inc. All rights reserved. 21

GHG allowance price projections based on analyses of federal legislative proposals levelized Source: 2011 Carbon Dioxide Price Forecast. Synapse Energy Economics. February 2011. Page 9. www.synapse-energy.com 2011 Synapse Energy Economics Inc. All rights reserved. 22

Synapse CO2 trajectories and GHG allowance price projections for HR 2454 and APA 2010 levelized 2015-2030 Source: 2011 Carbon Dioxide Price Forecast. Synapse Energy Economics. February 2011. Page 21. www.synapse-energy.com 2011 Synapse Energy Economics Inc. All rights reserved. 23

Synapse 2011 carbon price forecast Source: 2011 Carbon Dioxide Price Forecast. Synapse Energy Economics. February 2011. Page 1. www.synapse-energy.com 2011 Synapse Energy Economics Inc. All rights reserved. 24

Electric utility energy efficiency costs CT IOUs 2000-2005 70 60 MA IOUs 2003-2005 Efficiency Vermont 2000-2006 SMUD 2000-2006 50 Seattle 2000-2005 2006$/MWh 40 30 PG&E 2000-2005 SDG&E 2000-2005 SCE 2000-2005 20 10 0 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% Annual Incremental Savings as % in Annual Sales Source: Prudent Planning and New Coal Fired Power Generation. Prepared by Synapse Energy Economics for CERES Conference 2008. April 2008. Slide 7. Mass. Electric 2000-2002 W. Mass. Electric 2000-2002 Boston Ed/Nstar 2000-2002 Cambr. Elec. 2000 Com. Elec. 2000 Fithb. G&E 2000-2002 www.synapse-energy.com 2011 Synapse Energy Economics Inc. All rights reserved. 27

Capacity Markets Paradigm Flaws All capacity is not created equal There is a limited market for new generic capacity only in constrained LDAs There is even less market for a one-year capacity product, three years out, through a centralized market Administratively determined price is not the same as a market price Costs: in PJM, about $50 Billion and counting Incenting the Old, Preventing the New www.synapse-energy.com 2011 Synapse Energy Economics Inc. All rights reserved. 28

Alternatives Support (and do not discourage) long-term bilateral capacity and self supply Allow market to recognize distinctions in types of capacity i.e., state mandates, RPS, etc. Allow flexibility for portfolios of energy and capacity that can combine attributes and deliver value Don t cook the market outcome by imposing an RPM-style, all-requirements auction Portfolios, portfolios, portfolios www.synapse-energy.com 2011 Synapse Energy Economics Inc. All rights reserved. 29

Integrated portfolio management in a restructured supply market Source: Integrated Portfolio Management in a Restructured Supply Market. Resource Insight, Inc., and Synapse Energy Economics, Inc., prepared for Ohio Consumers' Counsel. June 2006. Page 31. www.synapse-energy.com 2011 Synapse Energy Economics Inc. All rights reserved. 30