London Economics International LLC Reflections on US market developments prepared for IPPSA Annual Conference, 2019 Banff, Alberta Julia Frayer Julia@londoneconomics.com March 12, 2019
www.londoneconomics.com 2 Range of wholesale market situations across the US ISO-NE MISO NYISO WECC (excl. CASIO) PJM SPP CAISO SERC & FRCC ERCOT Wholesale market Essentially ISO/RTO administered ISO/RTO dominated by Energy energy only energy market with administered energy vertically only with capacity voluntary (or bilateral) and centralized integrated market backstop spot capacity market capacity market utilities
www.londoneconomics.com 3 Capacity has been 20% to almost 40% of total wholesale market costs in regions with centralized capacity Historical wholesale market cost shares, 2015 to 2017 average PJM NYCA ISO-NE NYC 3% 3% 4% 3% 21% 23% 27% 37% 60% 69% 74% 76% ERCOT MISO CAISO SPP 7% 1% 37% 100% 100% 48% 93% 14% 1% Energy Capacity A/S and others Utility revenue requirements for power contracts Sources: ISO New England, New York Independent System Operator, Inc., PJM Interconnection LLC, Midcontinent Independent System Operator, California Independent System Operator, Southwest Power Pool, Electric Reliability Council of Texas
www.londoneconomics.com 4 Three US markets use a centralized capacity market with a downward sloping demand curve 2018 Installed Capacity Nameplate capacity (MW) 206,731 250,000 MW ISO-NE 200,000 Renewables NYISO Oil/ Dual 44,019 150,000 Natural Gas MW Hydro 100,000 37,534 PJM Uranium MW 50,000 Coal 0 PJM NYISO ISO-NE (US$) PJM New York New England Energy prices, APS zone: $36.8/MWh Capital zone: $37.8/MWh Internal Hub: $44.1/MWh implied market (13.8 MMBtu/MWh) (8.4 MMBtu/MWh) (8.9 MMBtu/MWh) heat rate, 2018 Capacity RTO: $4.22/kW-month NYCA: $1.81/kW-month $8.5/kW-month prices, 2018 (existing) All-in prices, APS zone: $ 42.6 Capital zone: $40.3/MWh Internal Hub: $55.8/MWh 2018 /MWh Energy prices, PJM West: $33.0/MWh Capital zone: $36.8/MWh Mass Hub: $43.3/MWh 2020 forwards
www.londoneconomics.com 5 Latest capacity market pricing outcomes indicative of a surplus supply situation Net CONE and Capacity Clearing Price (“CCP”) $16 Net CONE $14 Net CONE $12 CCP CCP Net CONE US$/kW-month $10 Net CONE Net CONE $8 $6 CCP CCP CCP $4 $2 $0 ISO-NE NYISO NYISO NYISO PJM (NYCA) (G-J locality) (NYC) ISO-NE: FCA#13 (February 2019) for 2022-2023 delivery year NYISO: June 2018 spot auction PJM: 2018 BRA for 2021-2022 delivery year
www.londoneconomics.com 6 New England had a construction boom more than 15 years ago, but in last five years, new generation additions made up of policy-driven renewables ISO-NE age of generation fleet and new entry/ retirement 5,000 40 Installed Capacity (MW) 4,000 Generation Fleet Aggregate Age 3,000 30 2,000 (Years) 1,000 20 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 -1,000 10 -2,000 -3,000 0 New entry - market driven New entry - policy driven Retirement Capacity-weighted average age Note: Most of the retirements in New England have been coal and nuclear. Coal retirements are a function of both environmental policy and economics.
www.londoneconomics.com 7 NYISO saw robust gas-fired investment in first decade of operations, with more sporadic gas entry recently and a lot of policy-driven renewables NYISO age of generation fleet and new entry/ retirement 5,000 40 Generation Fleet Aggregate Age 4,000 Installed Capacity (MW) 3,000 30 2,000 (Years) 1,000 20 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 -1,000 10 -2,000 -3,000 0 New entry - market driven New entry - policy driven Retirement Capacity-weighted average age Note: We do not distinguish between the various drivers for retirements. Most retirements are based on some element of economics, although some have a political angle as well..
www.londoneconomics.com 8 PJM has experienced waves of market-driven investment: large market, more opportunities for new additions PJM age of generation fleet and new entry/ retirement 15,000 40 Generation Fleet Aggregate Age 10,000 Installed Capacity (MW) 30 5,000 (Years) 0 20 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 -5,000 10 -10,000 -15,000 0 New entry - market driven New entry - policy driven Retirement Capacity-weighted average age Note: Most of retirements are coal-fired, and a result of both environmental policy and market economics
www.londoneconomics.com 9 Capacity market rules have evolved at 3 to 5 year intervals on average Timeline of capacity market reform in selected ISOs 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 ISO-NE 1 2 3 4, 5 6 7 NYISO 1 2 3 4 PJM 1 2 3 4 CAISO 1 2 3 = capacity market reform = pending proposal
www.londoneconomics.com 10 Capacity market rules have evolved at 3 to 5 year intervals on average (continued) Legend New New PJM CAISO England York 1: spot ICAP 1: spot ICAP 1: Spot ICAP 1: System and Local market market market Resource Adequacy instituted by state 2: FCM adopted 2: addition of regulator (spot 2: move to (with transition sloped capacity, bilateral) RPM, first period) demand curve Base Residual 2: CAISO wins 3: first Forward Auction held 3: addition of FERC approval for Capacity Auction Buyer side Flexible RA mitigation (MOPR) 3: introduction 4: addition of of Capacity sloped demand 3: proposal to 4: addition Performance curve move to forward of new zone: scheme capacity G-J Locality 5: introduction of procurement Performance 4: awaiting Incentive scheme FERC decision 6: move to MRI on RCO = capacity market demand curve proposal reform (MOPR) 7: CASPR implemented = pending proposal (to accommodate “sponsored resources”)
www.londoneconomics.com 11 Power markets were designed in an era of positive load growth… but that is no longer true for the future 10-year average expected outlook for peak load in each vintage of forecast year 3.0% 10-year average expected outlook 2.5% 2.0% for peak load (%) 1.5% 1.0% 0.5% 0.0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 -0.5% Year when forecast published ISO-NE NYISO PJM Sources: ISO-NE CELT, NYISO Gold Book, PJM Load Forecast
www.londoneconomics.com 12 Markets intended to drive investment, but are out- of- market policies and “events” in driver seat? Policy encroaching on market POLICIES EVENTS POLICIES POLICIES EVENTS EVENTS POLICIES MARKETS
13 www.londoneconomics.com LEI expects the RCO proposal to have negligible impact on the PJM RTO capacity price, but Extended RCO proposal will raise capacity prices by as much as 20% Forecast for 2022/2023 Delivery Year - PJM RTO under Resource Carve Out (“RCO”) and the Extended RCO Parallel leftward shift of the supply curve from removing 7.7. GW of plants with actionable subsidies Capacity (MW)
www.londoneconomics.com 14 Most often, the Gross CONE has come down at the periodic demand curve re-sets ► This is consistent with technology improvements in electric generation equipment, which the US Department of Energy has recorded to be as much as 28% on average for gas-fired generation from 2013 to 2015* Gross CONE in ISO-NE, NYISO and PJM $30 Circles indicate years where Gross $25 CONE was changed as a consequence of the demand curve Nominal US$/kW-month ICAP $20 reset process $15 $10 $5 $0 ISO-NE NYISO (NYCA zone) PJM NYISO (NYC) Sources for Gross CONE: ISO-NE: CONE and ORTP Updates; PJM: BRA Planning period parameters; NYISO: 2010, 2013 and 2016 Demand Curve Reports * Source: EIA. “Construction costs for most power plant types have fallen in recent years”. July 5, 2017. <https://www.eia.gov/todayinenergy/detail.php?id=31912>
www.londoneconomics.com 15 Technological innovation, changes in supply, and policy mandates are guiding developments in power markets Decarbonization State policies driving renewable generation mandates or carbon pricing mechanisms Examples include NY’s CES, Massachusetts procurement of offshore wind and large hydro Innovation Technical innovation driving down costs of renewable generation and storage resources - capital costs for wind resources declined by 25% and solar by 70% over the last 10 years Emergence of smart grids and new business models for utilities Changes in supply Low natural gas prices and policy-driven entry of renewable generation is forcing retirement of older coal and nuclear assets More capacity market rule changes on the horizon Resilience Resilience of the electric grid is challenged by evolving supply mix, so that utilities must examine ways of maintaining reliability of the transmission system Out of market mechanisms are being implemented to ensure resilience
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