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NRG's Crane: Economics Do Not Support New Generation Build "In This Country"; Statement Casts Doubt on Efficacy of Capacity Market in ERCOT
July 23, 2012
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Copyright 2010-
Economics do not support the construction of new capacity "in this country" unless the plant is being built pursuant to a state's renewable portfolio standard, or has a bilateral contract, NRG President and CEO David Crane said today during a media call regarding the company's merger with GenOn.
"The fact of the matter is that, right now, with the way that natural gas prices have weighed on wholesale electricity prices, you can't really economically justify building any new type of generation in this country, at this point, even natural gas-fired generation, unless a couple things exist: One, if you're building a project in a state that has a renewable portfolio standard and you're building something that qualifies ... or secondly, if you have a bilateral contract for a new conventional plant, [and] both GenOn and NRG have taken advantage of the few opportunities that exist in that way," Crane said [note: these bilateral contracts have included mandated procurements ordered by state regulatory commissions to build new capacity or reduce capacity prices]
Crane's broad statement that new generation cannot be economically justified "in this country" by its very nature includes the RTOs with capacity markets. Indeed, Crane conspicuously omitted the presence of a capacity market as one of the two factors allowing new build to proceed.
This begs the question of whether adding a capacity market, or similar mechanism designed to impose an obligation on load to pay for generators' fixed costs, in the ERCOT energy-only market would result in any new build -- or would only result in incumbent asset owners collecting additional rents.
Indeed, Crane conceded that only "slightly" higher wholesale market prices in ERCOT are needed to justify new build, saying that prices are only 10-15% off of where they need to be for people to start building. Crane then did qualify that assessment by stating that investors need to see strength across the forward curve to support a 40-50 year investment, and that transient price increases will not spur new build.
Notwithstanding that only slightly higher prices are needed, Crane said that he supports a capacity market in ERCOT (while respecting policymakers' desire to make the energy-only market work), and expects discussion of future ERCOT market design to center on something "akin" to a capacity market or something that "looks and feels" like a capacity market, because "I think that may be what gets it over the hump in terms of getting a few people to start adding capacity" -- even though, by his own statement, areas of this country with capacity markets cannot support new build absent RPS or a bilateral contract.
Copyright 2010-
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