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SHOCK: Calpine Exec Says Not All New Capacity Clearing PJM Capacity Market Likely to Get Built Calpine's President and Chief Operating Officer Thad Hill essentially conceded on an earnings call yesterday that new generating resources clearing the PJM capacity market cannot be relied upon for resource adequacy, and despite receiving assurance of a three-year forward revenue stream, still cannot get built.
Calpine is one of the chief proponents of a forward centralized capacity market in Texas, having told Texas that the forward capacity payments extracted from load are needed to assure investment in new generating capacity.
But yesterday during an earnings call, in discussing its perspective on PJM market conditions, Hill said of the 2016/17 PJM Base Residual Auction that, "not all new plants cleared will likely get built."
Hill was specifically encouraging investors to not simply extrapolate the low capacity prices from the 2016/17 capacity auction forward.
"[W]hile the results of the auction were disappointing, we'd encourage people not to simply extrapolate those results forward. We say this for several reasons, including the fact that not all new plants cleared will likely get built, and that incremental imports from MISO are likely to get materially more expensive," Hill said.
Asked by an analyst to expand on this statement, Hill later said during the call that it appears that, despite the capacity payments assured to these new units clearing the capacity auction, the new units are still, "struggling to achieve financing, particularly equity financing."
"[T]here's no doubt some of those plants will be developed. I would say, from the information we're hearing and, frankly, from inbound calls we've had from [developers] asking whether we wanted to participate in an equity way, that some of the new capacity may be struggling to achieve financing, particularly equity financing. So we'll just have to wait and see. Maybe they all get built, but we think it's likely, for sure, some will, but some, we think, will be more challenged," Hill said.
To be clear, Matters emphasizes that Hill was specifically discussing new "steel in the ground" generating capacity which cleared the auction (and thus, if available, is guaranteed to earn future capacity revenues), and not demand response or other non-asset resources whose future availability generators routinely cast doubt on.
Hill basically said that the PJM market has to "wait and see" if the new generating capacity clearing a forward capacity auction will actually be developed (and the "gold standard" of capacity auctions at that). Certainly a different outlook from what's being spun by capacity market supporters in Texas.
Indeed, the fact that new generating capacity clearing the PJM capacity market is "struggling" to attract financing -- to the point where Calpine is even casting doubt on all such new cleared capacity being built -- undermines one of the key arguments previously made by the "ERCOT Reliability Advocates" (of which Calpine is a member), who told the Public Utility Commission of Texas last year that, "From the investor's perspective the FRM [forward reliability mechanism, of which an at-least three-year forward capacity auction would be the central part] supports a reliable market because it provides the competitive forward price required to support future long-term investment."
Clearly, if cleared new generating resources are not likely to get built, the capacity market does not, "support future long-term investment."
Calpine also said in an investor presentation that PJM and its capacity market are, "increasingly dependent on high-cost resources for reliability," and that prices in the PJM energy market, "continue to respond to volatility," despite the presence of a capacity market (which Texas is told will dampen volatility since no scarcity will exist after hitting a minimum reserve margin).
Hill said that current PJM market conditions, "will continue to drive significant price upside in any kind of warm weather event."
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July 26, 2013
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Copyright 2010-13 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com
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