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Texas Capacity Market Supporter Continues to Call New Capacity Investments in PJM Capacity Market "Questionable", Again Says New Plants "Unlikely to be Completed"

November 8, 2013

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Copyright 2010-13 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

Calpine, which spent much of an earnings call pressing for a centralized capacity market as the mechanism to meet a mandated reserve margin in Texas, continues to describe new physical capacity investments clearing the PJM capacity market as "questionable" and, "unlikely to be completed."

The clarion call for the Texas capacity market is that it is the only solution which can get new capacity built. But even as Calpine presses for a Texas capacity market, Calpine casts doubt on new generating plants, which have already cleared PJM's capacity market (the gold standard), actually getting built to meet the mandated reserve margin in the year they are required to come online. How Texas can continue to even entertain a capacity market given this clear shortfall even conceded by ardent capacity market supporters is beyond us.

In any event, this is what Calpine President and COO Thad Hill said of the PJM capacity market during an earnings call yesterday:

"Moving on to PJM as can be seen on the chart on the upper right. Starting next summer, the resources that make up the reserve margin increasingly consist of demand response resources rather than power generation resources. This is even more impactful in the next several years when you remove the plants that clear in the capacity auctions that either can't be built on time or unlikely to be completed. This will add volatility to market pricing as we saw this past summer on a couple of occasions, and the frequency of this will increase" (emphasis added).

In the chart referenced by Hill, Calpine describes these cleared capacity additions, which PJM will be relying on to meet the mandated reserve margin and which we stress are physical generation and not demand response, as, "Questionable (Online on time — or at all?)"

Of course, these concessions from Calpine are nothing new. During a second quarter earnings call this summer, Hill encouraged investors to not simply extrapolate the low capacity prices from the 2016/17 PJM capacity auction forward by casting doubt on such new capacity clearing the PJM capacity auction actually getting built.

"[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 in July (click here).

Asked by an analyst to expand on this statement, Hill had said during the July earnings 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."

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