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ERCOT IMM Releases State of the Market Report

July 29, 2015

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Copyright 2010-15 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

ERCOT's Independent Market Monitor has released the 2014 state of the market report, which finds the overall performance of the ERCOT market to be competitive in 2014.

Regarding net revenue analysis, the IMM found as follows:

"Overall, the net revenues in 2014 were higher than those in 2013 and 2012, and all three years were much lower than in 2011. This is not surprising given shortages have been very infrequent over the past three years. Shortage pricing plays a pivotal role in providing investment incentives in an energy-only market like ERCOT. In order to provide adequate incentives, some years must exhibit an extraordinary number of shortages and net revenues that are multiples of annual net revenues needed to support investment," the IMM said.

"[T]he 2014 net revenue for new natural gas-fired units was somewhat higher than 2013 levels, primarily because of higher gas prices during the first quarter of 2014. Net revenues for coal and nuclear technologies increased by larger amounts from 2013 to 2014 because they benefit from the increase in natural gas prices," the IMM said

"Despite these increases, the net revenues produced by the ERCOT markets in 2014 were lower than the estimated annualized cost of investing in any of these new technologies," the IMM said:

• For a new natural gas-fired combustion turbine, the estimated net revenue requirement is approximately $80 to $95 per kW-year. The net revenue in 2014 for a new gas turbine was calculated to be approximately $37 per kW-year.

• For a new combined cycle unit, the estimated net revenue requirement is approximately $110 to $125 per kW-year. The net revenue in 2014 for a new combined cycle unit was calculated to be approximately $57 per kW-year.

• For a new coal-fired unit, the estimated net revenue requirement is approximately $265 to $310 per kW-year. The net revenue in 2014 for a new coal unit was calculated to be approximately $105 per kW-year.

• For a new nuclear unit, the estimated net revenue requirement is approximately $450 to $585 per kW-year. The net revenue in 2014 for a new nuclear unit was calculated to be approximately $227 per kW-year.

"These results indicate that during 2014 the ERCOT markets would not have provided revenues greater than the estimated costs of any of the types of generation technology evaluated," the IMM said

"Therefore, it may seem inconsistent with these results that new generation continues to be added in the ERCOT market," the IMM said, which the IMM said can be explained by the following factors:

"First, the net revenues in any one year may be higher or lower than an investor would require over the long term. In 2014, the net revenues were substantially lower than the estimated cost of entry because shortages were much less frequent than would be expected in the long-term on average. Shortage revenues play a pivotal role in motivating investment in an energy-only market like ERCOT. Hence, in some years the shortage pricing will be frequent and net revenues may substantially exceed the cost of entry, while in most other years it will be less frequent and net revenue will be less than the cost of entry," the IMM said

"Second, the costs of new entry used in this report are generic and reflective of the costs of new resources on a new, undeveloped, greenfield site. They have been reduced somewhat to reflect the lower costs of construction in Texas. However, companies may have opportunities to build generation at much lower cost than these estimates; either by having access to lower equipment costs, possibly though large, long-term supply agreements, or by adding generation to existing sites, or through some combination of both," the IMM said

"Third, in addition to the equipment cost, financing structures and costs can vary greatly between suppliers. Again, the net revenue analysis assumes generic financing costs that a specific supplier may be able to improve on. The only revenues considered in the net revenue calculation are those that came directly from the ERCOT real-time energy and ancillary services markets in a specific year. Suppliers will develop their own view of future expected revenue which may include a power sales contract for some amount of the output. A power sales contract could provide them with more revenue certainly than is available by relying solely on the ERCOT wholesale market. Given the level to which prices will rise under shortage conditions, small differences in expectations about the frequency of shortage pricing can greatly influence revenue expectations," the IMM said

Among other recommendations the IMM recommended that ERCOT implement changes to ensure all load deployments are reflected in the real-time dispatch energy and reserve prices.

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