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Platts (2009) - Electric Power Daily Citing what he says are extreme price fluctuations in Northeastern capacity markets, the CEO of a leading power plant developer believes that power purchase agreements are vital in order to obtain financing for new electric generation projects in the region. "The one thing that is very clear in this market is the fact that you are going to need a PPA," said Doug Egan, CEO of Competitive Power Ventures, a developer of natural gas-fired and wind generation projects. Northeastern capacity markets "just fall way short" of what is needed to get financing in the current financial environment, he said. Capacity prices are insufficient, the amount of time given for repayment is too short, and "wild fluctuations" in capacity prices in the Northeastern capacity markets make them "totally unreliable" in terms of financing, he said. "If you are going to have a prayer for a deal in these markets, it's really going to be PPA-based," said Egan, speaking at Platts' Northeast Power Markets Forum in Washington. The recession following the financial crisis has pretty much flattened demand growth in the Northeast, he said. But history shows that when a bad economy turns around and starts gaining, electricity load not only grows, it actually catches up to the growth curve it had been on previously, he said. "We need to think about what the [independent system operators] are doing in that light," he said, adding that the PJM Interconnection seems to be focusing on "coal by wire" from the Ohio River Basin to the East Coast. These transmission projects are frequently controversial, but lines are getting built, he said. The New York Independent System Operator and ISO New England are aggressively increasing their reliance on demand response, according to Egan. In New York, demand response represents close to 4% of supply, and in New England it is approaching 6%, he said. But since demand response providers sometimes do not respond to calls to reduce their load, some of that supply is not so reliable, he said. Depending on load growth, the duration of the recession, the siting of new transmission projects and the use of demand response, new generation for East Coast load centers could be needed as early as 2011 or as late as 2016, he said. Given that generation takes years to gain approval and be built, "the time to think about new generation is now," he said. The universe of power project financers has shrunk, but there are still eight to 10 commercial lenders interested in financing generation, and a handful of "institutional lenders," such as hedge funds and consortiums. The cost of debt and private equity is going up, he said. In terms of financing transmission in the Northeast, Citigroup power sector specialist John Clapp said that Federal Energy Regulatory Commission incentive rates, as well as regional cost allocation in markets administered by regional transmission organizations, make transmission projects relatively low-risk investments. Looking at transmission proposals springing up around the country, "a lot of that has truly been unlocked by the kinds of incentives that FERC has provided," Clapp said. "We have had a real effort around transmission for several years, ever since FERC introduced its transmission incentives...," Clapp said. "Once you get over the siting risk, these are relatively low-risk projects." In RTO-administered markets such as PJM, regional allocation of transmission project costs make financing projects in RTOs relatively easy, he said. "You're really taking, in many cases, PJM credit risk, and not the credit risk of a single counterparty," Clapp said. "It's relatively easy to do these kinds of transactions. Again, the pricing and other components of this are going to be different today, but transmission is a safe haven-type of investment in the current market," Clapp said. He said he expects to see more of these kinds of projects in upcoming months, he said. -- Jason Fordney License and copyright: |
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© 2009 - Competitive Power Ventures