California Merchant Gas Generator, Lamenting Market Forces, Files for Bankruptcy

The owner of a merchant 1,022-MW combined cycle natural gas–fired power plant in California has filed for bankruptcy protection, citing regulatory policies and market forces that have depressed revenues.

La Paloma Generating Co. on December 6 filed for U.S. Chapter 11 bankruptcy, blaming a debt of $524 million that it racked up even though its four-unit power plant located in McKittrick, Calif., is strategically located to serve both northern and southern California power markets.

According to a First Day declaration filed in the U.S. Bankruptcy Court for the District of Delaware, La Paloma has operated in California for the past 13 years. The combined cycle plant, which was completed in March 2003, uses a technology that reduces the amount of fuel used and the amount of carbon dioxide emitted relative to many other natural gas–fired electric generating facilities. It also has another unique feature in that it can be modified during a short outage to improve its ability to reduce output during periods of low demand, Niranjan Ravindran, a senior vice president at EIG Global Partners, which is a key investor in La Paloma, said in the declaration.

But while these flexibility features can help support California’s grid operations, the merchant plant is subject to prices in the California Independent System Operator’s (CAISO’s) day-ahead market, which vary from hour-to-hour based on the amount of supply being offered by competing sellers in CAISO, Ravindran explained in the filing.

“The Debtors’ bankruptcy filings are the result of a confluence of adverse market developments, a challenged regulatory environment, mounting compliance obligations under California’s ‘cap and trade’ scheme, and substantial debt service requirements,” the declaration says.

La Paloma apparently fell victim to slower than expected growth in demand for power, cheap gas, depressed power prices, and the vast build-out of renewable generation in CAISO. These factors ultimately “compressed the Facility’s generation output and reduced the margin between the market price for electric energy and the market price for natural gas fuel consumed in generating such energy (this margin often is referred to as a ‘spark spread’),” says the declaration.

But the plant’s dilemma was worsened by CAISO’s failure to provide a market mechanism to compensate the plant for the reliability service that the facility provides, it adds. CAISO also denied or withdrew requests from the facility to place some of its units in “outage” mode to alleviate financial losses, it says.

Earlier this year, La Paloma filed a complaint against CAISO with the Federal Energy Regulatory Commission (FERC), requesting that the federal agency issue an order requiring CAISO to grant La Paloma a “reliability must run” (RMR) designation. But FERC shot down the complaint this October, finding that CAISO reasonably denied La Paloma’s outage requests.

“When the price of such offer is at or below the clearing price in the wholesale market, then CAISO provides an award and subsequently ‘dispatches’ the unit to generate and sell energy. The Facility is regularly dispatched by CAISO for power, but capacity factors (i.e., the amount of energy actually generated compared to the maximum capacity to generate) across the full year cycle and spark spreads have compressed,” the declaration says.

CAISO acknowledges that as policy initiatives to ramp up renewables and distributed generation are realized, it will need flexible resources to manage the green grid.

“The ISO is actively engaged in policy efforts to build awareness of the new grid needs,” CAISO said in a November 22 fact sheet outlining what it has learned from a recent analysis of changing grid conditions.

“Working with the industry and policymakers, the ISO is collaborating on rules and new market mechanisms that support and encourage the development of flexible resources to ensure a reliable future grid.”

For more on how competitive markets are affecting generation, see: SLIDESHOW: An Alarming Trend Affecting U.S. Baseload Power


Sonal Patel, associate editor (@POWERmagazine, @sonalcpatel)


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