Coal and Nuclear Nearly Invisible at Platts Global Power Markets

Gas, wind, and solar are it for any new generation in North America for the next five to 10 years (with a few one-offs), speakers at this year’s Platts Global Power Markets conference agreed.

The annual event for those involved in power project development, financing, and litigation was held in Las Vegas Apr. 7 to 9. Though the short-term prospects for coal and nuclear in North America are less than rosy, speakers on the final day’s “State of Project Finance and Access to Capital” panel were rather upbeat overall and agreed that in 2013 and 2014, access to capital has been better than in recent history.

A few sound bytes from that session point to the reasons for optimism in the financial community. John Cogan, managing director and co-head of Power & Utilities at Credit Suisse, predicted “a miniwave” of utility merger and acquisition activity. Carl Morales, director of the Structured Finance Group at Sumitomo Mitsui Banking Corp., noted that the European banks “are back.” Also underscoring the international nature of power project finance was RBC Capital Markets’ Mark Saar, managing director and head of North American Project Finance. RBC, Saar noted, has Canadian roots but is actually larger in the U.S. than in Canada and is “agnostic to a client’s market of execution.” Last year was “a very busy year” for RBC, which closed a record number of deals.

Little New Nuclear, but Some Business in Old Coal

The headline of this event report should come as no surprise. Although the event was kicked off by Exelon Generation President & CEO Kenneth Cornew, who sang the praises of his company’s “largest and best-run nuclear fleet,” otherwise only passing mention was made of the new nuclear units under construction in the U.S.

Cornew made the case for keeping nuclear in the fleet. This past winter demonstrated the need for reliable “always-on generation,” he began. With nuclear plants swerving into uneconomic positions as a result of low natural gas prices, even the Department of Energy is concerned about the viability of some of Exelon’s fleet, he said. However, retiring nuclear plants will make it “difficult to impossible” to reach the administration’s greenhouse gas (GHG) reduction goals—not to mention the goal of maintaining grid reliability. In the question and answer period, Cornew added that Exelon has three nuclear plants with economic problems—unless federal policy incentivizes nuclear clean energy as well as solar, he said. In another intriguing hint of what may lie ahead, Cornew noted they’d “have to see” if Exelon is “the right owner” of those nuclear plants, implying that that they might be better off under a regulated generator.

Despite the merits of nuclear capacity, nuclear was clearly not where other participants saw any business or market action. In the Wednesday project finance session, Donald Kyle, senior managing director of GE Capital Markets Inc., said his company sees a lot of greenfield gas projects ahead. And he was not alone in that view. Another field with enormous growth potential: energy storage. RES Americas Chief Development Officer Rob Morgan claimed, “We’re scratching the surface on storage.” (For a look at the state of energy storage technology and implementation, see “The Year Energy Storage Hit Its Stride” in the forthcoming May issue of POWER at powermag.com.)

As for coal, pending Environmental Protection Agency (EPA) regulations governing GHG emissions for new coal-fired generation mean that no new coal units are likely to pop up unless and until carbon capture and sequestration (CCS) becomes less expensive and more viable in a wider range of geographic locations.

For Global Power Markets attendees, who were mostly focused on market rules and functioning, financing, and the legal side of the power business, the only real mention of coal was with regard to the buying and selling of the existing fleet. (As it may already be clear, though the event title included the word “Global,” presentations focused almost exclusively on the U.S. market.)

In a pre-conference conversation with POWER, Ryan Hardy, a North American power generation expert at PA Consulting Group, stated what has become obvious (at least since the winter natural gas price spikes): “Low prices have led to a rush to gas, but fuel diversity is needed.” When I asked if anyone is not betting on gas, Hardy noted that some entities (he mentioned private equity firm Riverstone in particular) are buying and upgrading coal generation facilities. Over the next 12 to 24 months, he predicted, generating companies with both regulated and unregulated businesses will be divesting themselves of their unregulated coal generation. The activity in sales and purchases of coal units isn’t so much regional but more a case of matching sellers with buyers who see coal units as an investment opportunity because the price has been “beaten down.”

Meanwhile, coal plant workers, Hardy said, are in high demand because of their knowledge and the aging workforce. Employment opportunities are there, provided workers are willing to move. In other cases, he noted, states and local governments want to keep coal plants operating because of the economic impacts of closing any generating facility.

Another reason to keep coal in the fleet concerns fuel price volatility, as POWER stories have noted over the past several months. In light of that volatility, Hardy said that generating companies are changing their hedging strategies, and he noted that the response has regional aspects—at the independent system operator (ISO) or state level.

For example, as several panelists noted, six New England governors are considering a scheme for developing new natural gas pipeline infrastructure and financing it via customers’ electric bills—a controversial move.

Getting Markets “Right”

In the Tuesday “Global Power Markets Executive Roundtable,” panelists agreed that the U.S. needs to get power markets “right,” but there was disagreement about what that meant. Though not a previewed bullet item, subsidies became a hot topic.

It all started with Pattern Energy President and CEO Michael Garland’s comment about gas and renewables being very “complementary” because gas provides grid stability while renewables provide price stability. However, there isn’t a level playing field because, among other things, there are tax subsidies and insurance available to some fuel technologies plus “disposal issues” for nuclear generation. He opined that simplifying the tax code and energy policy is the way to go—even though it appears to not be feasible.

Chair Jerry Bloom of law firm Winston & Strawn LLP followed up by saying, “Everything is subsidized. . . . Shouldn’t we accept subsidies and just ensure they are available to all?” A little later, Todd Carter, president and senior partner of Panda Power Funds, said he didn’t think there should be any subsidies. Next into the fray was Exelon’s Cornew, who said we need to get the market rules right “for all technologies.” But how, asked Morgan of RES Americas, do we deal with externalities? Taxing carbon to level the playing field was his solution, even though there was limited optimism among his fellow panelists that the U.S. would see a carbon tax in the foreseeable future.

Instead of waiting for the federal government to put a price on carbon, “fix” the tax code, or adjust the balance of industry sweeteners, the solutions will need to come from consumers and industry, several panelists suggested. RES’s Morgan argued that customer choice will drive change and low-carbon generation, pointing to large commercial entities such as Microsoft, Google, and Apple as leading the way. Cornew countered that customers like “clean” generation but don’t want to pay for it. Nevertheless, Panda’s Carter insisted, most people understand “we have to do something about climate change.”

One thing the panelists did agree on is that we won’t see new coal plants in the U.S. in the near term. However, Pattern Energy’s Garland said he thinks that “over time,” coal will come back. China, he pointed out, is working on cleaner technologies that could make coal viable even in markets with carbon restrictions.

The State of Capacity Markets

Another session took on the issue of capacity markets. However, that Tuesday afternoon group, which included past chairman of the Federal Energy Regulatory Commission Jon Wellinghoff, didn’t come to any headline-worthy conclusions.

Leidos Vice President Ronald Moe kicked off the discussion by noting that the Electric Reliability Council of Texas (ERCOT) had been “flirting” with adding a capacity market to its energy-only market but had halted its advances. (Our February issue article by Kennedy Maize, “Texas and the Capacity Market Debate,” headed to press two months before the Texas Public Utility Commission put the brakes on a decision.) Instead, Texas is exploring an “operating reserves demand curve” that Moe called “even more complicated.”

After saying that California does have a capacity market—just a very flawed one—Jason Cox, senior director for regulatory affairs at Dynegy, added that he doesn’t think an ideal capacity market exists anywhere in the world. A bit later, Direct Energy Residential President Manu Asthana wondered aloud, “Do we even need capacity markets? What problem are we trying to solve?” You need “really high price caps” in energy-only markets like Texas, even though that can be hard on retailers like Direct Energy, he noted.

Ultimately, Wellinghoff commented, people will decide how reliable they want their electricity service, just as they have decided with landlines versus cell phones. The former FERC chair agreed with Cox that the California ISO is “fatally flawed and dysfunctional.” Nevertheless, he granted that “there may be value to having different markets,” if only to compare how well each works.

How would we know how well a particular model works? With regard to ERCOT, PA Consulting Group’s Hardy may have provided one answer. He is confident that we won’t see a capacity market in Texas “anytime soon.” Asked what it would take to change the tide there, he suggested that it would take reliability deterioration such that blackouts and sustained brownouts became too much to bear. In the current scheme, there’s little incentive to build new capacity, the exception being Panda Power, which is building three gas projects in the state.

In the meantime, Hardy said his company expects ERCOT to lower its load predictions for summer 2014 and 2015 because it has “changed the models.” It will be interesting to see if models align with weather and actual load.

Growing Existing Platforms

The most international element of the event was Tuesday’s luncheon keynote by AES Chief Operating Officer, Global Operations and Executive Vice President Andrew Vesey. As Vesey explained, AES is “primarily a project finance company” and so is involved with all types of generation except nuclear and geothermal. “We don’t see the value in nuclear,” he stated bluntly.

Aside from highlighting his company’s projects and focus on culture, Vesey’s main takeaway for attendees was that even in low-load-growth scenarios, growth can come from existing platforms, not just new markets. Among the examples he provided was adding 20 MW to a 1,000-MW hydro project in South America to maximize the water resource. Another way AES has added value by making the most of existing infrastructure is by selling desalinated water to local buyers instead of providing that water just “within the fence” to a Chilean combined cycle plant.

Though such initiatives may be slightly easier for an independent power producer than a regulated one, the message that “only nonlinear thinking creates value” is one that’s worth listening to in challenging times.

Note: This article will appear as a web exclusive associated with the May issue of POWER.

Gail Reitenbach, PhD, is POWER’s editor (@GailReit, @POWERmagazine).