2020: A Year of Reckoning for Competitive Generators

The post 2020: A Year of Reckoning for Competitive Generators appeared first on POWER Magazine.

Over the past year, power generators that depend on wholesale electricity markets for the bulk of their revenues endured remarkable pressure stemming from the pandemic, changing company business priorities, and environmentally driven policy shifts. But customer-centric efforts, founded on principles of healthy competition, have helped them persevere, said the Electric Power Supply Association (EPSA).

The 1992-founded national trade group which fiercely advocates for well-functioning competitive wholesale electricity markets has 16 members that together own and operate more than 150 GW in markets governed by Independent System Operators (ISOs) and Regional Transmission Organizations (RTOs) in New England, New York, the Mid-Atlantic, the Midwest, Texas, the Southwest, and California.

Its membership comprises global and domestic generators which develop and own a diverse array of fossil fuel, renewables, and storage resources: BP, Calpine, Cogentrix, Competitive Power Ventures, Diamond Generating, Eastern Generation, Energy Capital Partners, Gen-On, J-Power, LS Power, NRG Energy, Rockland Capital, Shell, Tenaska, Transalta, and Vistra.

A Model Rooted in Market Signals

Nearly all EPSA's members have sustainability targets, and during 2020, many of its members set new ambitions to achieve net-zero emissions by 2050, suggesting overhauls to their generation profiles. BP, for example, followed its February commitment to net-zero emissions by 2050 with a goal to boost its renewables capacity to 50 GW, and it is now seeking early positions in hydrogen and carbon capture and utilization (CCS). Shell also went net-zero in April, positioning its competitive arm Shell Energy to address expanding opportunities in the commercial and industrial space.

Vistra, which holds a 39-GW portfolio-making it the largest competitive power generator in the U.S.-also pivoted in September with a net-zero commitment, announcing plans to break ground on nearly 1 GW of renewables and storage and retire its entire Midwest coal fleet. And on Dec. 9, NRG Energy pioneered the first Sustainability-Linked Bond (SLB) in North America, directly linking its climate and funding strategies. The company, which set a net-zero goal in 2019, already led U.S. firms in choosing science-based greenhouse gas (GHG) emissions targets that align with Intergovernmental Panel on Climate Change (IPCC) guidance to limit global warming to a 1.5 C degree increase.

In November, Calgary-based TransAlta Corp. said it will end operations at its Highvale thermal coal mine west of Edmonton by the end of 2021, a decision that advances its goal to switch all its Alberta power plants to natural gas starting in 2022-four years earlier than planned. The company is now exploring investments in new technologies, including hydrogen. We'd like to be one of the first power companies to plan hydrogen into our facilities and we're working with potential partners today to see what opportunities may now be available," said TransAlta President and CEO Dawn Farrell in November.

Other EPSA members are also spearheading innovative, potentially ground-breaking technology projects. In November, Calpine Executive Vice President Caleb Stephenson told reporters during a power-focused Carbon Capture Coalition webinar that the company is focusing on developing two carbon capture pilot projects in California-one to turn carbon dioxide into concrete aggregate, and the other, in collaboration with ION Group, to demonstrate CCUS at the Los Medanos combined cycle power plant.

Calpine's 518-MW Los Medanos Energy Center is a 2001-built natural gas-fired, combined-cycle cogeneration plant in Pittsburg, California. Calpine is working with ION Clean Energy to demonstrate carbon capture with ION's ICE-31 solvent technology on a flue gas slipstream at the facility. Courtesy: CalpineA Critical Conversation on Carbon Pricing

According to EPSA, efforts by competitive generators to transform their power profiles and boost technology innovation are deeply rooted in business value. However, its members are committed to solutions that maintain the highest standards of environmental responsibility but are also cost-effective.

Power generation owners must operate efficiently to remain economically competitive while providing power capacity to system operators. Meanwhile, market signals keep these power generators responsive to price trends," it explained. For example, the low cost of cleaner natural gas dramatically advanced coal plant retirements, and the increasingly low cost of renewable resources is driving more investment in wind and solar generation."

Key to their endurance in volatile markets are competitive generators' nimbleness and flexibility, an attribute not enjoyed by regulated utilities. If markets are allowed to work as they should, power generators will adapt quickly to invest in the lowest-cost, most-effective resources-achieving lasting widespread, regional results," EPSA said.

Navigating a Policy Fog

Over the past year, however, the clarity of market signals have been dulled by several out of market" interventions.

In a much-watched development, for example, the Federal Energy Regulatory Commission (FERC) in a December 2019 order directed PJM to expand its minimum offer price rule (MOPR)-and it largely accepted PJM's March 2020 and June 2020 MOPR-related compliance filings this October. In November, following FERC's approval of PJM's new values for the energy and ancillary services offset (a key input to the calculation of both the default and unit-specific MOPR floors), PJM announced it would hold its next capacity auction of the 2022-2023 delivery year-originally scheduled for May 2019-in May 2021. PJM also announced a schedule for holding subsequent auctions, promising to return the region to a normal auction schedule, with capacity auctions conducted three years in advance of the capacity delivery year.

However, FERC's orders have been challenged in court, with nearly 29 petitions for review recently consolidated in the Seventh Circuit. Some states with strong clean energy commitments-including Illinois, Maryland, New Jersey, and Virginia-are meanwhile mulling opting out of the PJM capacity market using the Fixed Resource Requirement (FRR) option as a preferred path to decarbonization.

EPSA has battled a number of other state interventions, including NYISO's efforts to revise its buyer-side mitigation rules (which FERC rejected in September). Long a strong voice against nuclear subsidies, EPSA has also spoken out against energy legislation (HB6) in Ohio that sought to bail out two nuclear plants. That controversy, alleged to be the largest bribery scheme in Ohio's history, is ongoing. In December, as Ohio House Select Committee on Energy Policy and Oversight set up to study what to do about HB6, it pushed forward House Bill 798 to essentially delay nuclear charges to ratepayers by one year, until January 2022. However, until no action is taken, HB6 remains in full effect with charges to ratepayers set to begin on Jan. 1.

EPSA: Sustainability Is Necessary, But How to Get There Effectively?

EPSA has been clear that it supports evolving resource mixes, and efforts to combat climate change, but it stresses, these efforts must be cost-effective, holistic, efficient, transparent, and nondiscriminatory.

The most effective way to achieve a balance is through an economy-wide price on carbon. Competitive markets that incorporate both environmental and reliability requirements will yield the lowest cost set of resources and technologies that jointly produce the greatest emission abatement while maintaining reliability," it says.

The trade group ramped up advocacy for carbon pricing over 2020. First, it joined a diverse energy industry coalition, including renewable developers, trade associations, advocates and policy experts to ask FERC to seriously consider how carbon pricing could be implemented in and would impact the wholesale markets where electricity is bought and sold.

FERC responded with enthusiasm, holding a day-long technical conference in September. During the conference, legal experts generally agreed FERC has authority under Section 205 of the Federal Power Act to review proposals submitted by regional transmission organizations and independent system operators that incorporate a state-determined price on carbon emissions.

In mid-October, FERC then issued a draft policy statement that encouraged regional market operators to explore and consider the benefits" of establishing wholesale market rules that incorporate state-determined carbon pricing. But the move generated controversy-with competitive generators urging FERC to move forward with the proposed guidelines and environmental groups and states signaling skepticism and opposition. A recent shakeup in FERC's leadership may dampen progress on that front until President-elect Joe Biden replaces newly named Chairman James Danly with a Democrat, experts have suggested.

The Uphill Battle to Garner Public Favor for Competition

Determined to sustain the momentum of the carbon pricing conversation, EPSA has now shifted its focus on nurturing public discussions, and in particular, with power consumers.

EPSA says its engagement began in earnest earlier this year, as the pandemic prompted financial emergencies across the power sector. Though stricken by falling revenues from steep drops in power demand, EPSA's members urged Congress to heed the resiliency of its business model.

In June, for example, Brian George, director of EPSA's strategic policy and government affairs told a Senate committee: Unlike regulated utilities, our business model places investment risk and market exposure on private investors, not captive ratepayers. We believe it is more appropriate for companies-not consumers-to take on the risk of building, operating, and maintaining a power plant. As such, when the market dips from lower-than-expected demand, we take the hit."

In August, as the pandemic raged on, the group surveyed American voters to assess their priorities. Poll data it released showed nearly two-thirds of voters opposed policies that subsidized struggling power plants. Summarizing the findings, Todd Snitchler, president and CEO of EPSA, pointed to widespread support for affordability: What this poll makes clear is that voters prioritize reliability and affordability, and they are fed up with bailouts and the political gamesmanship we've seen in multiple states, including Ohio and Illinois," he said. What voters want is simple: policies that prioritize reducing emissions efficiently and at the lowest cost."

Then in late October, EPSA released a pivotal study in partnership with Energy + Environmental Economics (E3)-a consulting firm that helps utilities, regulators, policy makers, developers, and investors craft strategies that cater to shifting market trends and new public policies. The study essentially found that if PJM, the nation's largest grid operator, implemented a carbon price of $10/ton-though an expansion of the Regional Greenhouse Gas Initiative (RGGI) or a federal carbon policy, for example-it could achieve decarbonization of 80 million metric tons (MMT) by 2030 at an annual cost that is $2.8 billion less than a business-as-usual approach.

States in the PJM region have enacted a mix of clean energy policies, from direct mandates that procure certain resource types (e.g., Solar Renewable Energy Credits (SRECs) in New Jersey and offshore wind in Virginia) to subsidies that maintain existing resources (both nuclear and coal resources)," the study noted. The policies are found to increase electricity system costs by over $3 billion in 2030 relative to a reference case, while achieving only 40 MMT of carbon emissions." Policies are costly for several reasons, it argued, but mostly because they are fragmented as opposed to more comprehensive."

We need a solution that will work - one that will make a real impact on carbon emissions without undermining the competitiveness of markets," noted Vistra's CEO and President Curt Morgan (who was recently appointed as chair of EPSA's board of directors). EPSA and its members believe a consistently applied carbon fee will compel companies to make strategic choices, incentivize investments in new technologies, support the integrity of markets, and provide enormous cost-savings relative to decarbonizing through one-off subsidies or other out-of-market approaches."

Looking Forward with A Steadfast Focus

The E3 study has gone on to inform productive conversations at the FERC and PJM," the trade group said in a statement to POWER on Dec. 28. EPSA has also made significant strides" in facilitating understanding of environmental goals and policies to support decarbonization and reduced costs for consumers, it said.

A key emphasis is on success that has already been achieved. The Carbon Tax Center (CTC) announced in May that U.S. power sector emissions fell below the targets set by former President Obama's Clean Power Plan a decade early. Much of that can be attributed to consistent market dynamics that drive consumer-focused innovation and the shift away from coal for power generation and toward more reliance on cleaner natural gas-despite changing political winds," it said.

Looking forward into 2021, the trade organization is taking stock of how the incoming Biden administration's policies and ongoing state policy discussions will play out. EPSA and our members look forward to tackling the challenges that lie ahead, securing a competitive future for American power generation and continuing their leadership on these critical priorities," it said.

However, its focus is unchanged. Competition drives down costs, gives more choice to consumers, and encourages innovation-America's power grid cannot move forward without it," it said.

-Sonal Patel is a POWER senior associate editor (@sonalcpatel, @POWERmagazine).

The post 2020: A Year of Reckoning for Competitive Generators appeared first on POWER Magazine.