ERCOT Investment Incentives andResource Adequacy
June 1, 2012
Samuel NewellKathleen SpeesJohannes Pfeifenberger Robert MudgeMichael DeLuciaRobert Carlton
Prepared for
Electric Reliability Council of Texas
Copyright © 2012
The Brattle Group
,
Inc
. This material may be referenced subject to citation. Reproductionor modification of materials is prohibited without written permission from the authors.
About the Authors
Samuel Newell, Johannes Pfeifenberger, and Robert Mudge are Principals, Kathleen Spees is anAssociate, and Michael DeLucia and Robert Carlton are Research Analysts of
The BrattleGroup
, an economic consulting firm with offices in London, Rome, Madrid, CambridgeMassachusetts, Washington DC, and San Francisco. They can be contacted at www.brattle.com.
Acknowledgements and Disclaimer
The authors would like to thank ERCOT staff for working with us closely to provide data,insights, and input for our analysis, including Joel Mickey, John Dumas, Warren Lasher, PaulWattles, Kenneth Ragsdale, Sai Moorty, Bob Spangler, Calvin Opheim, Haso Peljto, ResmiSurendran, Bill Blevins, and Kittipong Methaprayoon. We would also like to thank the PUCTCommissioners, the Independent Market Monitor, and market participants for their responsiveness to our many questions and for their valuable insights. We would also like tothank
The Brattle Group
’s Frank Graves, Bin Zhou, and Metin Celebi for their helpfulcomments, and acknowledge Khanh Nguyen and Stephen Fang for their research and analyticalcontributions. Opinions expressed in this report, as well as any errors or omissions, are theauthors’ alone. The examples, facts, results, and requirements summarized in this reportrepresent our interpretations. Nothing herein is intended to provide a legal opinion.
i
TABLE OF CONTENTSExecutive Summary .......................................................................................................................1
I.
Background ............................................................................................................................9
A.
Study Motivation and Approach ....................................................................................9
1.
Motivation ...............................................................................................................9
2.
Approach...............................................................................................................10
B.
ERCOT Energy-Only Market Design ..........................................................................11
C.
Investment Track Record since Market Implementation .............................................14
D.
Recent Market Conditions ...........................................................................................16
1.
Low Gas Prices .....................................................................................................16
2.
Fleet Makeup and Supply Stack ...........................................................................18
3.
The Impacts of Wind Penetration .........................................................................19
4.
Historical Generator Returns ................................................................................22
E.
Current Resource Adequacy Concerns ........................................................................23
1.
Recent and Projected Shortages ............................................................................23
2.
Potential Impacts of Environmental Regulations .................................................25
F.
Recent and Ongoing Efforts to Address Resource Adequacy .....................................29
II.
Generation Investment Criteria by Investor Class ..........................................................30
A.
Classes of Generation Investors ...................................................................................31
1.
Classes and Criteria of Entities Involved in Generation Development ................31
2.
Market Share of Current ERCOT Asset Owners ..................................................33
3.
Ability to Finance Investments by Investor Class ................................................35
B.
Debt Financing Models for Power Plant Investments .................................................38
1.
Project Financing ..................................................................................................38
2.
Balance Sheet Financing .......................................................................................39
C.
Capital Market Conditions ...........................................................................................39
1.
Debt Markets ........................................................................................................39
2.
Public Equity Markets ..........................................................................................41
3.
Private Equity .......................................................................................................42
D.
Implications for Generation Investment in ERCOT ....................................................43
1.
Ability to Finance Plants without Long-Term Contracts .....................................43
2.
Impact of Market and Regulatory Structure on Financeability ............................44
3.
Estimated Cost of Capital and Range of Potential Investment Hurdle Rates .......45
4.
Estimated Cost of New Entry ...............................................................................47
III.
Current Market Outlook ....................................................................................................48
A.
Trends in Futures Prices...............................................................................................48
B.
Comparison of Futures Prices to CONE ......................................................................51
C.
Stakeholder Perceptions of the Futures Market ...........................................................53
D.
Observed Developments in Resource Investment .......................................................53
IV.
Long-Term Resource Adequacy Outlook .........................................................................54
A.
Methodology ................................................................................................................54
1.
Generator Energy Margins During Scarcity Conditions ......................................55
2.
Non-Scarcity Margins ...........................................................................................60
3.
Adders to Non-Scarcity Margins from New Rules...............................................61
B.
Estimated Reserve Margins this Market will Support .................................................63
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