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ERCOT power prices seen hampering gas-fired project development: sources

By: Housley Carr |

Developers continue to prepare to build natural gas-fired capacity in the Electric Reliability Council of Texas footprint, but low prices and the prospect of the construction of more tax-subsidized, low-cost renewable capacity has some wondering how many new gas-fired units will actually be financed and come online over the next few years.

“Market prices just don’t support financing for new [generation] assets today,” Jeff Schroeter, managing director at Dallas-based developer/consultant Genova Power Advisors, said Wednesday. “And now that the [federal production tax credit] for wind has been extended, more wind farms are likely to be built, resulting in continued suppression” of market prices.

Texas wind farms often offer nighttime wind power into the ERCOT market at negative prices, Schroeter said, helping to hold down the market price and reduce the capacity factor of existing gas units — and the expected capacity factor of prospective gas units. That too is hurting the prospects for financing new gas units.

On Wednesday, ERCOT North Hub on-peak power fell $1 to around $19/MWh for Thursday delivery on IntercontinentalExchange. ERCOT North Hub February on-peak was flat at $23/MWh on ICE at around 2:30 pm EST.

Schroeter said that while ERCOT’s latest Capacity, Demand and Reserve report, issued on December 1, suggests the reserve margin in the region will remain relatively high through the rest of this decade, many of the gas-fired projects the CDR suggests will be completed in the 2018-20 period may not advance to financing and construction as quickly as their developers had once hoped.

That could result in a considerably lower reserve margin, and greater potential for volatile market prices during a very hot summer, he said.

CDR SEES HIGH RESERVE MARGIN

In the CDR, ERCOT said that — based upon the gas-fired, wind and other projects that have secured interconnection agreements and made other steps toward construction –it expects the summertime reserve margin in the region to be 16.5% this year, 20.7% in 2017, 25.7% in 2018, 22.9% in 2019 and 21.8% in 2020. ERCOT seeks to maintain a summertime reserve margin of at least 13.75%.

Warren Lasher, ERCOT’s director of system planning, said Wednesday the CDR’s reserve margin for 2016 and beyond “is not so much an expectation as it is an accounting of [proposed] resources that have met certain criteria” such as having interconnection agreements and air permits in hand.

Lasher acknowledged that some of the gas-fired projects that were included in the CDR may not be financed and built as quickly as their developers have expected, and that the reserve margin for future summers could be lower than the CDR suggests.

But, “on the other hand, we continue to see projects advancing to construction,” he said, citing the 1,042-MW, combined-cycle expansion project now under construction at Exelon Generation’s Wolf Hollow station in Granbury.

‘MAKING IT TOUGH’

John Fainter, CEO at Associated Electric Companies of Texas, said low natural gas prices and low-priced wind power “are really making it tough” to finance new gas-fired projects. Additional wind and solar capacity developed as a result of the newly extended PTC and investment tax credit will only add to that concern.

Fainter said an important factor — yet to be determined — will be whether the Environmental Protection Agency’s Clean Power Plan survives the ongoing court challenge.

If the US Court of Appeals for the District of Columbia Circuit issues a stay delaying implementation of the CPP “we’d have a lot more time” to develop new generating capacity, he said.

But if the CPP is implemented as proposed, significant amounts of coal-fired capacity would need to be replaced by gas units, he said.

Genova Power Advisors’ Schroeter said the expects the most likely gas-fired projects in ERCOT to advance next to financing and construction will be either combined-cycle projects with very low heat rates or peaking projects with very low capital costs.

Developers continue to move prospective gas-fired projects into position, enabling them to advance the projects to financing and construction as soon as market conditions warrant.

On Tuesday, Halyard Energy said it has secured a state air permit for a second 400-MW peaking project the Houston-based developer is planning, this one in Henderson County. Halyard previously secured an air permit for a similar project in Wharton County.

Spokesmen for Halyard did not respond to a request for comment, but the company said in a statement is “has received all permits required to begin construction” of the Henderson and Wharton projects.

Halyard is in earlier stages of developing three other gas-fired projects in ERCOT, it said.

Calpine, meanwhile, plans to build two 227-MW, gas-fired combustion turbines at its Guadalupe station in Marion, Texas, that will come online sometime between June 2017 and June 2010.

Also, Luminant is in the early stages of developing four 210-MW, gas-fired CTs — two at its Tradinghouse station in McLennan County and two at its DeCordova station in Hood County.

NRG Energy is planning several possible gas-fired projects too.