Nuclear and Coal: Rebirth on the Horizon?
will be merchant plants. Each merchant plant can obtain revenues from the wholesale power marketplace that can be viewed as having three segments: an energy market, an installed capacity or ICAP market, and an ancillary services market. Revenues from the three market segments must be sufficient to cover not only variable operating costs but also fixed operating costs, paying off debt financing, and providing additional revenues so that the equity holders realize target returns on investment or internal rates of return (IRR). It is neither necessary nor realistic that all generators meet financial targets, but most existing generators and new projects needed to maintain generation reserve margins must be able to do so. Revenues from these market segments that are net of the variable costs of securing these revenues are deemed contributions to fixed charges (CTFC). In recent history, the tendency has been to construct gas fired generation because it is the least capital intensive, fastest to permit and construct, and supported by favorable expectations of natural gas availability and cost. Merchant plant developers will be induced to develop more capital intensive technologies, such as coal-fired and nuclear plants, only when the additional contributions to fixed charges from the marketplace are at least sufficient to finance the capital premium while meeting financial targets.
Our market model assumes that reliability will be maintained by enforcing a generation reserve margin obligation in each reserve-sharing pool. In this study, reserve-sharing pools are typically assumed to coincide with a NERC region or sub-region. Reserve margin targets, based on today's targets, range from about 13 to about 20 percent of seasonal peak load, depending on the region. (See sidebar, )
Raber Consulting maintains an ongoing list of announced new generation projects and tracks their development status. As we sense that a project is likely to come into service, we add it to the database of our energy market model. In the early years of the study, this list of new projects determined whether each reserve-sharing pool has more capacity or less capacity than is called for to meet its reserve obligation. The model adds expansion unit projects to each reserve-sharing pool when the existing level of generation, net of economic retirements, falls to the minimum level required by the reserve margin obligation. In this study, it is assumed that all expansion units will be natural gas fired. A developer perspective on which of these technologies will provide the better IRR drives the mix of simple cycle combustion turbines (CTs) and combined cycle units in each pool. An "equilibrium" mix, which would produce the same IRR for both technologies, is sought. In most market areas, the expansion unit mix is heavily tilted toward combined cycle. ECAR is a notable exception, wanting perhaps 30 percent to 50 percent simple cycle CTs in the mix in order to balance out existing base load generation that will continue operating over many years.
Building Power Plants in Competitive Markets:
An Explanation of Assumptions
The competitive generation market is viewed as having three segments: an energy market, an installed capacity or ICAP market,