Merchant plants snub the market, using native load to create their own private rate base.
You've read those stories about distressed assets-how the collapse of energy prices has sent firms scurrying to sell off plant to raise cash, buy down debt, and shore up the balance sheet. But that's just window-dressing. It tells you nothing about how to make money in a $40 power market with a high-cost gas turbine peaker bought during the height of the California power crisis, when prices were $300, $400, $800/megawatt-hour (MWh).
Until now, that is. Lately, some clever folks have found ways to divorce their overbuilt and overpriced gas turbines from the wiles and whims of commodity prices, and instead to remarry their assets to the girl next door-to the same captive native load that they disdained only a few short years ago.
The result is a guaranteed stream of payments, allowing the plant owner to recover fixed costs at no risk. The generator can then afford to bid and sell into any regional spot market, no matter how low the price, or simply to operate as a plant dedicated to native load.
Doesn't that distort markets? You bet. But it's already happening, with aid and comfort from the regulators, and even with help from a regional independent system operator (ISO)-the one player that you would think would want to preserve the integrity of a standard market design (SMD) with locational marginal pricing (LMP).
In February, the Federal Energy Regulatory Commission (FERC) allowed Cinergy's merchant generation subsidiaries CinCap Madison and CinCap VII to sell the unprofitable Madison (576 megawatt [MW]) and Henry County (136 MW) plants in Ohio and Indiana to PSI Energy Inc. for a proposed book-value price above $630/kilowatt (kW). The deal would take market-contestable generation capacity and put it under control of a Cinergy utility subsidiary operating in a regulated state, with a native load obligation. (See 102 FERC 61,128.)
According to the Electric Power Supply Association (EPSA), Arizona Public Service Co. recently asked the state utility commission (PUC) to help it meet native load obligations by approving a $500 million load guarantee to its merchant generation affiliate. And now come two more deals pending approval at FERC.
First, Ameren's merchant generation subsidiary, AEG, proposes to sell two gas turbine plants in Illinois (Pickneyville - 216 MW; Kinmundy - 232 MW) to Union Electric, its Missouri utility subsidiary, to help UE meet a requirement imposed by Missouri regulators to boost the utility's reserve margin in that state.
Second, NRG has asked the New England ISO to approve cost-of-service contracts for its Devon, Montville, Middletown, and Norwalk Harbor merchant plants, totaling 1,728 MW and located in the ISO's Southwest Connecticut congestion zone. The request falls under a recognized ISO program to sign reliability-must-run (RMR) contracts to aid out-of-merit units that wield market power because they are essential for local grid support. The plan would give NRG a guaranteed payment of $178 million, representing a capacity payment of $8.11/kW-month, or $97 per year, compared with a total balance sheet plant value of $257/kW.