Cheap gas, regulatory uncertainties, and a technology revolution are re-making the U.S. utility industry. Top executives at three very different companies—CMS, NRG, and the Midwest ISO—share their...
Energizing the Big Apple
Uncertain market design affects generation investment planning.
their incremental investment costs. This observation, based on historical data, is substantiated by the development queue for New York Zone J—most proposed assets are combined-cycle units, not peakers.
The issue is that as the Zone J capacity market is administered today, capacity prices based solely on the cost of new combustion turbines may lead to significant over-compensation for combined-cycle asset owners. That is, in Zone J, the capacity revenue plus energy operating margin realized by a combined-cycle asset can exceed the cost of new construction. If this condition persists, equity issues will be raised by retail electric customers, meaning that the Zone J capacity market will be subject to more redesign efforts as the competing interests of generation owners and retail customers clash in Albany and Washington, D.C. Investors who assume that today’s capacity market design will persist in the future run the risk of over-estimating future revenues and potentially paying “too much” for assets located in Zone J.
1. Apologies to The Drifters, George Benson, and everyone else who has recorded “On Broadway.”
2. NY-ISO capacity markets are discussed in more detail in “ Capacity Markets Demystified ,” Public Utilities Fortnightly , March 2008
3. See “Report on Implementation of the Installed Capacity Demand Curves,” NY-ISO, Jan. 15, 2008.
4. “New York Control Area Installed Capacity Requirements for the Period May 2008 through April 2009, Technical Study Report,” New York State Reliability Council, LLC, Installed Capacity Subcommittee, Dec. 14, 2007.
5. The combined cycle unit is assumed to have a heat rate of 7,000 Btu/kWh and a VOM of 2.00/MWh. The respective values for the combustion turbine are 10,000 and 3.50, and for the gas steam unit 15,000 and 4.00.
6. These annual operating margins are based on a dispatch analysis of historical hourly LMPs and gas prices, with no allowance for fixed costs. Revenue is only from the energy market, not capacity or ancillary services. This assumes assets are responding to prices only, with no allowance for out-of-merit order dispatch due to local reliability requirements.