Momentum continues to grow across the United States towards a 100% clean energy future. Most advocates of greening our economy, for good reason, focus on the economic potential that such a transition may bring. That’s seen, for example, in Joe Biden’s recently released clean energy plan, which aims to create new American jobs by achieving a carbon-free American power sector within 15 years. Regardless of the feasibility of meeting such targets, it is easy for power plant owners to see the economic potential of massive investment in clean energy under such aspirational goals.
California, as the first mainland state to adopt a 100% clean energy target, has shown that the path will be anything but smooth and that bumps along the way will create unforeseen opportunities for sophisticated energy investors. This includes investors who own traditional carbon emitting power plants.
Since electric deregulation in California two decades ago, the vast majority of new power plants built in the state are owned by non-utility and non-governmental entities. Within the context of this ownership structure, a central feature of California’s energy system is its Resource Adequacy program which was developed in direct response to the 2001 California energy crisis as a means of ensuring there are enough power plants in the state to ensure customer receive reliable electricity supply. The program compensates power plants for a commitment to be ready to produce electricity when needed versus paying the plants for the actual electricity produced.
Since its inception, the program has operated in a bifurcated manner where new power plants are typically able to earn much higher resource adequacy payments than existing power plants. The implication is that power customers will generally pay more to incentivize power plant developers to build new electric generation facilities, whereas customers will pay less to keep existing power plants from retiring.
This was the case until recently; the payments that existing plants were able to secure within California’s Resource Adequacy market were relatively modest. However, an unanticipated regulatory change determining how clean energy is allowed to participate in the Resource Adequacy market increased the payments existing power plants are able to earn. According to the California Community Choice Association, Resource Adequacy effectively doubled between 2018 and 2019. This has boosted the value of California’s existing plants and renewed interest in sales and financing of these assets, such as Calpine’s $1.1 billion financing of its Northern California geothermal assets.
At the heart of the doubling in price is the often heard refrain that solar power plants cannot generate electricity when the sun does not shine, nor can wind power plants generate when the wind does not blow. Because solar and wind power plants cannot be counted on to provide maximum output in any given hour, electric system planners and regulators typically discount the amount of output that a wind or solar power plant that can effective be relied on compared with the power plant’s theoretical maximum output.
Most system operators have traditionally relied on the past performance of a power plant during peak system conditions as a means of calculating a plant’s value. With growing levels of solar and wind generation on the system, California decided that the traditional methodology of past performance may not be the best indicator of future performance. In 2018, California regulators implemented new rules to determine what percentage of a solar and wind generator’s maximum output could reliably be counted on during times of peak energy demand based on probabilistic modeling.
This new methodology, known as the Effective Load Carrying Capability (ELCC) of solar and wind, nearly cut in half the amount of solar output that can count towards California’s Resource Adequacy market with no actual change in California’s physical infrastructure. The resulting doubling of Resource Adequacy pricing was based on simple supply-and-demand dynamics, as the regulatory removal of this capacity from the market created upward pressure on pricing to benefit existing power plants.
The ripples of this speed bump towards 100% clean energy were felt not just in pricing. The California Independent System Operator, responsible for reliability, became concerned that the state would be short on the number of power plants needed to maintain a reliable system as early as 2021. Due to the lead time necessary to build a new power plant, the California Public Utility Commission recommend that the State Water Resources Control Board extend the deadline by three years for the scheduled retirement of several older inefficient power plants that use marine water in an environmentally damaging manner to cool steam generated at the plants, as a way to temporarily provide a backstop to maintain a reliable electric system. As California works to identify the root cause of the rolling blackouts experienced this August, certainly additional recommendation are likely to be proposed.
While there is much discussion on the theoretical possibility of transitioning to a 100% clean energy power grid, owners of power plants should recognize this does not mean the value of traditional power plants will decline in lockstep with tightening clean energy targets. California’s experience demonstrates that market rules and regulations will need to continue evolving to capture the practical realties of how to reliably and cost effectively operate a clean energy power grid. These changes to market rules create opportunities for thoughtful investors able to capitalize on unexpected turns in the market, including those who own traditional carbon-producing power plants. Such opportunities will not be limited to California, but also other states with aggressive clean energy aspirations.
via Forbes.com: Energy News https://ift.tt/2Qyn5KJ