Bridging the Missing Money Gap Solutions for competitive power cash flow shortfalls

Transcription

1 IHS ENERGY Multiclient Study Bridging the Missing Money Gap Solutions for competitive power cash flow shortfalls This major research study identifies the causes of competitive power cash flow shortfalls, evaluates the impact of alternative solutions and inaction, and makes recommendations for cost-effective solutions.

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3 CONFIDENTIAL PROSPECTUS Overview After two decades of power industry deregulation in the United States, the accumulating evidence is clear: market-clearing prices for electric energy are typically too low to recover the total costs of power production. This missing money problem in cash flows influences investor expectations and leads to underinvestment in power supply: too many power plants are retired, and too few new plants are built. This underinvestment prevents the power industry from achieving its primary objective: to provide consumers with the reliable electric service they demand at the lowest possible cost. The failure to address the missing money problem threatens the long-term viability of the competitive power business model and sets the stage for another California-style regional power shortage that could push the industry back toward more comprehensive cost-of-service regulation. Perhaps more troubling, incomplete solutions may avert crisis, but generate inefficiency in the generation mix over the long run. IHS proposes this multiclient study to help build a consensus on the root causes of the problem, as well as quantify the impacts of inaction, incomplete action and appropriate actions to address the missing money problem. This study seeks to help advance the industry debate with a series of recommendations regarding the cost-effective solutions. This study will answer three critical questions: What kind of information will help build a consensus among power market stakeholders regarding the nature of the missing money problem? What are the most cost-effective solutions to the missing money problem? What is the cost of inaction or incomplete remedies? Evolution of power market rules to address the missing money problem ISO-NE begins energy market with capacity obligation PJM establishes Capacity Credit Market (CCM) States in restructured markets offer requests for proposals NY in , MD in 2006, CT in 2006 and 2008, DE in 2006, and MD in 2008 ISO-NE First Forward Capacity Market auction CAISO proposal for flexible capacity procurement requirements and must-offer obligations ERCOT Public Utility Commission endorses mandatory reserve margin ERCOT begins energy market with capacity obligation NYISO starts energy and Installed Capacity Market (ICAP) ERCOT suspends capacity obligation NYISO introduces administratively sloped demand curve PJM First Forward Reliability Pricing Model auction PJM and ISO-NE file significant capacity design changes with FERC ISO-NE proposal to remove price floor and descending clock auction 2013 IHS Source: IHS

4 Study Conceptual Framework and Modeling Methodology The study will build on the initial IHS research insights into the missing money problem developed in the IHS Private Report, Power Supply Cost Recovery: Bridging the missing money gap. The conceptual framework for finding solutions to the missing money problem involves 6 steps: 1Define the problem. Explain why chronically low power prices are not simply the result of normal dynamic adjustments in the marketplace and instead, the result of a predictable market failure, exaggerated by an unintended consequence of energy policy. 2Identify root causes. A proper diagnosis of the underlying causes of this complex and multi-dimensional problem is critical for developing an effective solution framework. 3Provide context. Understanding how the missing money problem has shaped the power business establishes the starting point to implement corrective actions. 4Categorize alternative approaches. A variety of approaches exist regarding the missing money problem. Specifying the alternatives provides the basis for the cost and benefit evaluations. 5Quantify economic impacts. Some solution frameworks will work better than others. Power market simulations will allow quantification of the impact on reliability, efficiency, power supply costs, power prices as well as asset valuations. 6Provide Recommendations. An assessment of the relative economic impacts will provide the basis to recommend the best available solutions.

5 Who Can Benefit From Bridging the Missing Money Gap? Competitive power suppliers who need to build a consensus with other power market stakeholders on the necessity to solve the missing money problem. Regulated utilities who need missing money solutions to level the playing field with competitive retail offerings that take advantage of current negative wholesale price distortions. Renewable power suppliers who need flexible generating assets with adequate cash flows to provide the most cost-effective power system integration for their intermittent power output. Power demand-side managers who need to evolve power market rules to produce price signals for timely and adequate new power supply and demand-side resource development. Independent power system operators who need to evolve power market rules to produce price signals for timely and adequate new power supply development and a cost-effective pace of existing power plant retirements. Power consumers who face higher, less stable and less predictable power prices if the unresolved missing money problem causes regional power shortages and an inefficient mix of generating resources. Coverage The multiclient study will focus on the missing money problem in the competitive power sector of the United States and Canadian power industries. The study will compare and contrast its results with IHS recently completed European multi-client study, Keeping Europe s Lights On: Design and Impact of Capacity Mechanisms. This major research study will accomplish the following: Identify the root causes of competitive power cash flow shortfalls Evaluate the impact of alternative solutions on reliability, efficiency, power costs and generating asset valuations Make recommendations for implementing cost-effective solutions Analytical Framework IHS will quantify the impact of alternative solution frameworks with regional power market simulation models and power generating asset discount cash flow valuation models.

6 Study Timeline January 2014 February 2014 April 2014 May 2014 Kick off call 1st workshop 2nd workshop Final Report Study Deliverables Kick off Call: Call to discuss start of study, discussion of key issues and timeline Kick-Off Workshop: The study will kick-off with a project workshop to discuss the IHS research into the root causes of the reliability and efficiency dimensions of the missing money problem and to formulate the slate of solution frameworks to evaluate in the study. Preliminary Results Workshop: After the initial research is completed and a draft of results prepared, the study will involve a project review meeting to discuss the initial evaluation of the alternative solution frameworks, the initial results of the quantification efforts and the proposed outline of recommended solutions. IHS Special Report: The report is intended for use by clients to help build a broad consensus on implementing recommended solutions to the missing money problem. The audience for the report is power market stakeholders who need to understand the causes of the problem, the consequences of inaction or incomplete solutions and the benefits of cost-effectively solving both the reliability and efficiency dimensions of the cash flow shortfalls from current power markets. The report s recommendations of the most cost-effective solutions are intended to help advance the evolution of power market rules.

7 Project Leader Lawrence J. Makovich, IHS Vice President and Chief Power Strategist, directs IHS research efforts in the power sector as part of the Office of the Chairman. Dr. Makovich is highly respected authority on electricity markets, regulation, economics, and strategy and has testified before the US Congress on electric power policy. Dr. Makovich advises senior management, Boards of Directors and government leaders regarding the alignment of strategy to the trends in consumer preferences, industry regulations, market conditions as well as production technologies, costs and environmental impacts. His latest research involves quantifying the value of generation portfolio diversity, financial risk management, power demand drivers and the potential for smart grid technologies. He has also recently provided a technique to recalibrate power cost assessments to take renewable integration costs into account and estimate the implicit cost of greenhouse gas emission abatement. Team Aaron Marks, IHS Associate, is a member of the Power, Gas, Coal, and Renewables Americas Group specializing in North American Power. He provides analysis on power market fundamentals, regional power markets, power generation technologies and electricity resource planning. Prior to joining IHS, Mr. Marks worked in growth strategy consulting with Treacy and Company, specializing in manufacturing and insurance. He holds BS and MS degrees from Carnegie Mellon University. Tanuj Deora, IHS Director of Business Development, specializes in electric power generation strategy, focusing on power markets, renewable energy, and the energy industry s license to operate. Prior to his time at IHS, Mr. Deora led EDPR s state and RTO relations efforts across the eastern US. In that capacity he served on the board of the Colorado Independent Energy Association, Interwest Energy Alliance, Renewable Energy New England, and the Mid-Atlantic Renewable Energy Council, and served as Vice Chair of the American Wind Energy Association Transmission Conference. He has developed wind energy projects across the Rockies and in New England, was a consultant for McKinsey and Company s electric power and natural gas practice, and provided analytical support for Calpine s energy trading operations. Mr. Deora came to IHS after serving in the cabinet of Governor John Hickenlooper as head of the Colorado Energy Office, and holds a mechanical engineering degree from the University of Texas and an MBA from Harvard Business School.

8 About IHS Energy IHS Energy, a part of IHS (NYSE: IHS), is the industry s authoritative provider of information, analytics, and insight to help clients to understand the interconnected, dynamic forces that shape energy markets and asset performance. Our experts and analytical tools enable clients to continuously improve their strategy and operations across the entire energy value chain, covering oil and gas, coal, power, and renewables. For more information Contact your account manager or call us at Americas: Tel: [email protected] Europe, Middle East, and Africa Tel: +44 (0) [email protected] Asia Pacific: Tel: [email protected] AW