ISO-NE Offer Review Trigger Price 2013 Update – Draft Results Presented to: NEPOOL Markets Committee Presented by: Sam Newell (Brattle) and Chris Ungate (Sargent & Lundy) August 7, 2013. Agenda. Summary Methodology Updates ORTP Results Combined Cycle ORTP Simple Cycle Gas Turbine ORTP - PowerPoint PPT Presentation
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Antitrust/Competition Commercial Damages Environmental Litigation and Regulation Forensic Economics Intellectual Property International Arbitration International Trade Product Liability Regulatory Finance and Accounting Risk Management Securities Tax Utility Regulatory Policy and Ratemaking Valuation Electric Power Financial Institutions Natural Gas Petroleum Pharmaceuticals, Medical Devices, and Biotechnology Telecommunications and Media Transportation
Presented by:Sam Newell (Brattle) and Chris Ungate (Sargent & Lundy)
August 7, 2013
2
Agenda
Summary
Methodology Updates
ORTP Results
♦ Combined Cycle ORTP
♦ Simple Cycle Gas Turbine ORTP
♦ Onshore Wind ORTP
♦ Demand Response ORTP
♦ Energy Efficiency ORTP
Annual Updates
Appendix
3
Summary
Objectives and Approach
Objectives
♦ Provide Offer Review Trigger Price (ORTP) values for various resource types for use in FCA9
♦ Provide a capital budgeting model and indices that ISO-NE’s IMM can use to update ORTPs for FCA10 and FCA11
Approach
♦ Screen technologies
♦ Build bottom-up cost estimates of capital costs, then estimate the amount a resource would need from the first-year FCA to achieve zero NPV net of all revenue sources over 20 years
♦ Recommend indices for future updates
4
Summary
Recommended ORTP Values
Summary of ORTPs (2018 $)
Notes: 1.Overnight costs, fixed O&M, Gross CONE and revenue offsets are calculated based on installed capacities; Net CONE and ORTP values are calculated based on qualifying capacities.2.Some values, esp. Onshore Wind, may appear high compared to current costs. These values are in 2018$ and include all cost components (e.g. Onshore Wind is $2,823/kW in 2013$ of which $496/kW is due to interconnection.) See later slides for detailed values of each technology for which we developed an ORTP. 3.FOM includes site leasing costs.4.DR categories evaluated at the asset level. Actual resources would be aggregations of at least 100 kW.
Reference Total Plant Installed Qualifying Overnight After-Tax Fixed Gross Revenue Net 2018/19Technology Capital Cost Capacity Capacity Cost WACC O&M CONE Offsets CONE ORTP
($m) (MW) (MW) ($/kW) (%) ($/kW-mo) ($/kW-mo) ($/kW-mo) ($/kW-mo) ($/kW-mo)denominator Installed Installed Installed Installed Qualifying Qualifying
♦ We estimated the after-tax weighted-average cost of capital (ATWACC) based on market data for merchant generation companies
♦ There are only two public merchant generation companies• Estimated ATWACC for NRG is 6.9%, reflecting substantial hedging
• Estimated ATWACC for Calpine is 7.5%, reflecting greater merchant exposure
• Contrary to earlier presentations, no risk-free adjustment was needed since rates have increased over the past 2 months
♦ We have chosen to use the average ATWACC of NRG and Calpine due to our consideration of their portfolios relative to tariff requirements (assume PPA on only non-capacity revenues)
♦ The value-weighted average of these two data points is 7.2%
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Methodology
Net Energy and Ancillary Service Revenue Offsets
Estimated 1st year E&AS margins using historical net revenues for like units in 2010-12 adjusted to 2018/2019 based on gas and electricity futures prices
♦ 2018/2019 MA Hub On Peak Electricity Price = 2013 Market Heat Rate * (2018 Henry Hub + 2013 Algonquin City Gates Adder)
♦ This is a proxy for a PPA-supported forward energy price that accounts for the effect of rising gas prices. It does not account for how market heat rates might increase as generation reserve margins tighten after the FCA price floor disappears; nor does it fully account for the growing discount one would expect for forward prices relative to expected spot prices for longer forward periods (as with any pro-cyclic commodities)
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Aug-13 Aug-14 Aug-15 Aug-16 Aug-17 Aug-18 Aug-19
Gas
Pric
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Btu)
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($/M
Wh)
Mass HubOn Peak
Alongquin City Gates
Henry Hub
Projected Mass Hub On Peak prices for estimating energy revenues
Average Projected E&AS MarginProjected Gas and Electricity Prices
♦ Assumed siting in Western Maine due to the quality of the wind resources and proximity to transmission
♦ Analyzed characteristics and costs based on recent projects in other parts of the country
♦ Capacity Factor is based on the wind farms used to develop the capital cost estimates
♦ Qualified Capacity is from ISO-NE analysis of Onshore Wind average summer capacity value and is consistent with Intermittent Resource rules
Unit Specifications On-Shore Wind
Turbine Model GE 1.6-100Primary Fuel WindConfiguration 37 x 1.62 MWNet Plant Capacity (MW) 60Capacity Factor 31%Qualified Capacity 19%Interconnection 115 kVPlot Size (acres) 3,840Location Western ME
We calculated costs and benefits for the following state programs, excluding Low Income programs
♦Benefits and costs of all programs are aggregated into a single “resource,” consistent with how states offer into the FCM
♦Program MW sizes are for summer peak conditions and grossed up for line losses
Vermont New Hampshire Maine Connecticut Massachusetts Rhode Island
Residential New Construction
ENERGY STAR Lighting Residential Lighting Residential Consumer Products
Resid'tl. New Constrct. & Renovations
Large Commercial New Construction
Residential Efficient Products
ENERGY STAR Homes Residential Appliances Residential New Construction
Residential Heating and Water Heating
Large Commercial Retrofit
Business New Construction
Home Energy Solutions Business Incentive Program
Home Energy Solutions Multifamily Retrofit Small Business Direct Install
Business Existing Facilities
ENERGY STAR Appliances
Large Customer C&I Lost Opportunity MassSAVE Single Family - Low Income Services
Residential Existing Homes
New Equipment & Construction
C&I Large Retrofit O Power Residential New Construction
Large C&I Retrofit C&I Small Business ENERGY STAR Lighting ENERGY STAR® HVAC
Small Business Energy Solutions
ENERGY STAR Appliances
EnergyWise
C&I New Constrct. & Major Renovations
ENERGY STAR® Lighting
C&I Large Retrofit ENERGY STAR® Appliances
C&I Small Retrofit
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Energy Efficiency ORTP
EE Program Costs and Benefits
EE program costs are computed using the 2012 budget from each state♦ Include customer costs to account for total costs to support energy
savings♦ Assume budgets will be spent during pre-power year
We considered both energy and avoided T&D investment as benefits♦ Avoided energy saving ($/MWh) is calculated based on historical load-
weighted average LMP adjusted by Mass Hub futures prices ♦ Projected load-weighted wholesale price in 2018/19 is $63/MWh♦ Avoided T&D savings is estimated at $36/kW-yr ($41/kW-yr in 2018/19)
based on Connecticut 2013 Conservation and Load Management Plan
ORTPs for FCA10 and FCA11 will be updated in 2014 and 2015 using escalation factors calculated from indices for each line item of capital and fixed O&M cost
♦ Indices specific to each capital cost line item have been selected based on applicability and availability (see below)
♦ E&AS margins and RECs will be updated based on futures prices available at the time
♦ Futures updates will require inserting new values for each index and model will escalate each line item accordingly
Cost Component Index
Gas Turbines BLS - PPI "Turbines and Turbine Generator Sets"Steam Turbines BLS - PPI "Turbines and Turbine Generator Sets"Wind Turbines Bloomberg Wind Turbine Price IndexOther Equipment BLS - PPI "General Purpose Machinery and Equipment"Construction Labor Composite index developed from RS Means labor categoriesOther Labor Composite index developed from BLS job classificationsMaterials BLS - PPI "Materials and Components for Construction"Electric Interconnection BLS-PPI "Electric Power Distribution."Gas Interconnection BLS-PPI "Oil and Gas Field Equipment and Machinery."
37
Agenda
Summary
Methodology Updates
ORTP Results
♦ Combined Cycle ORTP
♦ Simple Cycle Gas Turbine ORTP
♦ Onshore Wind ORTP
♦ Demand Response ORTP
♦ Energy Efficiency ORTP
Annual Updates
Appendix
38
Sensitivity Analysis
Cost of Capital Sensitivities
♦ Limited sensitivity to range of ATWACC values♦ Wind is most sensitive due to its highest capital cost per kW
of qualified capacity
ORTP ($/kW-mo)
NRG Average CalpineATWACC 6.9% 7.0% 7.1% 7.2% 7.3% 7.4% 7.5%
Sargent & Lundy developed bottom-up estimates for capital and fixed O&M costs for selected technologies
Assume a competitive entrant at an unencumbered site♦ No electric transmission line or gas lateral costs (nor network
upgrades, but need direct interconnection costs include breakers and substation expansion)
♦ No site-specific challenges or unusual environmental requirements
♦ Contingencies and owner’s development cost at the lower end of the range Sargent & Lundy has seen
Escalate 2013 installation to a 2018 online year (in 2018 $s)
40
Methodology
CONE Calculations
The Cost of New Entry (“CONE”) is the net revenue a new resource would need in Year 1 to be willing to enter the market, such that the NPV of all cash flows (over 20 years) is zero
A key driver of CONE is whether total net revenues are likely to increase over time (such that lower first year revenues are acceptable) or decrease (such that higher first-year revenues are necessary)
♦ Long-term revenues will be determined by future prices (energy + capacity + other) which, all-in, must equal CONE of future entrants to support investment
♦ Hence, projected cost trends determine revenue trajectories for current entrants
♦ Need to consider different non-capacity net revenues between current and future entrants
Revenue trajectories may vary by technology♦ Assume total revenues for current gas entrants will be approximately constant in real
terms over time because future entrants are likely to enter at a higher CONE (turbine prices have historically increased slightly faster than inflation) but out-compete current entrants slightly on efficiency
♦ We assume total revenues for renewables will also stay approximately constant as future entrants enjoy more efficient technology but must locate at inferior or more remote sites
41
Methodology
Revenue Offsets and Net CONE
First year revenues must equal CONE, with revenues coming from several sources, including capacity, energy and ancillary services margins (EAS), RECs if applicable, and performance incentives (PI)
“Net CONE” is the 1st year revenue a new resource would need specifically from capacity to be willing to enter the market
♦ Net CONE = CONE – 1st Year Non-Capacity Revenue Offsets
♦ ORTP is Net CONE of a competitive entrant for each technology