THE FUTURE OF MERCHANT POWER PLANTS Presented by: F.T. Sparrow State Utility Forecasting Group Purdue University Presented to: 14th Annual Surface Mined Land Reclamation Technology Transfer Seminar Jasper, Indiana December 5, 2000 To download a copy of this presentation, visit our website at: http://fairway.ecn.purdue.edu/IIES/SUFG/
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THE FUTURE OF MERCHANTPOWER PLANTS
Presented by:
F.T. SparrowState Utility Forecasting Group
Purdue University
Presented to:
14th Annual Surface Mined Land ReclamationTechnology Transfer Seminar
Jasper, Indiana
December 5, 2000To download a copy of this presentation, visit our website at: http://fairway.ecn.purdue.edu/IIES/SUFG/
MAJOR CONCLUSIONS
• There is growing concern over the developing shortage ofIndiana utility-controlled generation capacity. SUFGexpects the statewide reserve margin to fall below 15percent this year when the generation deficit (including 15percent reserves) is expected to be 400 MW, or about 2percent of Indiana’s current generating capacity.
• If, as the forecast predicts, electricity sales and peakdemand grow at 1.8 percent per year (down from 2 percentin the 1996 forecast), SUFG projects the need for 2250 MWof new capacity by 2005, and an additional 5400 MW by2016, the end of the forecast horizon.
MAJOR CONCLUSIONS (Continued)
• If the current regulatory framework is unchanged over theforecast horizon, SUFG predicts real (inflation adjusted)prices to fall at a rate of slightly less than 1 percent per yearuntil 2003, when prices level out until the end of theforecast horizon when they are expected to increaseslightly.
• If, on the other hand, Indiana chose to allow competitionamong generators and competition works perfectly, SUFGwould initially expect market clearing prices to drop belowthe level of prices that would prevail if regulation were tocontinue. SUFG would then expect competitive prices torise quite rapidly as demand growth increases until suchprices reach a point where new units are added at the long-run cost of electricity, which is slightly above the mid-termprice under continued regulation.
MAJOR CONCLUSIONS (Continued)
• However, SUFG is doubtful that electricity markets will workperfectly; hence, the competitive price forecast should beconsidered as a lower limit on likely prices if competition isintroduced. If market power is exercised by sellers, actualprices are not likely to be lower and could very likely behigher than those expected with perfect competition.
• In the long run, after the transition from regulation tocompetition is complete, SUFG would expect prices withcompetition to be lower than prices with continuedregulation, as electricity generators are provided withgreater incentives to reduce costs.
INDIANA ELECTRICITY REQUIREMENTS IN GWh (HISTORICAL, CURRENT AND PREVIOUS
• Hourly prices are set at themarginal cost of the mostexpensive unit that isdispatched.
• No stranded cost recovery.
SUFG’s 1999 COMPETITIVE MODEL
SCENARIO A -- BASE CASE
• Net export is 376 MW from ECAR/MAIN tosurrounding utilities. (Source: NERC 1998Summer Assessment Study)
• Yearly Forecast = energy-weighted average ofhourly marginal costs + average T&D cost +average cost of ancillary services.
SCENARIO B -- CASE WITH 5500 MW NETECAR/MAIN EXPORT TO OTHER REGIONS
• Assumed the higher ECAR/MAIN export is about45 percent of the maximum transmission capacitylimit.
• Yearly price calculated the same way as Case A.
INDIANA YEARLY ENERGY-WEIGHTEDAVERAGE PRICES--COMPETITION VS.REGULATION (1996 REAL DOLLARS)
1999 2001 2003 2005 2007 2009 2011 2013 20150
10
20
30
40
50
60
0
10
20
30
40
50
60
$/M
Wh
$/M
Wh
Year
Scenario B:
5500 MW
Scenario A:
376 MW
Continued Regulation
IMPERFECT COMPETITION
• Key Assumptions:– Not enough producers to ensure competitive
pricing.
PJM DATA: ENERGY-WEIGHTED AVERAGE MARKET CLEARINGPRICE AND MARGINAL COST
1 3 5 7 9 11 13 15 17 19 21 230
10
20
30
40
50
60
70
80
0
10
20
30
40
50
60
70
80
$/M
Wh
$/M
Wh
Hour
Market Clearing Price(August 1998)
Marginal Cost(August 1998)
Market Clearing Price(September 1998)
(September 1998)Marginal Cost
THE PROJECTED ENERGY-WEIGHTEDAVERAGE RETAIL PRICES FOR INDIANA
2001 2002 2003 2004 20050
10
20
30
40
50
60
0
10
20
30
40
50
60
$/MWh
$/MWh
Year
Scenario 1: Low Intensity G am ingScenario 2: M oderate Intensity G am ingScenario 3: H igh Intensity G am ing
Scenario 1
Scenario 2Scenario 3
Scenario 4: Perfect Com petition
Scenario 4
CONCLUSIONS
• The perfect competitionmodel has practical valuebecause the results couldbe used as a benchmark tomeasure the degree ofcompetitiveness.
• During low demandperiods, pool marketprices were close tomarginal costs.
• The imperfect competitionmodel is tailored for realworld situations whendemands are high and thecapacity margin is tight. Itcaptures the deviationsfrom a perfect world andwould give betterforecasting.
• More studies are needed.
1999 TOTAL DEMAND AND SUPPLY (MW)FOR INDIANA - 1999 to 2004
Conclusion: The 1680 MW installed would be sufficient IF all theMW stayed in Indiana. BUT, they are independent power producerplants, whose output will be purchased by the highest bidder, which
may not be an Indiana utility.
199920002001200220032004
167791714517514179171827918620
195202017420460206602119021490
600300350
00
300
000
20000
00000
500
16.317.716.815.315.915.4
Year Demand Capacity Peaking CyclingBaseLoad
ReserveMargin
(%)
Additions
ECAR/MAIN PROPOSED MERCHANT PLANTS (MW)
ECAR Indiana 10960 MW Michigan 8623 MW Ohio 9941 MW Pennsylvania 1170 MW West Virginia 2768 MW
Subtotal 33462 MW
MAIN Illinois 21052 MW Missouri 2022 MW Wisconsin 3528 MW
Subtotal 26602 MW
TOTAL ECAR/MAIN 60064 MW
THE COAL OUTLOOK
• Still true that 98% of Indiana power is generated from coal (EIA data).
• New construction mostly CTs for peaking.
• SO2 and NOx emissions standards work against coal.
• High gas fuel costs work against gas. (If all ECAR/MAIN plants come on as planned, 25% increase in gas fuel use by U.S. utilities.)