ERCOT Power & Renewables markets long-term outlook H1 2015 Report

Commodity Market Report 28 August 2015

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Report summary

North American power markets are adapting as demand growth struggles against energy efficiency improvements and demand response programs. Economics of wind and solar are improving, as within the next decade, utility scale solar becomes attractive from a purely economic standpoint in many regions. Coal capacity that has survived MATS and CSPAR are also under threat from low natural gas prices. Further, the industry awaits EPA’s CPP announcement, requiring reductions in carbon in 2020.

Executive summary
Policy and regulation
- Emission reduction policies shadow energy markets
  - Key takeaways:
  - Concerns with CPP that make it unlikely to be finalized in it's current form
Demand
- Key takeaways
- Energy efficiency
- Demand response
- FERC 745
- Prospects of Demand Response likely uneven across markets
- Distributed generation
- Electric vehicle build-out presents a long term uncertainty to the forecast
Costs
- Natural Gas Markets
  - Key takeaways:
  - Supply
  - Demand
- Prices
  - Henry Hub price outlook
  - Basis outlook
- Coal Markets
  - Key takeaways:
  - Market fundamentals – policy and economics continue to erode coal’s position
  - Longer-term power sector fundamentals offer little support
  - Prices ultimately struggle to find traction
- Carbon Pricing
  - Key takeaways:
  - United States federal Regime
  - California (and Quebec) cap and trade
  - RGGI
Supply
- Key takeaways:
- Coal to gas conversions continue to accelerate our retirement projections
- Changes in federal policies could drive incremental retirements
- Federal policy reversal combined with local reliability rules could lessen the final tally of retirements
- Current status of the PTC
- Expansion of distributed solar generation to see support as soft costs come down
- Natural Gas – the foundation for new power generation supply
- Key takeaways:
Emissions
Supply-demand balances
Trade
- Transmission
- Competitive transmission projects still see obstacles to project success
Prices
- Key takeaways:
- ERCOT: Market attempts to correct for true amount of wind penetration on prices
  - Impact of Operational Reserve Demand Curves in summer of 2014
  - PJM: Epicenter of gas price volatility
    - Winter/summer pricing dynamics driven by dual natural gas pipeline capacity limits
    - Summer upside still exists for pricing
  - MISO Central/North:
    - PTC-concentrated wind build depresses Iowa prices while Indiana and Michigan are pulled higher by PJM market interaction
  - Northeast - winter basis pressure is alleviated over the forecast
  - Southeast – natural gas, demand growth and carbon policy set the direction for market pricing
  - WECC
    - Near to mid term volatility increasing in California
    - As the high cost regional market, California drives prices across the WECC
    - Coal retirements boost local natural gas generation in Desert Southwest
    - Pacific Northwest pricing relationships to change on transmission build out
    - Colorado: an eddy against the stream
    - Alberta: an island on to itself
Capacity Prices
- Key takeaways:
  - Illinois in focus
  - 2016: Illinois in focus again
  - 2017 +
  - Risks
  - PJM Reliability Pricing Model (RPM)
    - 2018/2019 Auction Results
  - Auction price
    - RTO
      - Demand Response
      - Imports
      - Impact of lower capital cost assumptions / CONE / Net CONE
      - LDA pricing
      - Long Term Capacity prices
      - Figure 25: PJM Supply Demand Balances: H1 2015 vs H2 2014
      - ISO New England Forward Capacity Market (FCM)
        
        Dynamic De-list price
        
        New capacity market boundaries
        
        Lower Net Cone
        
        Incorporating DG forecasts within FCM
    - ISO New England supply demand balances
  - NYISO ICAP market Outlook
    - Other Markets
    - Capacity Markets to Grow?
- RPS Compliance and REC prices
  - Key takeaways:
  - NEPOOL-GIS
  - PJM-GATS
  - WREGIS
  - NYSERDA
  - MIRECS and M-RETS
  - NARR
  - ERCOT
- New Entrant Economics
  - California has initiated the path to viability in alternative resources
  - ERCOT looks to extend the solar footprint in a sea of wind generation
  - Despite a lack of current RPS goals, the Southeast may be in the best position to pick up the solar mantle

Tables and charts

This report includes 34 images and tables including:

Figure 17: US Emissions History and Forecast
Figure 18: Change in Emissions
Figure 19: Regional supply and demand balances

Table 1: Environmental Policy Assumptions
Figure 2 GDP growth and electric demand growth linkage
Figure 3: State retail sales percentage above/below pre-recession levels
Figure 4: Domestic Energy and its impacts : Resurgence of Industrial Demand
Figure 5: Current demand response saturation by market as percent of peak
Figure 9: US coal demand by sector
Figure 12: Comparison of Wood Mackenzie assumed coal retirements over previous forecasts
Figure 13: Installed wind capability
Figure 14: Large Scale Solar
Figure 15: US generation outlook by fuel class
Figure 16: Changes in generation by region 2014-2035
Figure 1: CPP Compliance Timeline
Figure 6: Henry Hub outlook
Figure 7: Price outlook and marginal plays
Figure 10: FOB coal price forecast (Real 2015 US$)
Figure 11: Base Case assumed carbon price
Table 2: ORDC Impacts in August of 2014
Figure 20: Supply Demand Balances: H1 2015 vs H2 2014
Figure 21: MISO Capacity Price Outlook
Figure 22: Changes in the Variable Resource Requirement (VRR) curve:
Table 3 NYISO ICAP Parameters
Figure 28: Supply Demand Balance
Figure 29: NYISO Cap Price forecast
Figure 30: California resource economics for new generating capacity
Figure 31: ERCOT resource economics for new generating capacity
Figure 32: SERC Southeast resource economics for new generating capacity
Figure 26: ISONE Supply Demand Balances: H1 2015 vs H2 2014
Figure 27: ISONE capacity price outlook
Figure 23: COMED supply curve:
Figure 24: PJM COMED and EMAAC Capacity Prices
Capacity Prices: Image 6