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ERCOT participants see more must-run contracts as likely

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ERCOT participants see more must-run contracts as likely

High wind capacity factors that diminished wholesale powerprices in the ElectricReliability Council of Texas Inc. this summer might not prevail inthe future, and increasing retirements of generating capacity are likely toforce more reliability must-run, or RMR, decisions on ERCOT grid managers.

Those were a couple of the points made Oct. 4 duringdiscussions at the Gulf Coast Power Association's fall conference in Austin,Texas.

"It was cheap and windy," said Steve Reedy, deputydirector of the ERCOT independent market monitor office of Potomac Economics,during a panel discussion titled, "ERCOT's Future: A Look at the MarketUsing Recent History as a Guide."

Energy prices averaged between $25/MWh and $35/MWh thisJune, July and August, according to Reedy's presentation, compared with a rangeof $25/MWh to $40/MWh in the same period of 2015 and $35/MWh to $40/MWh in thesummer of 2014.

ERCOT's Operating Reserve Demand Curve, which the gridoperator uses to add amounts to clearing prices to reflect increasing scarcityas generation reserves diminish, contributed significantly to power prices in the summerof 2015, Reedy said. For example, it made up about $9 of the $40/MWh averageprice in August 2015, according to his presentation.

However, this summer's high amount of wind generation meantreserves were not so scarce, Reedy said, and his presentation shows that theORDC contributed less than $1 to this summer's average energy prices.

"Across the board, wind capacity factors werenoticeably higher this summer," he said.

For example, West Texas wind generation capacity factorsaveraged between about 50% and 60% for the peak hours of 3:30 p.m. to 6:30 p.m.this summer, compared with between 15% and 20% for the same hours of the summerof 2015, according to Reedy's presentation.

Sam Newell, principal at The Brattle Group, an energy marketconsultancy, said, "We've had good wind this year, right on peak, but itcould go the other way next year. I hope the forward markets are accounting forthat."

Charles Griffey, president of Peregrine Consultants, whichfocuses on energy markets, said that in addition to wind, the weathercontributed to lower prices by providing more rain and milder temperatures inAugust in areas of the state that usually have high summer load levels.

'A chance of multipleRMRs' in forecast

Robert Helton, market design and policy director forEngie, formerly knownas GDF Suez North America, joked that this summer "was windy and coolerwith a chance of multiple RMRs."

ERCOT started the summer by with to keep the unit 5operating for the summer months starting this July and continuing through June2018, mainly to cope with a transmission constraint in the northwest area ofthe ERCOT Houston region. Stakeholders estimate that keeping the 406-MW GreensBayou unit 5 operating could cost about $60 million, which would be uplifted tomarket participants.

In a keynote address earlier Oct. 4, Dynegy Inc. President and CEO Robert Flexon noted thatone of its generators in Oakland, Calif., has been operating on an RMR basisfor 18 years.

Another RMR contract may result from 's plan to its roughly 400-MWClear Lake powerplant in the Houston suburb of Pasadena, Texas, in February. ERCOT hasdetermined the unit is needed for reliability, but Calpine is seeking moreinformation about the area's reliability needs before deciding whether tonegotiate an RMR contract.

Brattle's Newell said RMRs constitute "an issue thatERCOT will have to deal with more and more."

Several Texas coal-fired and nuclear power plants are"right on the edge of financial viability, and there's quite a few plantsthat are losing money. What has surprised me is how much new entry there hasbeen," Newell said. "It's also surprising that there are very few retirements."

Texas has between 5,000 MW and 12,000 MW of generation"that has been identified as being very at risk."

Regional haze may be'knockout blow': Flexon

Engie's Helton said that if the pending regional haze ruleand Clean Power Plan litigation result in stronger environmental limits forcoal-fired power plants, "they will retire pretty quick."

Flexon said, "The knockout blow for some of theseplants is going to be the regional haze rule, if it stands."

The Dynegy executive cited the prospect of baseload coalretirement in ERCOT as one reason his company announced plans to about 9,000 MW ofEngie's generation fleet, including about 4,500 MW in ERCOT, of which all but600 MW is gas-fired.

The Engie asset acquisition cost is in the range of $250/kWto $275/kW, while the cost of new-build would be $700/kW to $1,000/kW, Flexonsaid.

While current market conditions do not support new thermalgeneration construction of any type, Peregrine's Griffey said, flexiblegas-fired peaking generation makes more sense in a market such as ERCOT with alarge and fast-growing wind fleet.

Which seems ripe for Dynegy. "We like our positionhere," Flexon said. "We like our assets. ... The market will continueto have a need for flexible generation."

Mark Watson is areporter for S&P Global Platts which, like S&P Global MarketIntelligence, is a division of S&P Global Inc.