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Out-of-market forces test merchant generators' goodwill on climate policy

Forone week each year, New York City plays host to the overtures of the corporate,policy and technology elite, who crowd into conference halls and present theirlow-carbon perspectivesunder the masthead of the city's annual Climate Week, run alongside a sessionof the United Nations General Assembly.

Muchof the vision presented by Climate Week participants relies on profound futureinvestment in renewable energy and some varying degree of commitment to carbonpricing, two seemingly universal mainstays adopted by a vast of Fortune 500 companies andenvironmental advocacy groups around the U.N. climate targets.

Thesecommitments make great marketing sense, and good strategic sense, especiallyfor those technology and retail goliaths involved in the market for corporaterenewable procurement, locking in long-term power purchase agreements that canlikewise help contribute to a state's renewable portfolio standard, or RPS.

Butwhere so much of the goodwill around low-carbon goals has been guided byexisting policies, most often federal tax credits and state requirements, ittoo has had the equal and opposite effect of rattling the confidence ofconventional power generators who continue to highlight their concern over theimposition of out-of-market policy mechanisms that can distort and evenundermine the efficiency of competitive power markets across the U.S.

"RPSprograms have been very successful in sparking investments, and that is aperfectly laudable purpose if the intent is to get an initial penetration ofrenewables" Jon Norman, BrookfieldAsset Management Inc. vice president for government and regulatoryaffairs, said during the U.S.-Canada Renewable Energy Forum on Sept. 22.

"Westarted off putting markets in place with the intent of having informationavailable in real time and responding to signals accordingly, but generallywhat we have done, because of state environmental policies that are out ofmarket, is move away from those markets," Norman added.

Thesentiment was expressed separately by other generators, which have dealt withtheir own out-of-market challenges, like those subsidies recently approved in New York to buoy segmentsof the state's aging, and otherwise uncompetitive nuclear resources, forexample.

"Ithink regulatory risk is the biggest threat to markets today … and now withstates meddling and trying to provide subsidies, it is throwing the markets outof whack," Dynegy Inc.Vice President for Corporate Finance, M&A and Treasurer Sidd Manjeshwarsaid at IJGlobal's North America Energy Finance Forum on Sept. 22. "Thereason we like PJMInterconnection LLC is because they defend their turf and try topush back against some of this out-of-market stuff."

"Ithink market design is perhaps the single most underestimated principle, andespecially in markets where you have capacity, like in and PJM, where smallchanges to the curve can have pretty significant impacts in the way you getpaid," Starwood Energy GroupGlobal LLC Principal Patrick Verdonck said.

Themarket for corporate renewable procurement, so often driven by out-of-marketincentives, may begin simmering due to "permanent erosion in wholesalepower prices," Bloomberg New Energy Finance senior analyst Daniel Shureysaid at the U.S.-Canada event. Shurey also indicated that some recent corporateofftake contracts have entered "into the red," relative to prices incompetitive markets.

Thatmay mean that achieving the lofty goals set out by the U.N. and toutedthroughout Climate Week rest perhaps less with the oft-cited corporateparticipants, and indeed more with the power generators and grid operators, whowill continue to make decisions around what is both economic and reliable.

Theresponsibility to advance the policy initiatives may be dealt most effectivelyby FERC, and regional grid operators like NYISO, PJM and , which have allundertaken various steps to evaluate the prospect of incorporating policy goalsinto market design.

"IfFERC had a mandate on how environmental objectives are achieved once they areset, then it could be nested within the marketplace to get true signals in realtime on pricing," Norman said. "I think that one change would be asignificant evolution, and it is not a coincidence that Congress is nowreviewing the FederalPower Act, and I think that represents an opportunity."