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PJM draws more investment than ERCOT, despite reserve margin differences

Houston — Despite the PJM Interconnection's large reserve margins and the Electric Reliability Council of Texas' tight reserve margins, power market participants and experts on Wednesday viewed PJM as a place where new generation is more likely to earn targeted rates of return on investment.

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During the Platts Global Power Markets Conference's panel discussion entitled "US Power Market Reform -- What are the Appropriate Pricing Mechanisms to Achieve Grid Resiliency," representatives of Competitive Power Ventures, Credit Suisse, the Leidos information technology and engineering company, and S&P Global Market Intelligence discussed US power markets' efforts to cope with the fast-changing US generation fleet.

"We are seeing a fairly unprecedented transformation of the generation fleet," said Steve Piper, S&P Global Market Intelligence director of energy research, adding that this process has raised questions about whether the changes "pose a threat to the reliability and resilience of the grid.

One place where the fleet is changing quickly, mainly from coal to natural gas, is the PJM Interconnection, where the latest planning reserve margins for the summer of 2018 is 28.7%, compared with a forecast minimum required reserve margin of 16.1%.

Another place where the fleet is changing quickly, from coal to a combination of wind and natural gas, is ERCOT, where this summer's planning reserve margin is forecast as 9.3%, well below what has been ERCOT's target of 13.75%, designed to ensure a capacity-related blackout occurs no more often than one day in 10 years.


But a quick, informal poll of panel discussion attendees showed that about 45% of respondents indicated they think that PJM is the best place where investors are likely to earn a targeted rate of return on new generation, but only about 19% consider ERCOT the best place.

The other options offered in the poll were ISO New England and the Midcontinent Independent System Operator, both with 8%, and the New York ISO, with 20%. California ISO and Southwest Power Pool were not offered as alternatives.

As of Tuesday evening, the Platts M2MS forward curve for on-peak August power at the ERCOT North Hub, the system's most liquid location, topped $193/MWh, while the PJM West Hub's number was just $36.20/MWh.

But Michael Proskin, Credit Suisse managing director for power and renewables, said, "I think ERCOT is one of the tightest markets, but the price signals are not such that you can make money."

In contrast, Shahid Malik, PSEG Energy Resources president, attributed investor enthusiasm for PJM to the reduced risk associated with a relatively steady capacity market revenue stream.

"The risk reduction does make it a little more interesting to be in PJM," Malik said.

Nevertheless, the tight reserve margins ERCOT forecast in December, in response to announced retirements totaling more than 5 GW, has caused project developers to "pick up their pencils again" to calculate potential returns on new assets in Texas, after a prolonged period of inactivity, Proskin said.


One of the issues hindering investment in ERCOT is the lack of hedging for the great bulk of ERCOT's residential and small commercial customers, Piper said. Most of ERCOT's load is served by competitive retail electricity providers, with a substantial share operating on a month-to-month basis.

And the relatively long-lead time needed for a thermal generation investment, usually at least two years, places more emphasis on 2019 and 2020 forwards. ERCOT North August 2019 on-peak forwards on Tuesday were valued at $142.33/MWh, and the August 2020 on-peak forwards were $112.74/MWh.

Several attendees at this week's conference at the Wynn Resort in Las Vegas said those forwards are backwardated because investors anticipate "irrational overbuilds."

Proskin noted a common truism in investing: "Markets tend to stay irrational longer than most of us would continue to stay solvent."

Ronald Moe, Leidos vice president for business strategy and transactions, said investors regularly complain that "retirements never happen as quickly as we forecast, and new builds always happen more quickly than we forecast."

Sherman Knight, Competitive Power Ventures president and chief commercial officer, said, "ERCOT is an interesting place to invest, but it's so volatile, that you have to look for a higher rate of return before anybody can decide to invest."

--Mark Watson,

--Edited by Gail Roberts,