March 9, 2020 Read More →

S&P: Renewables offer better financial return in New England market than merchant gas plants

S&P Global Market Intelligence ($):

The expected financial return on new renewable projects in ISO New England exceeds that of merchant natural gas projects, according to recent analysis from S&P Global Market Intelligence.

New merchant natural gas projects in ISO-NE are affected by the ISO-NE Forward Capacity Auction. In February, the auction, known as FCA 14, cleared at $2/kw-month, the lowest price ever and a 47% decrease from the previous auction. This result was predicted by the S&P Global Market Intelligence Power Forecast, noting decreasing load in ISO-NE, a lack of major generation capacity retirements in the near term and renewable portfolio standards in Massachusetts, Rhode Island, Connecticut, Vermont, and Maine.

To illustrate this, Market Intelligence evaluated the forecast unhedged margins of gas plant Bridgeport Harbor Station Combined Cycle Project. The open margin analysis assumes market rates for electricity, capacity and input natural gas. Contracts and hedges in place for these plants could materially change their actual performance. The forecast margin for 2030 is $9.00/MWh, reaching a high of $13.00/MWh in 2020 and decreasing to as low as $6.58/MWh in 2026. This plant is forecast to meet its full revenue requirement in 2020 when cleared capacity prices are at their highest, and is forecast just below the minimum revenue requirement in 2030.

While Market Intelligence forecasts decreasing returns on gas generation, the expected merchant returns on renewable generation are more positive. The Market Intelligence Power Forecast estimates an additional 7.7 GW of renewable capacity will be added in ISO-NE by 2025, and 18.8 GW of offshore wind are specified by Connecticut, Massachusetts, and Maine post-2025. Market Intelligence forecasts a full return is available for the onshore wind project Hoosac Wind in Massachusetts near Vermont at a renewable energy credit, or REC, value of $29.69/MWh in Massachusetts. Massachusetts Class I RECs were trading at $40.583/MWh for 2020 as of Feb. 21, 2020. The Tobacco Valley Solar Farm (Simsbury Solar Farm)(DWW Solar II) in Connecticut would need a $61.63/MWh REC price to make a full return, and an $18.86/MWh REC for a minimum return. Connecticut Class I RECs traded at $40.46/MWh on Feb. 21, 2020. These examples show a wind project projected to have a full return, and a solar project that will meet a minimum merchant return and provide some equity payout.

Wind and solar plants remain cash positive over the next 10 years even as merchant gas struggles. The included map shows the forecast return for wind solar and gas plants in ISO-NE relative to the minimum and maximum revenue requirements in 2020, 2025 and 2030. The relative profitability is computed to be: 100 when the plant meets the maximum revenue requirement; 0 when the return is the minimum revenue requirement—at the money but distributing little to equity holders; and -100 for plants that aren’t profitable. Generally, gas plants return between the minimum and maximum revenue requirement in 2020 and do not meet the minimum revenue requirement in 2030. Many wind projects return the maximum revenue requirement in all years between 2020 and 2030. Solar projects in Massachusetts, Rhode Island and Connecticut return between the minimum and maximum revenue requirement in all years between 2020 and 2030.

[Kristin Larson and Steve Piper]

More ($): In ISO New England, green energy surpasses merchant gas in profitability

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