CCGT sponsors push on in PJM, auction or no auction

Developers of gas-fired projects in PJM Interconnection are forging ahead with financing plans for Q1 2020, despite lingering uncertainty over the delayed capacity auction timetable and rules, while frustrated renewable energy developers have been forced back to the drawing board.

Although some clarity came on 19 December (2019), when the US Federal Energy Regulatory Commission finally ruled on PJM's proposals for handling state subsidies in the auctions, deal watchers say it is anyone's guess when exactly the next capacity auction will be held, with one source speculating that it would take place in September (2020) at the earliest.

PJM has until March to comply with the order, which calls for an expanded minimum offer price rule (MOPR), and provide a new timeline for the already severely delayed auction.

The auction for delivery year 2022/23 should have taken place in May (2019) but has already been postponed twice, most recently in August, amid the back-and-forth between PJM and FERC over proposed rule changes.

The December order is “constructive to capacity markets because it provides more sure footing for new investment into power infrastructure in general,” says the CFO of one developer with a pipeline of gas-fired projects in the region.

“I think it’ll be good for CCGTs as well as for renewables, since capacity revenues are not significant for either onshore or offshore wind, and solar is economic in PJM by itself," the finance chief adds.

At least two greenfield CCGTs that have been hunting for equity since last summer (2019) are said to be targeting financial close by Q1 2020, namely:

Wind and solar trade associations and developers, however, quickly came out in opposition of the FERC order, with the American Council on Renewable Energy describing it as "an early Christmas gift to the fossil fuel industry [...] at the unfortunate expense of ratepayers in PJM” and the American Wind Energy Association claiming it “threatens states' rights and hinders their ability to bring more clean energy to their communities”.

Solar developer LightsourceBP says the majority of its 1GW PJM portfolio is at risk of being priced out of the capacity auction.

“Quantifying that impact is yet to be determined and depends on the final implementation parameters,” says Emilie Wangerman, vice-president of business development and head of power marketing and origination at Lightsource. “As several of our projects are currently under PPA negotiation, LSBP, like other developers, will need go back to the drawing board and factor in the pending regulatory uncertainty and corresponding changes in our project economics.”

Stepping on the gas

The new rules are expected to push coal-fired and nuclear projects that receive state subsidies out of the next auctions, which could boost capacity prices, to the benefit of unsubsidized gas-fired generators.

Some deal watchers, however, downplayed the impact of the capacity auction chaos altogether, pointing to other developments in the market as more important.

“A bigger trend for project financing in PJM, in my opinion, began last summer with the move away from revenue puts and towards gas netbacks,” says Adil Sener, director in the power, energy and infrastructure group at Cantor Fitzgerald, which is actively exploring a range of financing solutions for gas netback structures.

Greenfield CCGT deals could progress to financial close before the auction actually takes place, say deal watchers.

“Banks don’t necessarily wait for auction results to build their base case assumptions," says Sener. "Especially for new-build CCGTs.”

The CFO of the CCGT developer agrees. “If the project is ready, you don’t necessarily need to wait,” he says. “For CCGTs, it takes three years to build anyway and this ruling takes you back to where we were three years ago, before we had to factor for out-of-market subsidies."

For refinancings, however, participants are more likely to wait until the auction takes place, the executive adds.

(A version of this story first appeared on Power, Finance & Risk)

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