The post-merchant power sector: What unintentional re-regulation could look like
Former FERC Commissioner Tony Clark says the collapse of the IPP model could return restructured states to a bilateral contracting model more familiar 20 years ago
The distress of the merchant power provider is well-known. All across the nation, low gas prices, stagnating electricity demand and an influx of subsidized renewables are stressing the finances of power plants that play in the open wholesale markets.
The issue has largely affected older coal and nuclear generators with high fixed costs. But in recent months, it has become so pronounced to force even some young, modern gas generators offline, like the Sutter and La Paloma plants in CAISO last year and ERCOT’s Panda Temple Plant this spring.
Even the companies at the center of the merchant generation space appear to have lost faith in it. In a March earnings call, the CEO of NRG Energy, one of the nation’s largest independent power producers, said the merchant model is “now obsolete and unable to create value over the long term.” In June, NRG’s 14 GW GenOn portfolio filed for bankruptcy protection, and a month later, NRG announced a reorganization plan that includes the sale of 6 GW of conventional generation and up to all of its renewable yieldco.
But if the struggles of the merchant generation model are well understood, less so is what a power sector without a thriving merchant presence would look like. Such upheavals in organized power markets have not been seen since the days of the California energy crisis, and the contours of the power sector in a post-merchant world remain an open question.
One figure with a unique vantage point is Tony Clark. A FERC commissioner from 2012 to 2016, Clark previously entered the sector as a North Dakota utility regulator in 2000, giving him a front row seat to the natural gas boom and the expansion of the nation’s wholesale markets.
Now a Senior Advisor at law firm Wilkinson Barker Knauer, Clark and his colleagues have published a series of white papers outlining the causes and consequences of wholesale market upheavals. At the summer conference of the National Association of Utility Regulatory Commissioners, he told Utility Dive that a post-merchant market may look a lot like “joint dispatch markets,” where long-term bilateral power purchase agreements take the place of capacity markets as the primary means of ensuring adequate power supply.
“I think what probably happens is, to the degree somebody’s able to make a go of it, you probably have some combination of a movement toward longer fixed-term contracts,” Clark said. “Number two, you probably see the independent power producers try to balance out their portfolio of assets, so they’re not so heavy in the merchant end of things, and they probably try to make sure they’ve got assets on the balance sheet that are regulated.”
The slide toward a joint dispatch model in the nation’s wholesale electricity markets could amount to what Acting FERC Chair Cheryl LaFleur called unplanned re-regulation, where market forces degrade the restructured market model to the point where it better resembles a bilateral dispatch model.
“I call it tacit re-regulation,” Clark said. “You’re not seeing state legislators openly repeal what they did 20 years ago, but they may end up kind of in the same spot.”
While agnostic on the value of the changes, Clark’s white paper offers restructured states some strategies to preserve their market models if they want to prevent backsliding to a joint dispatch model. But they can’t do it alone — sooner or later, Clark said, the issue will end up at FERC.
The move to joint dispatch markets
That movement back to a reliance on bilateral PPAs is already apparent. This spring, utility holding company AES announced it would sell its stakes in Ohio merchant generators, which CEO Andres Gluski framed as a movement back to PPA reliance.
“Merchant markets right now, with the U.S. system, are basically not growing,” Gluski told Utility Dive. “So in a system like that, when you have new technologies come in, you’re going to have a lot of obsolete plants, which are just dispatching to cover marginal costs.”
The quote harkens back to the warnings of another white paper from the WBK law firm from October 2016, when authors Ray Gifford and Matt Larson warned that merchant plants are increasingly unable to recover their fixed costs from market operations alone, pushing them to either pursue long-term power purchase agreements, or some sort of subsidy or market fix to better reward their generation.
If that trend continues, Clark said that as merchant generation contracts, the sector may “move away from capacity markets like we’ve seen.”