'Buyer beware': Report highlights challenges to new PJM gas plants

Dive Brief:

New natural gas generation projects in the PJM Interconnection face a growing list of headwinds, and this has resulted in delays at almost a dozen combined cycle projects, according to a joint study by the Applied Economics Clinic (AEC) and the Institute for Energy Economics and Financial Analysis (IEEFA).
The study points to a large oversupply in the capacity market, "uncertainty" over fuel prices, clean energy requirements passed by several states, and other factors that will impact the future of delayed plants as well as new proposals.
And those factors are being exacerbated by uncertainty in PJM's capacity market due to the Federal Energy Regulatory Commission's Minimum Offer Price Rule (MOPR), according to the report. In December, the commission expanded the rule, effectively raising the floor prices for state-subsidized resources. The market is now in a state of "upheaval," according to AEC and IEEFA.

Dive Insight:

AEC researcher and report co-author Bryndis Woods has a message for anyone considering buying or financing a gas plant: "Buyer beware."

"The headwinds facing new PJM gas plants are growing stronger and stronger," Woods said in a statement.

Among those headwinds is a "massive oversupply" of generating resources in the PJM market, according to the researchers. They say since 2002, PJM peak demand has grown by 1% while total generating capacity is up 173%. There are also high-risk global events, including the coronavirus pandemic and extreme weather disruptions including heat waves, cold snaps, hurricanes, and high tide flooding.

An increase U.S. liquefied natural gas exports could also drive up fuel prices, according to the report.

"U.S. gas prices are now increasingly tied to international markets, making long-term predictions increasingly uncertain and significantly raising risks for new gas plant development," the report warned. According to the analysis, since the beginning of 2016, "exports have soared, climbing from essentially zero" to a record 9.8 billion cubic feet/day in March 2020.

FERC'S MOPR decision has also caused "a great deal of uncertainty in PJM's capacity market, including an almost year-long delay in the latest auction," according to the report. There has also been talk of some states, including Illinois, Maryland, and New Jersey, leaving the capacity market.

“Individually, each of these risks could perhaps be factored into a project's financing,” Dennis Wamsted, an IEEFA analyst and report co-author, said in a statement. “Taken together, they pose virtually insurmountable hurdles for new gas-fired projects in the region.”

The AEC and IEEFA study highlights 11 gas power plant projects that it says are being slowed by the array of market factors in PJM.

"Project delays for power plants in the United States are exceedingly common. All 11 of the gas-fired plants currently in the early stages of development in PJM have experienced delays," the report said.