By Tom Kleckner
Boston Pacific’s 2016 “Looking Forward” report to SPP’s Board of Directors focuses on “big events.”
“What’s surprising is the number of big events that have occurred here in just the past year,” said Boston Pacific founder and director Craig Roach, who presented the report to the board last month.
The firm’s sixth annual report for SPP focuses on “broad market and regulatory events” that could significantly impact its markets or require the board’s attention:
- The shale gas “revolution”;
- EPA policies;
- Federal-state jurisdiction disputes;
- Challenges to the utility business model;
- Industry consolidation; and
- Electric vehicles.
Shale Gas Risk Narrowed
Roach cited as one “big event” EPA’s June 2015 draft assessment, which found no evidence that fracking was having a “widespread, systemic impact on drinking water resources.”
The report represented a “significant narrowing of risk” for shale gas supplies, Roach said. “The question is whether that abundance will continue in the future.”
Assuming continued technological advances, Boston Pacific believes it will, noting U.S. Energy Information Administration forecasts that shale gas production in the continental U.S. will increase by 73% by 2040, accounting for 55% of total U.S. natural gas production.
Gas is important to SPP, Roach said, because gas-fired power often sets the price in the RTO’s energy markets and because the flexibility of combined cycle power plants complements intermittent wind and solar generation.
Boston Pacific categorized the risks facing gas supplies as “above-ground” (regulatory) and “underground” (extraction). In other words, Roach asked: “Is the gas there? Can it be recovered at a reasonable cost?”
EPA’s ‘Environmental Campaign’
A second big event, Roach said, was the Supreme Court’s February stay of the Clean Power Plan. The report refers to EPA’s “continued environmental campaign,” saying it has “pushed along multiple fronts to drive the electricity business to reduce a broad range of air pollution emissions and other environmental impacts.”
Boston Pacific said the high court’s stay gives SPP’s board, members and states an opportunity to “collaborate” on their views. “The SPP markets have been, and will continue to be, the path to cost-effective reductions in carbon dioxide emissions,” the report says.
State-Federal Jurisdiction
Roach also took note of the Supreme Court’s April ruling rejecting Maryland regulators’ attempt to subsidize a power plant. (See Supreme Court Rejects MD Subsidy for CPV Plant.)
Based on the court’s January ruling upholding FERC’s jurisdiction over demand response compensation, Roach said he expected the court to support the state’s contract-for-differences with Competitive Power Ventures’ combined cycle plant.
“If the Supreme Court took the same principles as it did in the [DR] ruling … it would have reversed the lower court and restored state rights,” he said. “The Supreme Court did nothing like that. It said, ‘We’re going to rule very narrowly.’”
The report says the Maryland decision could result in state programs being “pre-empted under similar reasoning.”
Distributed Resources
Boston Pacific Managing Director Vincent Musco said the company hasn’t changed its view on the impact of distributed energy resources on the utility business model. “Consistent with the past, we see no evidence” that DER will displace the grid and centralized generation, he said.
The report notes that residential rooftop solar is much more expensive than utility-scale solar. “If costs alone drove technology choice, utility-scale would win,” it said. “Notably, utilities have made considerable investments in utility-scale solar and wind resources and are projected to continue to do so.”
Transmission Costs
The report points to customer pushback over growing transmission costs, citing complaints challenging the earnings of SPP members American Electric Power and Westar Energy.
Calling for “substantial grid investment,” the report says the challenge will be allocating expansion projects in a manner “considered fair.”
Industry Consolidation
The one new topic added in this year’s report is industry consolidation, which it said is being driven by the search for “growth and increasing operational efficiency through scale.”
The report says the number of investor-owned utilities has dropped by 52% over the last two decades, from 100 in 1994 to 48 in 2014. Average market capitalization has increased from $9.4 billion in 2004 to $16.2 billion in 2014 (measured in 2014 dollars).
“If there are fewer competitors, that can impact the competitiveness of the market,” Musco said. “It can affect governance, with fewer people around the table and fewer and [weaker] voices.”
