Generation backed by utilities accounted for half of new capacity in 2018-19

Power generation projects financially backed by utility ownership or by a utility contract accounted for about half of the new capacity built in 2018 and 2019, according to a new report by the American Public Power Association.

Utility owned new generation also resulted in a greater diversity of resources than merchant generation. In 2018, about half of the utility sponsored new capacity was natural gas, one-fourth was solar, and one-fifth was wind, according to the report.

In 2019, those three technologies each accounted for about one-third of utility capacity additions.

In contrast, new merchant capacity additions, plants that receive revenue solely from wholesale power markets, consisted almost entirely of natural gas-fired generation -- 92% in 2018 and 99% in 2019.

Merchant generation itself accounted for about 38% of the new capacity that began service in 2018 – a total of 11,800 megawatts (MW) – and 16% of the capacity that began service in 2019 or 3,700 MW.

“The capacity constructed or contracted by utilities is far more diverse than merchant generation capacity and includes hydropower and geothermal projects, which are not present in new merchant generation,” Elise Caplan, director of electric markets analysis at APPA and author of the report, said.

New merchant generation capacity has fluctuated over the past seven years, from a low of 2.4% in 2013, climbing to a peak of 29.1% in 2017 and then 37.9% in 2018 before settling back to 16.3% in 2019. That trend has not been “a positive development for resource diversity, environmental goals, and risks to consumers,” the report noted.

The downside of the expansion of merchant power plants includes concerns about fuel security as natural gas plants continue to dominate new generation. For example, ISO New England, which represented 30% of the new merchant natural gas generation last year, has said it has an “energy security problem” because it “relies most on gas delivered through its constrained pipeline system.”

Merchant generation also creates a pool of resources with a continued interest in propping up their earnings by administratively increasing energy and capacity prices, the report said, such as the Federal Energy Regulatory Commission’s (FERC) December 2019 order expanding the Minimum Offer Price Rule (MOPR) in the PJM Interconnection’s capacity market.

At the time, FERC said the administratively determined offer floor would “enable PJM’s capacity market to send price signals on which investors and consumers can rely to guide the orderly entry and exit of economically efficient capacity resources.”

Such administrative interventions “pose impediments to state and utility efforts to develop particular types of resources and increase costs to consumers,” the report said.

Overall, 31,200 MW of new capacity came online in 2018, exceeding the 18,750 MW of capacity that retired even though electricity consumption has been relatively flat. In 2019, about 22,700 MW of capacity came online, exceeding the 18,760 MW of capacity that retired.

The fact that the amount of new merchant generation in 2018 and 2019, 11,800 MW and 3,700 MW, respectively, came close to the amount by which new capacity exceeded the retirements – 11,800 MW in 2018 and 3,700 MW in 2019 – indicates that “new merchant generation could have been a contributing factor to the surplus of new capacity compared to retirements,” the report said.

The report also included data that show that public power utilities accounted for almost 20% of new capacity and 17% of all renewable energy and storage installations in 2018 and 11% of all capacity and 15% of renewables and storage in 2019.

Overall, the “data show that resource diversity, technology innovation, and emissions reductions can be best achieved by financial arrangements that consider utility, consumer and state policy goals rather than projects constructed to maximize earnings from wholesale markets,” the report said.

The report used the list of new generating units from the Energy Information Administration and combined it with information on financial arrangements behind the new capacity primarily from utility and developer websites and from news articles, as well as data from the Federal Energy Regulatory Commission and the American Wind Energy Association.