For private equity investors in power plants in the PJM Interconnection, the nation’s largest wholesale competitive power market, it’s been a case of live by the capacity market and die by the capacity market. That’s the finding in a new analysis from the non-profit Institute for Energy Economics and Financial Analysis, titled “Decade of strong growth is over for PE gas plant developers in PJM .”
The study by IEEFA analyst Dennis Wamsted notes that privately financed generation in PJM over the past decade experienced a boom: “Private capital, particularly difficult-to-track private equity (PE) investment, has reshaped the PJM power market in the past decade. PJM data shows that 35,515 megawatts (MW) of combined cycle gas capacity have been built in the 13-state regional system since 2011, reflecting the impact of the fracking revolution that brought plentiful, low-cost gas supplies to the market. PE and other private sources developed more than 80% of the total—28,815MW.”
The rise of private equity represented a major change for the composition of PJM’s generators. As the IEEFA analysis notes, as late as 2017, five investor-owned companies – American Electric Power, Dominion, Exelon, FirstEnergy, and NRG – were the largest PJM generators. Today, three of the largest generators are ArcLight (14,230 MW of nameplate capacity), LS Power (10,803 MW), and Talen (10,370 MW). Now about 60% of PJM’s generation comes from privately financed firms.
Private equity has significant advantages in what has historically been a largely regulated market. The report notes that traditional investor-owned utilities generally face state regulators setting rates based on costs, with at least a putative goal of keeping rates low. Utilities and public non-utility generators also face disclosure rules and scrutiny from the U.S. Securities and Exchange Commission. Private equity firms are free from those restraints.
What has driven the rise of private equity in PJM? Wamsted points to the regional transmission operator’s historically generous capacity market, which has paid generators for dedicating their plants to supply power during shortages, such as severe winter storms. The analysis notes that “those prices have collapsed, squeezing existing and new developers alike.”
In the last three PJM capacity auctions, the price the RTO has paid the winners “has averaged less than $40/MW-day “well below the $115/MW-day average in the eight years prior. That constitutes a major risk for existing plant owners and new projects alike, forcing operating projects to make do with less while requiring new developers to convince lenders that their plans are still worth the risk.”
The 2022 Christmas “Winter Storm Elliott” that hammered most of the eastern U.S. clobbered many of the gas-fired plants owned by private capital, as the plants froze up and were unable to deliver on their commitments under the PJM capacity market. The led PJM to levy massive fines, totaling some $2 billion, resulting in disputes over the fines at the Federal Energy Regulatory Commission and potential bankruptcy filings some private equity projects.
Also, the fallout from Elliott has led to widespread calls, including from FERC commissioners, and movement by PJM to take a fundamental look at its capacity market.
The report on the role of private equity in PJM is the first of three examining “the increasing risk environment in PJM,” IEEFA said. The next edition will “focus on the limited partners. These pension and retirement funds have poured money into the PE sector in the past decade, and have generally been well rewarded for their investments. But the changing regional power environment is likely to shift the outlook for outside investors by lowering annual returns, raising investment risks, or both.”
This second report “will pay particular attention to the fallout from bankruptcy filings, in which funds and other private entities end up owning assets they may not want. For example, Nuveen/TIAA found itself in that situation following the 2020 bankruptcy restructuring of FirstEnergy Solutions, which became Energy Harbor.”
The final installment will examine “the risks posed by PE’s relative immunity from oversight and public pressure, a growing threat for the localities where the plants operate. PE firms push risks onto the communities. When their plants are no longer economic, PE generators can simply decide to close up shop and get out, leaving unprepared localities facing significant economic dislocations from job and tax losses. This exact scenario played out in the spring at the Homer City power plant in Pennsylvania as we will examine, but that community is not likely going to be the last unless local leaders begin planning now for the coming transition.”
The lack of accountability in private equity financing, Says IEEFA, “creates the very real possibility that efforts to curb regional carbon dioxide emissions will become more difficult in the years ahead. The fossil fuel plants owned by PE firms and other private capital now account for more than 50% of the region’s annual power-related carbon dioxide (CO2) releases, and that percentage is likely to grow. But the sector’s lack of transparency shields it from the types of public pressure that have helped convince publicly traded electric utilities to move, however haltingly, toward decarbonization efforts.”
–Kennedy Maize
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