FERC OKs sale of Dominion merchant power plants to Energy Capital Partners

Wednesday, August 21, 2013

Federal regulators approved yesterday the sale of three fossil fuel-fired power plants from energy company Dominion Resources Inc. to Energy Capital Partners LLC for $650 million.  The order by the Federal Energy Regulatory Commission moves the deal closer to fruition.  Is the transaction part of a trend in the U.S. energy industry?

Dominion is a major player in the U.S. energy business, serving customers in 15 states with its holdings in both the electricity and natural gas sectors.  Dominion owns a portfolio of about 27,000 megawatts of electric generation and 6,400 miles of electric transmission lines, as well as vertically-integrated electric utilities like Dominion Virginia Power.  Dominion also owns a large natural gas storage system as well as about 11,000 miles of natural gas transmission, gathering and storage pipelines.

Buyer Energy Capital Partners is a private equity firm focused on investing in North America's energy infrastructure.  The firm has recently acquired other electric generation plants, including the 830-megawatt combined-cycle natural gas-fired Red Oak power plant in Sayreville, New Jersey, and the 847-megawatt Broad River simple cycle, natural gas-fired power plant in South Carolina.

Over the past several decades, Dominion added merchant power plants designed not to serve the load of its affiliated utilities.  These plants produced electricity from coal, oil and other fossil fuels, and sold the power into regional wholesale markets such as those managed by ISO New England and mid-Atlantic grid operator PJM.  But with tighter environmental regulations, and more competitive electricity markets thanks to low-cost natural gas, many New England coal and oil-fired power plants have a hard time succeding in the current markets.  As an apparent result, in 2012 said it would sell or close its merchant coal-fired plants to realign its portfolio and improve return on invested capital and shareholder value, and sold the coal- and oil-fired Salem Harbor Power Station in Massachusetts.

In March 2013, Dominion announced a deal to sell its interests in three power plants to Energy Capital Partners.  1,528-megawatt Brayton Point Power Station, in Somerset, Massachusetts, is the largest remaining coal-fired power plant in New England.  It has three coal-fired units and one unit capable of being firing oil or natural gas, as well as the coal-fired 1,158-megawatt Kincaid Power Station in Illinois..  Dominion also offered its stake in 1,424 megawatts of capacity at the Elwood Power Station outside Chicago, which is powered by nine 158-MW natural gas-fired combustion turbines.

The deal price announced was $650 million.  At least one analyst has noted that after removing tax benefits, the deal implied an underlying price paid per kilowatt of capacity of just over $100, a price 30 times lower than the the cost of building a new coal-fired plant according to the U.S. Department of Energy.

The Federal Trade Commission approved the deal from an antitrust perspective under the Hart-Scott-Rodino Act in March 2013,  so the Federal Energy Regulatory Commission approval today was among the final approvals needed.

Fossil fuel and electricity markets are experiencing changes, from tighter air emissions to the prospect of federal carbon regulation.  Assuming the Dominion deal actually happens, does it signal a trend of utility divestiture of merchant fossil fuel-fired power plants?  Will other utilities exit the merchant electricity generation business?  Will we see increased transactional activity, as utilities sell their fossil fuel-fired plants?  For how much longer will the buyers run these plants?  In the case of the Salem station Dominion sold last year, buyer Footprint Power LLC is demolishing the old plant and redeveloping the site as a natural gas-fired power plant.  Will Energy Capital Partners choose to keep Brayton Point operating in a market where margins are often tight?  Or is this just the rationalization of Dominion's asset base, with no similar ripples throughout the sector?

Virginia offshore wind site leases to be auctioned

Thursday, August 8, 2013

Next month the United States will auction off the rights to develop offshore wind energy projects off the Virginia coast.  The Virginia auction's results will shape the development of offshore wind in North America, as it will represent the nation's second competitive lease auction for commercial offshore wind projects.

As part of the Obama administration's efforts to promote the use of federal lands for the generation of renewable electricity, the federal Bureau of Ocean Energy Management is holding a series of auctions of the rights to lease sites in federal waters over the outer continental shelf.  On July 31, BOEM held an auction for sites off Massachusetts and Rhode Island.  In that auction, Deepwater Wind New England, LLC submitted the winning bid of about $3.8 million for the rights to lease two parcels covering 164,750 acres offshore New England.

BOEM will hold its second competitive lease auction on September 4 for sites off Virginia.  The Virginia auction will be for a single lease for a designated wind energy area covering about 112,799 acres.  The western edge of the lease area is located about 23.5 nautical miles off the Virginia Beach coastline.  If fully developed, BOEM expects the Virginia lease area to support more than 2,000 megawatts of wind generation.

The Virginia Wind Energy Area is outlined in blue in this map provided by BOEM.

BOEM's current offshore wind leasing program - known as "Smart from the Start" - features a process reliant on multiple rounds of proposals and calls for public feedback.  For Virginia waters, that process began in February 2012 when BOEM published a Call for Information and Nominations in the Federal Register.  The Call was designed to evaluate competitive interest for the area, as well as to seek public feedback on existing uses and other considerations relevant to leasing the sea space.  Simultaneously, BOEM published a Notice of Availability for the final Environmental Assessment and Finding of No Significant for commercial wind lease issuance and site assessment activities on the Atlantic outer continental shelf offshore New Jersey, Delaware, Maryland, and Virginia.

BOEM received eight nominations of interest in the lease area in response to the Call.  The eight companies responding with interest were:

  • Apex Virginia Offshore Wind, LLC
  • Arcadia Offshore Virginia, LLC
  • Cirrus Wind Energy, Inc.
  • Dominion Virginia Power
  • enXco Development Corporation
  • Fisherman’s Energy, LLC
  • Iberdrola Renewables Inc.
  • Orisol Energy US, Inc.

As with the recent auction for sites off Rhode Island and Massachusetts, some of these companies may not choose to participate in the auction.  While BOEM had found nine companies to be legally, technically, and financially qualified to participate in the New England auction, only three actually submitted bids.  For example, Fisherman's Energy and Iberdrola Renewables both qualified for the New England auction, but did not bid.

Assuming interest remains in the Virginia sites, the September auction is expected to yield a single winner.  That winning bidder will pay the amount specified in the final bid for the right to lease part or all of the Virginia wind energy area.  Development of an offshore wind project would then require a series of additional steps, ranging from financing to permitting to interconnection with the mainland grid.  Whether the auction actually leads to offshore wind development off Virginia will thus depend on a number of factors, but the September auction will represent an important step toward the development of the United States' offshore wind resources.

US holds first offshore wind site lease auction

Thursday, August 1, 2013

Yesterday the U.S. Department of the Interior held its first competitive lease sale for renewable energy on the Outer Continental Shelf.  With a total bid of about $3.8 million, Deepwater Wind New England, LLC won the rights to lease two parcels covering 164,750 acres offshore Rhode Island and Massachusetts.  What do the auction results mean?

Consistent with President Obama's climate action plan, the Interior Department is promoting the use of federal lands for the production of renewable electricity.  Yesterday's auction represents the first competitive auction for leases for offshore wind sites in federal waters.  Following significant stakeholder process, the Interior Department identified and refined the parcels off Rhode Island and Massachusetts, and solicited interest in leasing sites.  In June, the Interior Department announced that nine companies were legally, technically, and financially qualified to participate in the auction.

The auction took place in two phases in late July.  First, a panel met to consider non-monetary factors, including whether any bidders held agreements that could make their project a more realistic success.  For example, bidders demonstrating a power purchase agreement or joint development agreement could score bonus points enabling them to compete against higher monetary bids.  Deepwater Wind's joint development agreement with the State of Rhode Island thus gave it an advantage in the second round held on July 31.  This round took a more traditional auction format, with bidders placing a series of increasing bids until only one bidder remained for each parcel.

Three bidders participated in the auction: Deepwater Wind New England, LLC, Sea Breeze Energy, LLC, and US Wind Inc.  After 4 rounds, Deepwater Wind had won the south parcel for $94,153, and only one other company remained in the competition for the north parcel.  By round 11, Deepwater Wind had won the north parcel with a bid of $3,744,135.

With the auction completed, Deepwater Wind has 10 days to execute the lease agreements.  Its first rent under the leases will be due in 45 days.  Lease fees for the sites will be charged at $3 per acre, and if Deepwater Wind develops an operating project, it will also pay an annual fee roughly equal to 2% of its wholesale energy market revenues.

Building on this first auction, the Department of the Interior plans to hold a second auction for sites off Virginia in September.  Eight bidders have been deemed qualified to participate in the Virginia auction.  How many bidders will actually participate in the auction?  How much competitive interest will arise?  For what price will the parcels' lease rights sell?  Will the leases - whether off Rhode Island and Massachusetts, or off Virginia - lead to operating offshore wind projects?  Time will tell how the 2013 offshore wind lease auctions affect U.S. energy development.