Salem power plant wins market deferral

Wednesday, December 10, 2014

Federal regulators have granted a request by the developer of a power plant in Salem, Massachusetts, to defer its commitment to provide power to the New England market.  The process reflects challenges inherent to developing power plants in the Boston area, as well as methods to mitigate the impacts of those challenges.

Stacks of the former Salem Harbor Power Station, before its decommissioning.

Footprint Power Salem Harbor Development LP is in the process of redeveloping the site of a defunct coal-powered generation plant.  The former Salem Harbor Power Station could produce up to 745 megawatts of power, fueled by coal and oil.  In 2010, Footprint identified the site as a potential facility for redevelopment and, on August 3, 2012, it acquired the plant from Dominion Energy Salem Harbor, LLC.  Footprint now plans to build what the Federal Energy Regulatory Commission has described as two state-of-the art, efficient, low-emission, quick-start natural gas turbine generators; two steam-turbine generators; and two heat-recovery steam generators, including pollution control equipment, with aggregate generating capacity of 674 megawatts.

The New England electricity market compensates generators and other resources for two main products: energy and capacity.  Energy represents the volume of power sold by a market participant (measured in megawatt-hours), while capacity represents the intended full-load sustained output of a facility (measured in megawatts).  Regional grid operator ISO New England, Inc. operates a forward capacity market, under which generators can lock in the payments for capacity several years in advance of actually operating.  This structure is designed to ensure that the region has sufficient generating capacity to meet future needs, as well as to help new generation projects secure financing and be built despite long permitting and construction lead times.

Footprint bid its proposed natural gas power plant into New England's seventh Forward Capacity Auction, also known as FCA7.  That auction was held in February 2013, and gave Footprint a future capacity market revenue stream in exchange for the obligation to provide capacity over a one-year capacity commitment period starting on June 1, 2016.  According to Footprint, it then had 39 months to obtain all necessary permits, secure financing arrangements and complete construction of the plant, a process that had never been tested for a new plant not subsidized or sponsored by a state.

While Footprint secured many of the necessary permits promptly, one permit in particular -- a federal Prevention of Significant Deterioration (PSD) permit under the Clean Air Act -- took longer than expected.  Obtaining a PSD permit from the Massachusetts Department of Environmental Protection, acting under federally delegated authority, involves a five-phase process: (1) pre-application; (2) application; (3) draft permit preparation; (4) public participation; and (5) final decision to issue or deny a PSD permit.  While Footprint finally obtained its PSD permit -- and survived a last-minute appeal of that permit's issuance -- Footprint says the delay and revenue uncertainty the resulting uncertainty of revenues impaired its ability to finance the project. While Footprint had exercised an option to lock in its capacity rates for five years, without the deferral one full year of stable revenue would be lost, making potential lenders and equity providers unwilling to provide financing.

Under ISO-NE's tariff, a market participant may seek a deferral of its capacity supply obligation if three criteria are met.  First, the resource must first request and receive from ISO-NE a written reliability determination indicating that the absence of the resource's capacity would result in a transmission system reliability issue in both the associated Capacity Commitment Period and the next Capacity Commitment Period.  If ISO-NE makes such a determination, then the resource may file with the Federal Energy Regulatory Commission for a one-year deferral of its Capacity Supply Obligation. The resource must include in its filing to the Commission (1) the reliability determination from ISO-NE; (2) a demonstration that the project's development delay is due to factors beyond the control of the resource; and (3) a demonstration that the deferral is critical to the resource's ability to achieve commercial operation.

Footprint applied to the Commission for such a deferral on October 7, 2014.  On December 5, the Commission granted Footprint's request.  The Commission noted that ISO-NE had issued a reliability determination finding that the Footprint facility is needed for reliability in the 2016-2017 Capacity Commitment Period and the subsequent 2017-2018 period, that Footprint had demonstrated that it has failed to achieve commercial operation on time due to factors beyond its control, and that Footprint has demonstrated that the deferral is critical to the Facility’s ability to achieve commercial operation.

Footprint's experience highlights several key dynamics affecting New England power plant development.  The story is framed by the retirement of an aging coal plant and its replacement with natural gas-fired generation, a trend occurring across the U.S.  It features the challenges of securing necessary environmental permits and surviving appeals by project opponents.  Footprint's experience also highlights the features of the New England forward capacity market, and how it affects developers of new power plants.

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