Higher-than-expected clearing prices in the latest
PJM Interconnection capacity auction could
mean that several gas-fired projects that have been in the
works for months could finally circle financing, deal watchers
Capacity cleared in much of the regional transmission
operator's territory at $140/MW-day, versus $76.53/MW-day in
most of the same zones last year.
Senior project finance bankers had mostly expected the
outcome of the auction to be flat to last year or lower,
according to a survey conducted by PFR last month
"Everybody is surprised," says an executive at a strategic
investor. "Almost everybody thought it would be a lot lower.
Maybe a little bit of an increase from last year but not
Several reasons were given for the higher print, including
bidders seeking to offset low power prices with higher capacity
revenues; an increase in the net cost of entry for new
generation resources because energy revenues have decreased,
resulting in upward shift of the capacity demand curve; and a
decrease in the total capacity that cleared—which was
not unexpected given a fairly high reserve margin and low
These were all somewhat offset by a forecast decrease in
future electricity demand.
PJM also attributed the higher prices to transmission limits
in some regions.
Many market watchers were curious about the potential effect
of FirstEnergy nuclear retirements in
Ohio. Some 19.9 GW of nuclear generation cleared the auction,
about 7.4 GW less than last year—a smaller reduction
than was expected by analysts.
"The outcome signals rational bidding from key players" such
as FirstEnergy and Exelon, wrote analysts at
Cantor Fitzgerald in a report, noting that
about 5.5 GW less generation capacity had cleared the auction
overall compared with last year.
TIME TO HIT THE GAS
Bankers now expect the recent lull in quasi-merchant
financing, which has become something of an annual ritual in
the run up to the capacity auctions, to end as developers push
to round up their final equity checks.
"Did you see the capacity prices?" exclaimed one project
finance banker. "I’d look to sell and take
advantage of it today."
Others are more cautious, saying that banks need more time
to ponder whether the higher capacity prices are here to stay.
"One good auction jump doesn’t make a trend,"
another senior banker said.
The location of a project and nature of the sponsor behind
it will be determining factors in how quickly it is able to
come to the debt market.
"Many projects in the pipeline will move from amber to green
light, depending on where they’re located,
especially if they they are backed by a private equity
Louise Pesce, m.d.,
project finance, at MUFG, in Los Angeles.
"If there is one large P.E. sponsor who can hold 50% to 70%
of the project, it’s much easier to circle
equity," she adds. "If they're relying on a group of three or
four investors, one could hold the whole project up."
An additional gigawatt of gas-fired generation cleared the
auction compared with last year, including one new
Ares-EIF’s 664.7 MW Hill Top
Energy Center in Greene County, Pa., was the only greenfield
CCGT project to clear the auction, PFR
understands. Officials at the private equity sponsor in New
York did not immediately respond to inquiries.
SIZING THE DEBT
While higher capacity prices might be expected to result in
higher leverage ratios for project finance deals, this may not
be the case across the board.
"A project's leverage ratios may not necessarily shift
because of higher capacity prices," says Pesce. "Prices for
hedging tools like heat-rate call options and revenue puts have
not moved upward as energy prices are still
depressed—which is why capacity prices were bid up in
the first place!"
What is more likely is a wave of refinancings along the
lines of what BNP Paribas arranged for
Ares-EIF’s 700 MW St. Joseph CCGT in Indiana
earlier this year (