Higher-than-expected clearing prices in the latest PJM Interconnection capacity auction mean that several gas-fired projects that have been in the works for months will almost certainly be able to circle financing, deal watchers tell PFR.

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.

"The results were above expectations but not outside of our range of projections," says Sherman Knight, president and chief commercial officer at Competitive Power Ventures in Silver Spring, Md., which is developing the 725 MW Woodbridge project (also known as CPV Shore) in Middlesex County, N.J., and the 1,250 MW Three Rivers project in Grundy County, Ill.

"We as an industry tend to focus too intently on one annual data point," says Knight, adding, however, that it was "nice to see something higher than the last couple years, which were lower than usual and not sustainable."

An additional gigawatt of gas-fired generation cleared the auction compared with last year, including at least one new combined-cycle plant.

Ares-EIF’s 664.7 MW Hill Top Energy Center in Greene County, Pa., is among the projects that cleared the auction, PFR understands. Officials at the private equity sponsor in New York declined to comment.

TIME TO HIT THE GAS

Bankers 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.

"This is not just a green light," says Ralph Cho, co-head of North American power at Investec  in New York. "This is a neon green light to all developers, saying, 'come and get it!'"

"I’m getting emails from Japan already, saying, 'we are very pleased to hear the results from the auction," adds an investment banker.

Other observers are slightly more cautious, saying that banks and investors need time to assess whether the higher capacity prices are here to stay. "One good auction jump doesn’t make a trend," says another senior project finance banker.

The location of a project and the nature of the sponsor behind it will be determining factors in how quickly it is able to come to the debt market.

PJM Map 2021

"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 sponsor," says Louise Pesce, an m.d. in the project finance division 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."

Several sponsors that were close to rounding up all of the equity they needed for specific projects had already approached banks last year to discuss debt sizing, but deals had stalled as the last equity checks had remained elusive.

The better-than-expected auction result is likely to put those financing processes back on track, in what one project finance banker describes as "a resurrection from the dead."

Among the projects that are back in play is Panda Power Funds’ 990 MW Mattawoman  project in Maryland, deal watchers tell PFR.

"Wednesday's RTO print was 40% higher than what many had believed were optimistic estimates, providing a shot in the arm for equity and mezzanine investors in recent PJM new builds," says Kevin Phillips, New York-based global co-head of the power, energy and infrastructure group that recently moved en masse from Jefferies to Cantor Fitzgerald.

"In the 24 hours following the auction result we are hearing a palpable reaction of relief," he adds, "especially from Asian equity and mezzanine investors, many of whom had begun to question their PJM thesis after the abysmal RTO print last year."

SIZING THE DEBT

While higher capacity prices might be expected to result in higher leverage ratios in 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 MUFG's 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 in the term loan B market, along the lines of the deal BNP Paribas arranged for Ares-EIF’s 700 MW St. Joseph CCGT in Indiana earlier this year ( PFR, 3/16).

"We are skeptical that commercial bank term loan A lenders will substantially revise their downside cases so as to materially improve debt capacity," says Cantor's Phillips. "However, we do expect institutional debt from the term loan B market and gray market private placements to be more constructive on debt capacity as a consequence of the auction outcome."

BIDDING STRATEGIES

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 ( PFR, 4/26).

PJM Auction

"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 much."

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 prices.

These were all somewhat offset by a forecast decrease in future electricity demand.

"Separations in ATSI, Comed and PSEG were generally driven by the changes in transmission limits and generators’ decisions to opt out from the auction," says Adil Sener, director in the power, energy and infrastructure group at Cantor  in New York. "However, the RTO result indicates a major upward shift in bidding behavior and is more interesting."

Additional reporting by Richard Metcalf.

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