by Michael R. Engleman and Steven T. Wellner, Dickstein Shapiro LLP
If nothing else, 2011 was a year for industry consolidation. Mergers were announced between Exelon Corp. and Constellation Energy Group Inc., as well as Duke Energy Corp. and Progress Energy. By year-end, Exelon and Constellation had cleared the Department of Justice and Federal Energy Regulatory Commission (FERC) hurdles and aimed to close their merger by early 2012, while Duke and Progress work to address FERC’s rejection of their initial market power mitigation plans. Entergy Corp. announced its plan to join the Midwest Independent Transmission System Operator Inc., then announced it would divest and merge its transmission business with ITC Holdings Corp. AES Corp. announced and completed the acquisition of DPL Inc., the parent of Dayton Power & Light. Northeast Utilities and NSTAR pushed forward with the merger announced in late 2010. Consolidation occurred in all areas of the industry, with numerous assets or development projects changing ownership.
Given the Capitol Hill gridlock, most major federal action happened at the agency level. FERC issued orders on transmission planning and cost allocation and demand response compensation in organized wholesale energy markets. The Environmental Protection Agency (EPA) released its Cross-State Air Pollution Rule (CSAPR) and Mercury and Air Toxics Standards (MATS) for Power Plants. These regulations, predicted to result in retirement of between 35 and 70 gigawatts of coal-fired power generation, were hailed as overdue by environmental groups and decried as an economic disaster by many utilities and politicians. At the request of Texas, on Dec. 30 the U.S. Court of Appeals for the D.C. Circuit stayed implementation of the CSAPR regulations pending further court review. On the project side, the last-minute extension and looming expiration of federal incentives for renewable power resulted in projects’ pushing to start construction to qualify for benefits. And hearkening back to a different era for nonincumbent developers, LS Power announced the financial closing of its West Deptford Township, N.J., gas-fired project on a purely merchant basis.
2011 also brought setbacks, particularly for developers of renewable and innovative projects. In December, NRG Energy Inc. cancelled its proposed Delaware offshore wind farm after it was unable to find a buyer although the project had a long-term power purchase agreement (PPA). This news, coupled with the methodical development of federal and state offshore permitting procedures, reminded us of continuing offshore obstacles. Tessera Solar, unable to finance two utility-scale solar projects with PPAs, sold both projects. By early fall, parent company Stirling Energy Systems filed for bankruptcy protection. Joining Stirling was Dynegy Inc., energy storage company Beacon Power Corp. and solar companies Evergreen Solar Inc., SpectraWatt and Solyndra, whose half-billion-dollar federal loan guarantee created the Obama administration’s largest scandal. Meanwhile, New Jersey issued a request for proposal for new generation to mitigate the perceived failure of PJM capacity markets and was sued at FERC and in federal court by incumbent utilities and independent generators. And Fukushima stopped the predicted nuclear resurgence.
The EPA CSAPR and MATS regulations likely will drive 2012 activity. Plant operators plan to mothball thousands of megawatts of coal-fired generation. As new compliance requirements are finalized, more plants will be identified for closure. Renewables and new gas-fired generation primarily will compete to fill the void. Continued stagnant load growth will mitigate the need to fully replace mothballed plants in the short term, but a building spree appears inevitable. Whether that spree begins in earnest in 2012 will determine whether 2012 is good for energy industry companies.
2012 also should be a banner year for transmission policy and development. The retirement of coal-fired plants will spur transmission investment. Because renewables often are farther from load centers than the coal units they would replace, significant transmission investments might be necessary. Even gas-fired generation, which often can be constructed closer to load, could require major system upgrades.
The decisions made in 2012 regarding which projects will replace coal will impact the transmission system for years. Transmission development will be driven by mandatory compliance with FERC’s new transmission planning guidelines, which for the first time require that such planning account for public policy objectives, including renewable energy mandates or targets. Given that 29 states and the District of Columbia have renewable portfolio standards and eight states have nonbinding renewable goals, compliance with FERC’s directives will have long-term implications for system planners and users.
2012 should be a dynamic year in the electricity industry. Whether it will be seen in retrospect as the start of new optimism for the industry or a continuation of anxiety will depend on whether companies can navigate the regulatory waters to maximize opportunities and minimize failures. Oh, and a national election might change everything.