NEW RISKS, NEW REACTIONS: POWER & ENERGY …...May 16, 2019 · VP, Head of First Party Claims,...

NEW RISKS, NEW REACTIONS:

POWER & ENERGY INSURANCE

IN 2019 AND BEYOND

May 16, 2019

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Advisory Committee

Power Conference Inc (PowerCon) delivers interactive

educational and analytical content regarding the associated

risks for the onshore energy, petrochemical and power

industries to a diverse audience of risk managers, insurance

carriers, brokers, and third party service providers who

specialize in these areas of risk.

Advisory Committee

Thank you to our advisory committee…

Marc Giovannetti

Head of First Party Claims, LSM-US

John Roberts

VP Property Claims, Energy & Engineered Risks, AIG

Jose Mogartoff

Global Energy Claims – The Americas, Zurich

Dan McLeod

Claims Director, LSM-US

Steve Guggenheim

AVP, Executive General Adjuster, Zurich

Marc Haller

SVP, Product Line Manager – US Energy, LIU USA

Kevin Knoer

MBA, ARM, VP – Senior Property Underwriter, SCOR

Bob Edel

VP, US Power Generation Segment Leader, Zurich

Gary Ladman

Vice President, AEGIS

Advisory Committee

Independent Adjusting Firm Partners

Legal Partners

Engineering Partners

Accounting Partners

Featured Sponsor

The following presentation is for

educational purposes only and is

not intended for any other use.

It does not represent the view of

any firm, insurer, or reinsurer.

New Risks, New Reactions: Power & Energy Insurance in 2019 and Beyond

❖ Keynote – Disruptive Energy Futures

❖ Insurance Industry Perspective

❖ Energy Transformation

❖ Offshore Wind

❖ US Capacity Markets

❖ Engaging Younger Talent

❖ Capstone

KEY NOTE - DISRUPTIVE ENERGY FUTURES

DISRUPTIVE ENERGY FUTURES

Amory Lovins

Rocky Mountain Institute

INSURANCE INDUSTRY PERSPECTIVE

DISRUPTIVE ENERGY FUTURES –

INSURANCE PERSPECTIVE

Moderator: Marc Giovannetti

VP, Head of First Party Claims, LSM-US

Jatin Sharma

President, GCube Insurance Services

Jim Podesva

Vice President & Senior EGA, York SLA

As renewable energy assets mature, and become incorporated into

the portfolios of traditional power generation companies what new

issues and risks do you see emerging?



What issues do you see in the adjustment of energy losses based

upon the intersection of both of older aged assets and new

technology sitting side by side?

How can this make the technical assessment and valuation of energy

assets more complicated?



Renewable energy insurance portfolios have seen deteriorating loss

ratio’s while undergoing dynamic growth. Why has this occurred?

What changes need to take place in the insurance market for

insurance to become a more economically sustainable product?



As energy companies become more specialized and transition to the

adoption of newer technologies what challenges can this pose in

dealing with OEM’s and Suppliers when losses arise?

How can the proprietary nature of newer technology frustrate the

adjustment process?



Today more renewable assets are being bought up by private equity

and venture capital firms. When asset portfolio’s such as these are

presented to be underwritten, has this caused challenges for you in

analyzing the underlying risks?

What role and responsibility do you feel brokers provide in ensuring

that there is full transparency around the disclosure of insured assets

in an insurance portfolio?



Coffee Break

ENERGY TRANSFORMATION

Introductions: Bruce Kaliner

Mound Cotton Wollan & Greengrass, LLP

Prajit Ghosh

Global Head of Energy Transition Research,

Wood Mackenzie, a Verisk Business

Yayoi Sekine

Energy Storage Analyst, Bloomberg NEF

ENERGY TRANSFORMATION

© 2019 Verisk Analytics, Inc. All rights reserved. 35

The Energy Transition Story: Power Markets of Tomorrow

CONFIDENTIAL AND PROPRIETARY - DO NOT

DISTRIBUTE OR SHARE

© 2019 Verisk Analytics, Inc. All rights reserved. 36

Your presenter

Prajit Ghosh Global SME, Energy Transitions

[email protected]

The Energy Transition story: Power Markets of tomorrow

Energy Transformation - Battery Storage

Yayoi Sekine

CONFIDENTIAL AND PROPRIETARY -

DO NOT DISTRIBUTE OR SHARE

Coverage.

Clean energy

Advanced transport

Commodities

Digital industry

Bloomberg NEF (BNEF) is a leading provider of

primary research on clean energy, advanced

transport, digital industry, innovative materials, and

commodities.

BNEF’s global team leverages the world’s most

sophisticated data sets to create clear

perspectives and in-depth forecasts that frame the

financial, economic and policy implications of

industry-transforming trends and technologies.

BNEF research and analysis is accessible via web

and mobile platforms, as well as on the Bloomberg

Terminal.

Client enquiries:

Bloomberg Terminal: press <Help> key twice

Email: [email protected]

Learn more:

about.bnef.com | @BloombergNEF

Thank you!

Yayoi Sekine

[email protected]

https://about.bnef.com/mobile/

https://bloom.bg/29jlB0k

mailto:[email protected]

NEW RISKS, NEW REACTIONS


May 16, 2019

OFFSHORE WIND –

PAST, PRESENT, FUTURE

OFFSHORE WIND – PAST, PRESENT, FUTURE

Moderator: Marc Haller

SVP, Product Line Manager – US Energy, Liberty

Specialty Markets

Liz Peterson (thought leader)

Practice Leader - Energy & Complex Property, Envista Forensics

Bill Wall

Project Director, LS Cable America

Matt Yau

Director, Lloyd Warwick

POWERCON New York City May 2019

Offshore WindBill Wall, LS Cable America

Offshore Wind – Industry Review

➢ First Offshore Wind Farm Vindeby 1991 5MW pilot off Denmark

➢ Europe installed 3148MW during 2017 taking installed total to ~16GW capacity

➢ China aiming for 30GW installed by 2030

➢ Taiwan has 75 OSW projects planned

➢ Global installed capacity of 100GW expected by 2030

➢ The OSW industry represents Billions in industry capex for deployment & investment

Offshore Wind – Current US Status

➢ Block Island Transmission System (BITS) to Mainland by National Grid

➢ First (& only) Offshore Wind Farm in the US - 30MW pilot off Block Island

➢ Deepwater Wind (now Orsted) began development in 2007, installed 2016

Offshore Wind – Current US Status

➢ BOEM Lease Areas – WEA

➢ $1M to $230M!

➢ NY, NJ, MA have current RFP’s forOSW Energy

➢ NJ – 3500MW, NY 2400MW (9GW) MA 1600MW

➢ Orsted, EDF, Shell, Equinor, EDPR, PSEG, Eversource, Avangrid, CIP

➢ Vineyard Wind, Boardwalk Wind, Empire Wind, Atlantic Shores

Ocean Wind, Mayflower Wind,

Bay State Wind, Revolution Wind

Offshore Wind Basics

1. Foundation

2. Wind Turbine Generator (WTG)

3. Nacelle

4. Inter-Turbine Submarine Cables

5. Offshore Sub-Station & Export Submarine Cable

6. On-Shore Grid Connection

Offshore Wind – Key Components/Technology

➢ Turbines, 3MW, 5MW, 6MW, 8MW……

➢ Foundations – Jacket, Mono-pile, floating

➢ Submarine Cable – 3/C, single, AC, HVDC

Offshore Wind – Key Components/Technology

➢ Offshore Substations….

➢ Vessels – Survey, Piling, Cable, Turbine….

Jones Act?????

Submarine Cable Technology & Installation

TYPICAL SUBMARINE CABLE TYPES OR CONFIGURATIONS

AC DESIGNS

HVDC DESIGNS

Submarine Cable Technology & InstallationDESK TOP STUDY

-Proposed Route -Fishing Activities-Route Position List -Restricted areas-Cartography -Permits required-Bathymetry -Existing utilities-Geology -Cable Protection Survey-Oceanography -Site Visits-Meteorology -Survey Analysis-Archeology -Crossing Agreements


Geophysical & Geotechnical Marine Route SurveyBathymetrySide Scan SonarSub-Bottom ProfilerMagnetometerBurial Assessment SurveyThermal Resistivity Archeological SurveyGeotechnical BoringsFinalize Cable Length Met-Ocean Data

Marine Route Survey


HDD (Horizontal Directional Drilling) configurations at the Landings are usually preferred by regulators

Typical conduit profile


Jones Act?????

11,000 Tons


• Submarine Cable Installation Methodology: Jet Plow Technology for Cable Burial

• Simultaneous Lay & Burial

• Post Lay Burial by ROV

Operations & Maintenance (O&M)

Logistics, logistics, Logistics……..

Bill Wall, LS Cable [email protected]

Contact Information:

mailto:[email protected]

New York PowerCon: Offshore WindA Loss Adjusters Perspective

Matthew Yau

16 May 2019

LWI Team..

• Independent renewable energy loss adjusters

• Team in London consists of 30 adjusters, engineers & forensic accountants (8 specialized in renewables)

• Handled >200 offshore wind claims totaling >USD400m (across Europe)

• Adjusted claims on >30 Offshore Wind Construction projects & >15 Operational Wind projects

• >12GW of offshore wind experience

Capex Breakdown

• 504MW Offshore wind Farm

• Water depth 20 - 32m

• Estimated Contract Value USD 2.5bn

Unit/s Item/s Cost Cost p/unit Capex

USD (million) USD (million) %

140 Turbines 1,342 10 54

144 Foundations 467 3 19

280 Inter array cables 120 1 5

3 Export Cables 163 55 6

2 Offshore Transformer Platforms 191 96 8

1 Onshore Substation 92 92 4

1 Project Management 106 106 4

Key Coverage

What’s covered?

• Physical damage to project assets• Revenue Loss due to resultant delay• Revenue loss due to key installation

equipment damaged on site• Transportation, installation and ongoing

operation• All parties agreed under contract• Third party property damage and bodily injury

(TPL)• Design defect – LEG2 vs LEG3

What’s not covered?

• Non-damage (S&L)• Delay from schedule slippage• Contractor’s plant and equip.• Vessels – damage or liability• Wear and tear (normal)• Corrosion (normal)• Warranties and guarantees• Assets not included in the Sum Insured• Breach of the MWS recommendations• Lack of Due Diligence

Defects Cover

CAR Claims 2002 - 19

Number of CAR claims

Cable claims 40.3 % Collision 6.9 % Electrical 12.5 % Foundations 15.3% Fire 1.4 %

Lightning 2.8 % Blades 4.2 % Assembly 6.9 % Deductible 9.7 %

40%Cable Claims


Share of total Claims Cost

Cable claims 83.2% Collision 0.6% Electrical 4.5% Foundations 9.5% Fire 0.3%

Lightning 0.3 % Blades 0.3% Assembly 0.8% Deductible 0.8%

83% of claimed costs


65% Vessel Costs1%

16%

5%

5%

8%

BREAKDOWN OF COSTS

Vessel Charges = 65% Special Machinery (Third Party) = 1%

Site Works (contractor labour) = 16.5% Materials = 5%

Engineering (survey / consultants) = 4.5% Admin (overhead / legal / insurance) = 8%

CAR Claims - Cables

• Average claim cost: USD 2,500,000

• Inter- array cable damage: USD 1,500,000 – 10,000,000

• Export cable damage: USD 8,500,000 – 30,000,000

• 57 of the last 60 construction projects have experienced cable claims

• Vessel costs a major contributor (USD 120,000 – 350,000 p/day)

Challenging Operations

Claim: Circa USD 3,620,000

Damage: Birdcage in 132kV Export Cable

Cause:• Tracked vehicle – Nessie V was having problems gaining traction on the mud flats• Cable rollers were pinching the cable, not allowing it to rotate• Torsion build up in the cable caused it to birdcage approximately 522m into the operation

Poor Workmanship


Damage: Failed 132kV joint

Cause:

• Prolonged overheating of the cable and joint

• Air void in the bitumen filled joint

• Poor connection between the conductor and the compression ferrule / connector

• Joint 1 showed gaps between the conductors and connector body

Poor Workmanship


Damage: 132kV Export Cable and submarine joint

Cause:

• Lifting frame was incorrectly hooked up to manoeuvring points and not lifting points

• Manoeuvring points failed dropping the cable and frame

Lessons Learned:

• Operators were not familiar with the frame and its safe operation

• The lifting points were not clearly colour coded, which is good practice

Poor Workmanship

Cables – Catenary Management


Damage: Significant damage to 56m of 132kV Export cable

Cause: Too much cable paid out, slack cable formed in front of the plough skid. Poor management of cable catenary

Lessons Learned:• Plough was working within its design parameters but at its operating

limits• Cable Surveillance equipment on the plough was not ideal and has

since been improved

Cables – Catenary Management

Claim:

Circa USD 1,500,000 – 10,000,000

Damage:

33kV Cable out of spec (MBR)

Cause:

• Poor catenary management

• Slack in cable, introduced a loop

• Loop tightened beyond MBR during pull in

Cables – MWS / Weather


Cause:

Small weather front which was un-forecast came through the area giving unexpected direction and wind speed. The barge was in survival position, but was not able to survive the almost-beam-on winds and swells from this unexpected system

Damage:

Significant damage to Export cable & Plough

Lesson Learned:

MWS provided strong recommendations to consider seeking shelter, Barge Master decided to continue

Offshore – Standby / WoW

Offshore – Transit

Claim: Circa USD 40m (cables, deck equipment, carousel)

Cause: Loose or missing hatch covers, flooding of the ballast tanks

Damage: Total loss of 2 x Export cables in 3000m+ of water

Lesson Learned: Importance of MWS suitability and towage survey

OAR – Claims

• Offshore wind farms are relatively new, so portraying operational loss data requires a projected model.

• Majority of losses relate to component damage or failures. Including wear and tear.

• Increased mechanical damage compared to electrical

• Less frequent and severe workmanship claims

• Defects may be latent, manufacturing or design orientated

• BI cover more common in OAR policies

Cable losses - Summary

• Poor workmanship• Sub-contractor inexperience • Recklessness due to tight deadlines • Use of the wrong vessel or equipment for the task• The time allocated for these sub-contractors is kept to a minimum due to high vessel costs – sometimes shortened by weather

conditions• Cable laying is a complicated task e.g. busy shipping lanes, weather and tidal effects etc.

OAR – Claims Blades

Serial Defects / Damage

Case Example

Circumstances: During the ballast infill of 6 Gravity Based Foundations, internal J-tubes collapsed.

Root cause findings: J-tubes were under designed for the service environment

Repair: Fitting 11 redesigned - External J-tubes (policy LEG3 excl. applies)

Cost of repair: GBP 24,000,000 (gross)

Wording

SERIES LOSS CLAUSE

Subject to the terms and conditions of the Policy Underwriters shall indemnify the Assureds in respect of loss or damageresulting from a fault, defect, error or omission in design, plan, specification, material or workmanship of the same nature,after application of the deductible and as covered under Clause XX and buy-back if applicable of Section I Terms andConditions according to the following scale:

100% of the first loss amount.

75% of the second loss amount.

50% of the third loss amount.

No liability hereafter for third and subsequent loss amounts.

Adjustment

Series Loss Clause

GBP

Cost of repair (gross) 24,000,000

Audit adjustment (2,000,000)

LEG3 adjustment (1,000,000)

WOW limit adjustment (500,000)

Adjusted claim (gross) 20,500,000

Less Deductible (500,000)

Adjusted claim net (before SLC) 20,000,000

Number of defective parts 11

Cost per loss amount 1,818,182

Series Loss Clause

First loss 100% 1,818,182

Second loss 75% 1,363,636

Third loss 50% 909,091

Fourth loss 0% -

Weighted

Even

Adjusted Claim (after SLC) GBP 4,090,909

The Loss Amount?

Defective part Loss Amounts SLC loss amount

(GBP)

SLC application

(GBP)

Foundation 6 3,333,333 7,500,000

J-tube 11 1,818,182 4,090,909

Adjusted Claim (after SLC – 6 foundations) GBP 7,500,000

LWI SLC Case example.xlsx

Even vs Weighted?

What measurement basis to use:

• Weighting using order of repair, order of discovery, order of construction, order of damage?

• Weighted using duration based on DPR review, with most favourable turbines picked

Weighted Claim (after SLC) GBP 11,700,000

Direct & Indirect Costs?

Types of costs Allocation of costs Cost

(GBP)

Engineering Indirect 4,000,000

Commercial Direct 2,000,000

Operations Direct 12,000,000

Contracts Direct 2,000,000

Total cost 20,000,000

Direct costs = Cost which can be allocated to specific WTG’s

Indirect costs = Costs will be incurred regardless of the number of WTG’s repaired e.g. design costs

Should these costs form part of the SLC?

After SLC + weighting = GBP 9,36m

Weighted Claim (after SLC) + Indirect Costs GBP 13,360,000

Should the adjusted claim be?

a) GBP 4.1m? b) GBP 13.4m? c) Somewhere in between?

(Large delta of GBP 9.3m)

Settlement Options?

• Rapidly growing industry, opportunities for Insurers throughout the supply chain

• Familiar technology onshore renewables and offshore oil & gas

• Constantly evolving to reduce costs & increase efficiency, keeping up with Policy and technology challenges is very important

• Understanding the key Risks will drive down the costs of developing offshore wind. “Cabling is still the primary loss statistic”

• Economical Solution vs Local content, critical hurdle in delivering projects on time, to budget & safely in the USA

• Advantage of being a late entrant, learning from the first movers. UK spent as little as ½ as Germany to deliver an offshore wind grid

Summary:

OFFSHORE WIND THANK YOU!

Q&A ??

RECENT DEVELOPMENTS IN

US CAPACITY MARKETS

RECENT DEVELOPMENTS IN

US CAPACITY MARKETS

Introduction: Steve Gregoire

Vice President / Principal – Meaden & Moore

Sam Newell

Principal, The Brattle Group

Copyright © 2019 The Brattle Group, Inc.

Recent Developments in U.S.

Capacity Markets

PRESENTED TO

NY PowerCon

PRESENTED BY

Sam Newell

Principal and Co-Leader of The Brattle Group’s Electricity Practice

May 16 2019

brattle.com |Not for Distribution

Disclaimer

The contents of this document represent our understanding of various markets and analysis ofmarket conditions. It is entirely based on our interpretation of publicly available information.

Nothing in this presentation should be interpreted as a prediction of future prices or marketclearing results.

The Brattle Group does not accept any liability with respect to this presentation, any omissionsconcerning this presentation, any reliance that you may place on this presentation, or anyrepresentations (express or implied) made by The Brattle Group or concerning thispresentation. The Brattle Group and its affiliates, and their respective principals, employees,directors, officers and agents will not accept liability under any theory for losses suffered,whether direct or consequential, arising from your reliance on the presentation, and cannot beheld responsible if any conclusions drawn from the presentation or any explanations in relationthereto that are made should prove to be inaccurate.


Agenda

Why Capacity Markets?

Key Features that Differ by Market

– Forward and Delivery Timeframe

– Demand Curves

– Locational Capacity Pricing

– Capacity Performance Incentives

– Winter Energy Security

Market Prices and Fundamentals

Regulatory Uncertainties


Why Capacity Markets?

Capacity markets help meet resource adequacy requirements in restructured jurisdictions, where resources are supplied not by regulated utilities, but by merchant investors who sell into wholesale markets

– Load serving entities must buy enough capacity to meet their peak load + reserve margin (often with the RTO procuring on their behalf)

– Resources compete to provide that capacity at least cost– Resources that “clear” are paid the capacity clearing price– Forward clearing moderates boom-bust

The price needed to clear the market is positive because energy margins are typically insufficient to attract enough resources to meet the target reserve margin; this “missing money” has two causes:

– Energy prices may be below the true marginal system cost– Even if prices reflected the marginal system cost, an energy-only market would provide the economically optimal

reserve margin, but this would likely be below the high levels mandated based on “1-in-10”; such high reserve margins depress energy prices, so an additional payment is needed

– In addition, resulting reserve margins may be unacceptably variable/uncertain


Summary of Capacity Markets Experience

Capacity markets are meeting objectives:

– Meeting resource adequacy objectives

• All markets in surplus or balance

– Fostering competition to lower costs

• Retention of existing capacity

• Surprising amount of new DR, uprates, and imports

• Need for costly new generation was deferred

• Clearing prices have generally been far below expected costs, even with new entry

– Supporting merchant generation entry

• PJM attracted over 26 GW new generation in past 7 auctions, majority from merchants

Many ongoing refinements have been needed to ensure resources provide the reliability they advertise, to mitigate price volatility, and address market power

Case Study: PJM Attracting New Entry

In PJM, 25 GW of coal generation retired in only a few years due to new Mercury and Air Toxics Standards; the capacity market responded with replacement capacity, incl. merchant generation

Delivery Year


KEY FEATURES THAT DIFFER BY MARKET

Forward and Commitment Periods

Commitment Period 1 year except‒ 1 to 6 months in NYISO‒ ISO-NE offers new 7-year price lock‒ UK offers new 15-year term; 3 for refurbishments‒ Ireland offers new up to 10-year term

Forward Periods in Other Markets



Capacity Market Demand

0%

50%

100%

150%

200%

250%

300%

85% 90% 95% 100% 105% 110% 115% 120%

Pric

e (%

of N

et C

ON

E)

% of Resource Adequacy Needs

NYISO

PJM

ISO-NE

Net CONE

Great Britain

IESO - Summer

IESO - Winter

AESO

Administrative Demand Curves, by Market



Locational Pricing

PJM Base Residual Auction Results for 2021-22

NYISO ICAP Auction Zones ISONE Auction Results for 2022/23

$125

$125$125



Capacity Performance (PJM & ISO-NE)

Definitions:PPR = Performance Penalty Rate ($/MWh)

PJM: Net CONE ($/MW-yr) ÷ 30 hours = about $3,500 today

ISO-NE: $2,000 thru 5/21, $3,500 thru 5/24, then $5,455

CPBR = Capacity Performance Bonus Rate ($/MWh)

Bonus rate < PPR due to uncollected penalties from exemptions and approved outages (in PJM) and stop-loss

B = Balancing Ratio (%)

Demand in hour relative to capacity commitments

[load + reserves] ÷ [System UCAP Committed]; max of 1.0

Determines Expected Performance “share” per UCAP MW

A = Availability (%) (THE KEY PERFORMANCE METRIC)

Actual output of energy + reserves during emergency hours

Expressed as a % of UCAP CommitmentH = Hours (THE KEY MARKET UNCERTAINTY)

Hours of emergency events per year

Hourly Penalty Charges

PPR × (B – A)• Resources’ Expected Performance is their “share” of the

load + reserves during emergencies, i.e. [UCAP Committed] × B

• Charged for shortages relative to Expected

Hourly Bonus Payments

CPBR × (A – B)• Capacity resources earn a bonus payment for outputting

energy + reserves in excess of Expected Performance

Note: resources operating without a capacity commitment are also eligible for payment, as if B=0

ISO-NE and PJM introduced stronger real-time performance incentives without exposing load, by introducing $2,000-5,000/MWh price adders while embedding a financial call option in capacity obligations, such that under-performers fund over-performers


New England is vulnerable to cold snaps, when little pipeline gas is available to generation

– Raises risk of shortages (see right)

– Led to out-of-market actions

• Former winter reliability program

• Mystic RMR

– RMR prompted FERC to request in-market solutions

• Already have PFP, high energy shortage prices

• ISO-NE proposes MDAM, DA reserves of RT options, possible pre-winter procurement of options

• But these may not suffice to avoid future RMRs, so may need more, e.g.,

▪ Enhanced RT pricing and/or

▪ Fuel-secure capacity constraints in FCM (as contemplated in PJM)


Winter Fuel Security in ISO-NE

Source: https://www.iso-ne.com/static-assets/documents/2018/01/20180117_operational_fuel-security_analysis.pdf

ISO-NE scenario analysis of winter shortages in 2024-25 with 1-in-8 year cold winter


Some ISOs are moving to insulate capacity prices from the effects of “subsidized” supply

– New rules go beyond the prior minimum offer price (MOPR) provisions designed to prevent manipulative price suppression

– Concept is to restore capacity prices to the higher level that would be produced without subsidies

– FERC approved ISO-NE’s 2-stage design

• Stage 1 sets price, with policy resources’ offers mitigated upward, so may not clear

• Stage 2 substitution auction allows cleared resources to retire and pay uncleared policy resources (at a discount to the forward price) to take on their capacity supply obligation

• RECs are considered “in market” revenues


Adjusting for the Effect of State Policies

PJM “Extended RCO” Proposal• Stage 1 sets cleared quantities, with policy

resources at a low offer price

• Stage 2 sets prices for non-policy resources (policy resources are not paid)

• RECs are considered subsidies

• This proposal (and an alternative) is still pending before FERC


MARKET PRICES AND FUNDAMENTALS

Comparison Across Markets

Select Capacity Market Prices

Sources: ABB Velocity Suite, PJM Capacity Market (RPM), NYISO Market Monitor Annual Reports



Successfully Attracted New Gen

New Generation by ISO and Capacity Auction

Notes: New generation includes renewable generation added for reasons other than capacity, but the vast majority is gas-fired. Also includes uprates to existing generation. Sources: PJM Capacity Market (RPM) 2021/22 Results, ISONE FCA Results

https://www.pjm.com/markets-and-operations/rpm.aspx

https://www.iso-ne.com/about/key-stats/markets#fcaresults



Future Pricing Will Shift from Energy to Other Products and Services

Market Value Market Implications

Energy▀ Lower energy prices on average and in most hours▀ But much higher on-peak prices, driven by CO2 pricing for remaining fossil, scarcity pricing,

and demand response/storage

Flexibility & Scarcity Pricing▀ Need for greater quantities and new types of flexibility products▀ Higher price volatility and spikes reward flexibility

Capacity

▀ Value may go up or down▀ Down if additional clean energy contributes to excess supply for a period, or if new

capacity sellers are attracted by other value streams▀ Up if new fossil plants are needed for capacity, but only a small portion of their capital

costs can be recovered from other markets

Carbon and Clean▀ Some form of CO2 pricing and/or clean energy payments introduced to meet policy and/or

customer demand▀ Value must be large enough to attract new clean resources

Adjacent Consumer Products & Services

▀ Technology and consumer-driver demand for adjacent products and services (smart home, electric vehicles)

▀ Participation may overlap with wholesale, clean, and retail/distribution markets


Regulatory Uncertainties

State-sponsored clean energy

storage

“Mitigation” of policy resources

in wholesale markets

Electrification policies

Out-of market responses to

evolving reliability

challenges?

Carbon pricing (NYISO)


Additional Reading

Brown, Lessem, Lueken, Spees, and Wang, “High-Impact, Low-Probability Events and the Framework for Reliability in the National Electricity Market,” prepared for The Australian Energy Market Commission, February 2019.

Newell, Spees, Carroll, Kaluzhny, with Carden, Wintermantel, Krasny (Astrape), “Estimation of the Market Equilibrium and Economically Optimal Reserve Margins for the ERCOT Region, 2018 Update,” prepared for ERCOT, December 20, 2018. (See also original 2014 report).

Spees, Pfeifenberger, Newell, Chang, “Harmonizing Environmental Policies with Competitive Markets: Using Wholesale Power Markets to Meet State and Customer Demand for a Cleaner Electricity Grid More Cost Effectively,” discussion paper, July 2018.

Chang, Spees, and Pfeifenberger, “Hello World: Alberta's Capacity Market,” Presented at the 2018 IPPSA Conference, March 18, 2018

Newell, Oates, Pfeifenberger, Spees, Hagerty, Pedtke, Witkin, Shorin, “Fourth Review of PJM’s Variable Resource Requirement Curve,” report prepared for PJM Interconnection LLC for submission to FERC and PJM stakeholders, April 16, 2018. (See also first three reviews from 2008, 2011, and 2014).

Newell, Hagerty, Pfeifenberg, Zhou, Shorin, Fitz, with Gang, Duou, Wroble (Sargent & Lundy), “PJM Cost of New Entry Combustion Turbines and Combined-Cycle Plants with June 1, 2022 Online Date,” report prepared for PJM for submission to FERC and stakeholders, April 19, 2018. (See also prior reviews in 2011 and 2014).

Newell, Pfeifenberger, Chang, Spees, “How wholesale power markets and state environmental Policies can work together,” Utility Dive, July 10, 2017.

Spees, Newell, Pfeifenberger, “Capacity Markets: Lessons Learned from the First Decade,” Economics of Energy & Environmental Policy. Vol. 2, No. 2. Fall 2013.

Pfeifenberger, Spees, Newell, “Resource Adequacy in California: Options for Improving Efficiency and Effectiveness,” October 2012.

Newell, Spees, Pfeifenberger, Mudge, DeLucia, Carlton, “ERCOT Investment Incentives and Resource Adequacy,” June 2012.

Pfeifenberger, Newell, “Trusting Capacity Markets: Does the Lack of Long-Term Pricing Undermine the Financing of New Power Plants?” Public Utilities Fortnightly. December 2011.

Pfeifenberger, Spees, “Evaluation of Market Fundamentals and Challenges to Long-Term System Adequacy in Alberta’s Electricity Market,” April 2011 (Original Study), and March 2013 (Update).

Newell, Spees, Hajos, “The Midwest ISO’s Resource Adequacy Construct: An Evaluation of Market Design Elements,” The Brattle Group, January 19, 2010.

Hesmondalgh, Pfeifenberger, Robinson, "Resource Adequacy and Renewable Energy in Competitive Wholesale Electricity Markets,” BIEE, September 2010.

Pfeifenberger, Spees, “Best Practices in Resource Adequacy,” PJM Long Term Capacity Issues Symposium, January 27, 2009.

LaPlante, Chao, Newell, Celebi, Hajos, “Internal Market Monitoring Unit Review of the Forward Capacity Market Auction Results and Design Elements,” ISO New England and The Brattle Group, June 5, 2009.

Newell, Bhattacharyya, Madjarov, “Cost-Benefit Analysis of Replacing the NYISO’s Existing ICAP Market with a Forward Capacity Market," The Brattle Group, June 15, 2009.


PRESENTED BY

SAM NEWELL

Principal, [email protected]

Dr. Samuel Newell is a Principal and co-leader of The Brattle Group’s Electricity Practice.

He has 20 years of experience supporting electricity industry clients in regulatory, litigation, and business strategy matters. Hisexpertise is in wholesale electricity market design and analysis, generation and transmission asset valuation, andenergy/environmental policy analysis. Most of his work is in the context of the industry’s transformation to clean energy. Dr. Newellfrequently provides testimony and expert reports to Independent System Operators (ISOs), the Federal Energy RegulatoryCommission (FERC), state regulatory commissions, and the American Arbitration Association.

He earned a Ph.D. in Technology Management & Policy from the Massachusetts Institute of Technology, an M.S. in Materials Science& Engineering from Stanford University, and a B.A. in Chemistry & Physics from Harvard College.

Prior to joining Brattle in 2004, Dr. Newell was the Director of the Transmission Service at Cambridge Energy Research Associates.Before that, he was a Manager in the Utilities Practice at A.T. Kearney.

The views expressed in this presentation are strictly those of the presenter(s) and do not necessarily state or reflect the views of The Brattle Group, Inc. or its clients.


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May 16, 2019

LEGAL UPDATE – CAPACITY PAYMENTS

LEGAL UPDATE – CAPACITY PAYMENTS

Jeff Weinstein

Mound, Cotton, Wollan & Greengrass LLP

THE PROBLEM• P o we r p l a n t s h a ve t wo f u n c t i on s n o w: s u p p l y i n g e n e r g y a n d

s u p p l y i n g c a p a c i t y

• Tr a d i t i o n a l b u s i n e s s i n t e r r u p t i o n c o ve r a g e a d d r e s se s l o s s e s t h a t

h a p p e n a n d c a n b e m e a s u r e d d u r i n g t h e “ p e r i o d o f i n d e m n i t y ”

• L o s s o f c a p a c i t y d u r i n g t h e “ p e r i o d o f i n d e m n i t y, ” h o we ve r, c a n

r e s u l t i n i n c o m e l o s s e s r e a l i z e d m u c h l a t e r i n t i m e

• C u r r e n t b u s i n e s s i n t e r r up t i o n wo r d i n g s d o n o t a c c o u n t f o r t h e s e

c i r c u m s t an ces

Business Interruption:

This Policy insures the actual loss of business income you sustain due to the necessary suspension of your operations during the Period of Liability. The suspension of your operations must be caused by direct physical loss of or damage to property at the described premises, including personal property in the open, or in a vehicle, within 1000 feet, caused by or resulting from a Covered Cause of Loss.

Measurement of Business Interruption Loss:

The recoverable Business Interruption loss is your Actual Loss Sustained of the following during the Period of Liability:

(i) Net Profit, before deducting income taxes, which is not earned as a direct result of the interruption of production or suspension of business operations or services; and

(ii) Fixed Charges

(iii) Ordinary payroll

Period of Liability:

The Period of Liability is the period:a) starting from the time of direct physical loss or damage of the type insured against; and

b) ending when with due diligence and dispatch the building and equipment could be:

(i) repaired or replaced; and (ii) made ready for operations;

under the same or equivalent physical and operating conditions that existed prior to the damage.

Extended Period of Liability:

Business Interruption coverage is extended to cover the reduction in sales resulting from the suspension of your operations for such additional length of time as would be required with the exercise of due diligence and dispatch to restore your business to the condition that would have existed had no loss occurred, commencing with the date on which the liability of the Company for loss resulting from interruption of business would terminate if this extension had not been included herein.

CAPACITY PAYMENT LOSS TIMELINE

1/1 6/303/1 4/1 12/3110/1

Period of Liability/Recovery

Waiting Period

Capacity Auction Capacity Auction

EPOL

8/29

FUTURE LOST EARNINGS

Situations where business losses are not felt until after the period of indemnity ends:

• Loss of earnings from contracts that the insured would have entered into during the period of indemnity; or

• Loss of contingency fees from cases a law firm would have received during the period of indemnity

Gates v. State Auto. Mut. Ins. Co., (Tenn. Ct. App. 2005)

• Insured operated a rent-to-own business, under which customers purchased furniture on installment; the insured’s accounting did not credit the contract payments as income until after the payment was actually received

• The insured’s business was closed for several months due to tornado damage• The policy provided coverage for “actual loss of business income” during the period

of restoration• The insured sought to recover the entire value of sales contracts that would have

been signed during the period of restoration, even though payments under those contracts would not have become due until after the period of restoration

• In order to place the insured in the position that it would have been had the interruption not occurred, and considering the nature of the insured’s business, the court held that the insured was entitled to recover value of contracts that were not entered into during the period of restoration

Bernstein Liebhard, LLP v. Sentinel Ins. Co., Ltd., (1st Dep’t 2018)

• Law office was damaged by fire and insured sought coverage for contingency fees for cases it alleged it would otherwise have received, but did not because of the interruption of business

• The Policy provided coverage for the “‘actual loss’ of business income due to the necessary suspension of operations . . ..” that would have been “‘earned’ during the twelve months after the fire”

• Held: fees from settlements and judgments that would eventually have resulted from lost clients would not have been “earned” by the law firm within the 12-month period following the fire

LOST CAPACITY PAYMENTS

National Union Fire Ins. Co. of Pittsburgh, PA v. TransCanada Energy USA, Inc. (N.Y. Sup. Ct. 2016), aff’d (1st Dep’t 2017)

▪ A power plant turbine was taken out of service following the discovery of a

preexisting crack

▪ Insured sought coverage for decreased capacity revenues for the period of

time that the turbine was being repaired, even though the auction was held

after the period of recovery

▪ The court held that the insured’s loss was its decreased capacity and that

this loss was sustained during the period of liability, even though the

amount of the loss was not ascertained until after the period of liability when

the auctions were held

THE SOLUTION

• Draft policy wording that specifically accounts for the concept of lost capacity payments, taking into account:

o The inevitability of the loss (what needs to be proven)

o How such loss is to be measured

THE SOLUTION

• Endorsements specific to capacity payments can:

o Subject coverage to specific limits and deductibles

o Tie the actual loss of capacity payment to an interruption of the insured’s power generating capability as a result of physical loss or damage to covered property from a covered peril

o Define what loss is covered (capacity payments, additional non-performance charges, and/or lost bonus payments)

o Contain exclusions for, e.g., loss incurred directly or indirectly as a result of, or made worse by, planned outages or idle periods

BROKER/UNDERWRITER PANEL–

CAPACITY PAYMENTS

BROKER/UNDERWRITER PANEL –

CAPACITY PAYMENTS

Moderator: Steve Gregoire

Vice President / Principal – Meaden & Moore

Mike Perron

Power Generation Leader – North America, Willis

Towers Watson

Justin Byrne

Vice President, AEGIS Insurance Services

ENGAGING YOUNGER TALENT

IN INSURANCE WORKFORCE

ENGAGING YOUNGER TALENT

IN INSURANCE WORKFORCE

Introduction: Dan McLeodClaims Manager, US Energy & Construction, Liberty

Specialty Markets

Tony CañasClient Advisor, Insnerds.com

Capstone

May 16, 2019



NEW RISKS, NEW REACTIONS: POWER & ENERGY …...May 16, 2019 · VP, Head of First Party Claims,...

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Transcript of NEW RISKS, NEW REACTIONS: POWER & ENERGY …...May 16, 2019 · VP, Head of First Party Claims,...