Electric power generation owners have seen their fair share of change over time. From competition to deregulation, renewable energy to distributed power, generation owners have had to accept, adapt and, when possible, optimize their business models to changing conditions. Within this morphing operating environment, the opportunities to secure additional revenues are slim.
Bracing for a Blackout
PJM Interconnection coordinates electricity movement in 13 states and the District of Columbia and is one of the largest regional transmission organizations (RTO) in the county. Working with more than 900 utilities and members to serve about 65 million customers, PJM takes a proactive approach to grid planning and maintaining grid stability. One part of this strategy is the restoration of electricity in the case of a blackout.
The availability of black start-designated generators is required to restore electricity in cases where outside electrical supply is not available, such as a regionwide electrical blackout. Unlike day-to-day electricity supply, these services aren’t acquired through a regionwide market system. When needed, these resources must be on tap to get the grid up and running again.
PJM Opportunity
PJM is opening its second systemwide Black Start RFP in January 2018, with selected units to be up and running in 2020. Generation owners in the PJM Interconnection can submit proposals to have black start generator capabilities. What does it mean for generation owners? A chance to secure additional revenue to improve long-term investment economics and rate of return for operations.
The evaluation criteria for the PJM RFP are specific. Generation owners should determine whether they are well-positioned to meet the criteria, which increases their chances of success. Feasibility and desktop analysis can provide insight into whether a generator’s capabilities match the needs of the RFP.
For owners that meet the majority of criteria and operate within the PJM RTO with one or multiple plants, the RFP offers a unique income opportunity for successful applicants.
Utility Economic Benefits
The RFP defines cash payments that are available to winning proposals. Owners are guaranteed an annual revenue stream for five to 20 years, depending on the generator and plant age. This revenue is a function of the necessary retrofit costs, typically 12.5 percent to 36.3 percent, depending on duration.
In reality, a successful conversion project can expect to generate equity returns of greater than 10 percent. These returns are stable and can be relied upon for the duration of the contract.
A plant that successfully secures a PJM black start services contract incurs almost no additional risk as the arrangement supports justifiable and prudent costs to be recovered.
Also, designated black start resources in the PJM network can improve the perceived value of the generator or plant, given its importance as part of the system recovery network. This perceived value can play an important role in a sale process and attract more bidders.
For generation owners operating in changing environments and under extreme cost pressures, responding to the PJM RFP offers an opportunity for revenue improvement and business model benefits.