Evaluation of Changes in the Minimum Offer Price

Transcript:Evaluation of Changes in the Minimum Offer Price:
Evaluation of Changes in the Minimum Offer Price Rules on Financial Risk Presented By: David B. Patton, Ph.D. Pallas LeeVanSchaick, Ph.D. Potomac Economics External Market Monitor August 11, 2021 Scope of Study - Review ISO-NE is considering reforms that will sustain the competitive performance of the market if MOPR is eliminated. Eliminating the MOPR will affect the long-term investment and retirement decisions of participants by increasing the volatility and risk associated with future revenues. The ISO requested the EMM evaluate this risk and how it can be accounted for in the market. This presentation covers: Review of the modeling framework from the July 26 presentation (slides 4 to 8) Summary of initial input assumptions (slides 9 to 23) Initial results (slides 24 to 33) Additional details are provided in the Appendix Summary of Study This study estimates changes in the capacity market parameters that account for higher investment risk resulting from MOPR elimination The effects of risk/uncertainty are primarily accounted for in the weighted average cost of capital (WACC) used to calculate Net CONE. Hence, we estimate the incremental changes in the cost of equity and cost of debt that together determine the WACC This presentation discusses: Initial assumptions we make regarding: load growth, the supply of clean energy and storage resources, and the supply of conventional resources The model framework which utilizes these assumptions to estimate the changes in the COE, COD, and capital structure. Based on our initial assumptions and model, we calculate an after tax WACC increase of 115 basis points or 1.15 percentage points. We discuss planned enhancements to the model that may change this estimate, including a debt ratio adjustment that would tend to reduce it. Modeling Framework - Review Estimation of WACC in Net CONE Studies Recent Net CONE studies have estimated the WACC based on: Financial market theory including the capital asset pricing model Publicly traded independent power producers and utilities These firms are primarily exposed to market risk in regions with a MOPR or limited state policy intervention Our model is designed to estimate how future price and revenue volatility would be affected by a change in market rules. We will then use these results to estimate: The effect of these changes on the ROE using the capital asset pricing model; and The effects on investors’ cost of debt based on the processes employed by the ratings agencies. Modeling Framework – Overview