"Spark spread" sets value, but as prices diverge from system
lambda, merchant plant buyers will be flying blind.
Many power plants will be bought and sold in the next decade....
sale price of $1.59 billion ($312/kW) included about 1,100 MW of purchased-power contracts with wholesale suppliers.
California and Elsewhere. Another plant sold on a merchant basis is Dusquene Power and Light's 288-MW Fort Martin plant, which was sold to AYP Capital for $169 million ($587/kW). Anticipated plant sales by Boston Edison and by California's three major investor-owned utilities (next year) may provide more price points and help the players to calibrate their expectations. These large, unique events may or may not set precedents.
Merchant Plant Investment Activity
Indeck Industries, 38 MW cogen, Pepperell, MA
Mid America Power, 53 MW repowering, Stoneman, WI
AYP Energy (Allegheny Power), 288 MW, Ft. Martin, PA
Williams Field Services, 74 MW, Bloomfield, NM
CSW Energy, 300 MW, GT, Sweeny Texas
Planned or Under Development:
Calpine Power, 240 MW, TX
Berkshire Power, 252 MW, Agawam, MA
LG&E Power, 300 MW cogen, Corpus Christi, TX
US Generating Co, 240 MW, Sumas, WA
US Generating Co., 500 MW, OR
US Generating Co., 400 MW, Charlton, MA
Diamond Energy, 500 MW, Southern CA
Diamond Energy, 240 MW, OR
Duke/Louis Dreyfus & Puget Sound P&L joint venture to develop merchant capacity in Pacific Northwest
CNG Energy Services, 240 MW, Pacific Northwest
Power Development Corp., 272 MW, Westfield, MA
Energy Management, Inc., 170 MW, Dighton, MA
Energy Management, Inc., 250 MW, Tiverton, MA
UtiliCorp United/Air Products joint venture, Midwest
Commonwealth Gas, 300 MW, Chesapeake, VA
Source: Stephan H Watts, Mcguire, Woods Battle & Boothe LLP
1The exceptions are hydro and other renewable energy plants. For these types of units, the major risk factor is the uncertain availability of the energy source (e.g., water, wind) and the correlation of its availability with electricity price.
2The spark spread is defined as the difference between the fuel and electricity price, expressed in equivalent terms. For example, assume that the power price is $20/MWh and the fuel price is $1.50/million Btu for a 10,000 Btu/kWh plant. The spark spread = $20/MWh - [(10 x 106 Btu/MWh) x $1.50/106 Btu)] = $5.00/MWh.
3This correlation depends on the market share of the specific fuel. It is higher for fuels that are used to generate a large share of a region's electricity. It also may vary by season.
4Cyclical price swings in commodity markets reflect lags in investment by producers that lead to periods of surplus or scarcity. While prices may well reflect short-term variable costs during periods of excess capacity, they likely will run much higher when capacity runs short.
5Regulatory authorities may change this incentive. The California auction essentially nullifies this incentive because any proceeds below book value are to be recovered in the competitive transition charge and any revenue above book value will accrue to the benefit of the ratepayers.
6Traditionally, electric utilities considered a power plant as a component of an integrated physical system built to deliver reliable electricity to customers at minimum cost. Investors, however, will view a plan as an asset in a financial portfolio, along with sales and purchases of fuel and power.
Analyzing investment decisions from this new