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Keys for Success in Power Plant Investing

Fortnightly Magazine - January 1 1999

marketable products in New England. Similar unbundling is taking place in regional pools across the United States.

Transmission System Knowledge. Operators of unregulated generation facilities will soon yearn for the "good old days" when they were not faced with the mind-bending challenges of a complex transmission system and its potential impacts on plant value. As in all complex financial transactions, the winners will be the most knowledgeable, sophisticated market participants. These participants will not only operate their facilities to maximize value but will also be able to discern value at the time of bidding for existing plants or when deciding to build new plants. Superior knowledge about transmission systems and pool operations will be essential to maximizing investor returns in this developing world.

As a simple example look at New England, where the physical location of facilities and loads can dramatically impact asset values. The load centers in the Northeast are, not surprisingly, anchored in the New York metropolitan area and in the eastern portions of Massachusetts around Boston. Local generation in these areas is far from adequate, resulting in large import requirements during peak periods, particularly summer months. Without knowledge of the transmission system in upper New York State and New England, an unsophisticated buyer might believe that "all generation is created equal" and has equal value in serving the enormous needs of these metropolitan areas. However, some generation is clearly "more equal" than others, as an understanding of the New England and New York transmission systems reveals.

New York has a transmission bottleneck generally running north and south through the state's central portion. During peak periods, this bottleneck creates real difficulties in moving electricity from western New York, Canada and the Midwest. There are similar constraints in moving energy across the New York-New England borders in the west-to-east direction but, surprising as it may be to those not knowledgeable about grid operations, these limitations generally don't exist in the east-to-west direction. Moving electricity from north to south through New England is generally less constrained than in the central New York area.

Without going into an extensive discussion of these grid limitations, such transmission system bottlenecks can add real value to generation assets in the north-south corridor passing through New Hampshire, western Massachusetts and Connecticut. In fact, the further south and west one moves in New England, the greater the potential there is for capitalizing on existing transmission bottlenecks in New York state and at the Maine/New Hampshire interface.

Site Characteristics. As just described, the location of a site within the transmission grid can have a huge impact on value. Much can be gained through consideration of several other key site characteristics that can significantly affect the value of existing generation units and/or sites.

The most obvious issue may be scarcity. Land in highly developed areas is at a premium and the ability to access such scarce property is intrinsically a value creator, recognizing that there are transmission limitations and these sites are usually close to load centers. Waterfront property in the Northeast is far more valuable than in Wyoming.

Financial