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Keys for Success in Power Plant Investing

Fortnightly Magazine - January 1 1999

markets have repeatedly shown that flexibility creates value in any transaction, and electric generation is no exception to this rule. Recognizing that fuel is 75 percent or more of a fossil plant's operating cost quickly leads to an awareness of the value inherent in unimpeded access to multiple fuel sources. Dual fuel capability already present or easily developed by gas transmission extensions can be a powerful value creator. Triple fuel capability is obviously even better as the full range of a site's potential is evaluated.

Finally, in those parts of the country moving toward industry restructuring, air quality issues can be quite challenging. Therefore, the ability to convert to an alternative, cleaner-burning fuel creates the possibility of enhancing value through sale of air quality credits. These credits may come automatically or might be negotiated as part of the conversion process. Of course, a potential buyer should be fully aware of any likelihood that an existing facility might have a forced conversion thrust upon it without being eligible for any air credits, a distinct value-erosion risk. A thorough assessment of the reasonableness and, most importantly, the stability of the site's permit acquisition and renewal processes is essential in estimating inherent value.

Technology Options. As with any restructuring industry, there is likely to be an explosion of new technology brought on by the powerful market forces unleashed in the restructuring process. Some of the options associated with the first wave of site acquisition and development, while interesting, may not be optimal in the longer term.

For example, the application of new combined-cycle/gas turbine facilities seems to be the preferred - in fact, the only - path being pursued in many areas as restructuring unfolds. There is clearly logic in this approach because of the lower busbar costs these facilities have compared with alternative technologies for new, baseload generation. However, there is also some indication that we may be seeing an "Oklahoma land rush" to CCGT applications, which could produce great benefits for consumers but disastrous results for investors. The inevitable result of excess baseload, CCGT generation competing at essentially indistinguishable marginal operating costs along all parts of the dispatch curve, will be a boon to buyers but a catastrophe for sellers.

Owners of generation assets in a restructured world can be far more successful if they are fully aware of technologies being developed to meet market demands. These demands may be varied but will almost certainly include needs created by the unbundling of regional pools, as well as other products and services not yet identified. At a minimum there will be revenue streams created by pool needs for:

• rapid start capacity;

• voltage support;

• economic intermediate and peaking capability;

• load following capability; and

• rapid load change ability.

While a discussion of technologies to meet such needs is inappropriate here, market participants will improve their outcomes, probably dramatically so, if they understand the wealth of options available and factor such technologies into their acquisition activities.

For example, in many areas going through the early stages of restructuring, there are substantial numbers of gas turbines. These units,