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Keys for Success in Power Plant Investing

Fortnightly Magazine - January 1 1999

while generally characterized by poor thermal efficiency, often are located in desirable sites near load centers where transmission bottlenecks may exist. With a savvy application of emerging technologies to improve the capability and efficiency of these gas turbines, a facility owner may be able to transform an unattractive peaking unit into a highly desirable intermediate, load following facility with only modest investment. Similar considerations exist for any generation investment decision, whether for existing thermal plants, hydro installations or undeveloped sites.

Partnerships. The above considerations generally revolve around the physical nature of the asset - site, type, efficiency, etc. In a restructured world, the asset becomes the beginning, rather than ending, point of optimization. Even with all physical characteristics taken into account, there may still be a tremendous opportunity for enhancing returns through financial partnering to enhance the risk/reward characteristics of an investment. These combinations are almost without limit, but their importance demands that any serious investor consider them thoroughly. The opportunities for energy futures trading, fuel conversions, etc., can make the difference between a poor or mediocre investment and a real winner.

Not all investors can possibly create all the skills necessary to participate in the various risk management and financial products being developed as the industry restructures, but the investor should be aware of these products and consider strategies to capitalize on them. Without a doubt, the spectrum of products will become more complex and partnering arrangements will grow on regional and national planes. Ignoring this area of optimization surely will result in "money being left on the table," and could even result in a decent investment becoming a poor one.

Superb Operations. Electric generating units are complicated, capital-intensive facilities. Even if a plant is well-built, situated in a great market environment and is well-located in the electric grid, its value will be mightily affected by the plant's ability to achieve consistently superb operational performance. Being unavailable when market clearing prices soar or being less than first-quartile on total costs will seriously diminish investor returns in the coming restructured energy markets.

Progressive facility operators are attacking the issue of operational excellence, and new management tools and techniques aimed at continuous economic and operational improvement are becoming the norm. Other capital-intensive, commodity producing industries (e.g., refining or pulp/paper) have found such tools essential for survival; so will the electric generating industry.

Bernard M. Fox retired in 1997 from his position as chairman and chief executive officer of Northeast Utilities System.


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