U.S. companies' international strategies turn sour, as Europe faces a future with an oligopoly of power companies.
While the European Union is pushing to...
Generating Plant Sales and Acquisitions: Who's Doing What, and Why
maximize revenue and maintain supply in a region. Companies that appear to be pursuing this strategy include Southern Energy Inc. and Dynegy.
Southern Energy in May agreed to pay $537 million for nine power plants owned by Commonwealth Energy and Eastern Utilities Associates, totaling 1,260 MW of generating capacity. Southern Energy will own and operate the plants, but Southern Company Energy Marketing will sell output to COM/Energy, EUA and the open market. This move will leverage Southern's trading and marketing competencies, while giving it an asset-backed presence in the Northeast.
Dynegy CEO Chuck Watson recently described his goal for his company - to be among the top five asset owners. Dynegy would achieve that goal by acquiring a critical mass of generation assets (2000 to 4000 MW) in each North American Electric Reliability Council, or NERC, region. Dynegy's acquisition of Destec Energy Inc. and the Southern California Edison assets in California marks an element of this national strategy.
Operational Efficiency. Companies that operate generating plants might well seek to provide services to other asset owners (or to themselves, as operators, through a similar type of package). This strategy places a heavy value on operational improvements and less value on trading or marketing. The asset management function must find creative financing solutions to generate a benefit for the client and the services provider. Plant operations, the dominant factor, must bring a high degree of technical skill as well as the ability to integrate the client's former generation employees into its organization.
A tight integration of marketing and trading, asset management and plant operations is critical to maximizing the value of a generation services contract. In fact, all three must be blended to provide an offering that is technically feasible, financially attractive and meets or exceeds the customer's needs.
This strategy may or may not involve ownership of assets. It can vary from a pure outsourcing of operations to a sale-and-leaseback arrangement, by which the services company acquires the asset and charges an all-in management fee (including a capital component). However, companies adopting this strategy must overcome difficulties that could arise due to a lack of standardization. Outsourcing contracts for plant management could encompass a wide variety of generation equipment types.
Nevertheless, the companies that appear to be following this strategy include Sithe Energies and AES. These two companies, long noted in the United States as successful independent power producers, recently purchased assets from Boston Edison and Edison International, respectively.
The authors are executives at CSC Strategic Consulting's Chemical & Energy Group. Dean Maschoff is senior vice president; James Pardikes is vice president; David Thompson is principal; Michael Rutkowski, P.E. is manager; and Nainish Gupta, Ph.D. is a consultant.
How We See It: A Strategy for Asset Acquisition
As evidenced by recent industry transactions, companies are implementing various alliances and other arrangements to fulfill their strategies. A scale-driven player may choose to outsource its marketing function to a large-scale trading organization. A market-driven company may seek alliances with generation service providers to provide technical plant operations expertise. The possibilities for these alliances are endless,