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Did Power Plant Buyers Pay Too Much?

Fortnightly Magazine - November 1 1999

the cost of new capacity, developers will wait until increases in demand or reductions in existing generating capacity drive prices higher. Therefore, power prices will trend toward the all-in cost of new generating capacity. Today, that is either the all-in cost of new natural gas-fired combustion turbines or combined-cycle generators.

What is important for purchasers of power plants is how long the transition to equilibrium prices will take and the nature of emergent competitive power market business cycles (boom-bust market price fluctuations). That transition will vary from market to market depending on the existing technological mix of generators, the rate of growth in demand and how much new capacity is added to the market by new market entrants. In the New England market, for example, developers plan a tremendous amount of new generating capacity relative to what the market will support. Our studies indicate that if even a fraction of this capacity actually enters service, New England power prices could be depressed for five years or more (bust). On the other hand, in the Midwest, a shortage of generating capacity has resulted in very high prices for the last two summers (boom).

Dispatch Projections. The amount of power that a given plant produces relative to its maximum potential output is its "capacity factor." As with market prices, a plant's capacity factor and the timing of its sales are determined by supply and demand. Likewise, the competitiveness of a plant relative to other suppliers in its market is an important consideration in the timing and amount of its sales.

Stack analysis often is used to determine a power plant's position in the dispatch queue relative to all other resources in the market area. By overlaying a load duration curve on the graphical representation of the supply resources, it is possible to gauge the approximate capacity factor of any given resource. Figure 2 illustrates a stack analysis for the PJM Interconnection in 2003. The amount of capacity by technology is stacked in blocks from the cheapest hydropower resources ("hydro") to the most expensive combustion turbines ("CT-old"). Also shown is a representation of hourly demands, or loads, sorted from highest to lowest ("Load Duration Curve"). By comparing the dispatch queue to the load duration curve, an approximate load factor for each technology can be determined. For example, a low-cost coal plant in PJM will operate at between 70 percent and 100 percent of its maximum output, depending on where it falls relative to other coal plants.

Stack analysis, while a simple analytical technique, cannot consider operational constraints such as start times and ramping capabilities. Nor can it accurately project the timing of plant operations. Our firm and others use computer models to match a plant's dispatch to system prices, enabling a forecast of market revenues for a specific plant. Such models allow the specification of plant start costs, ramping capabilities and other detailed operational parameters including bidding behavior, in order to gain a realistic representation of the operations of a power system and each generating station. These detailed simulations allow for more accurate projections of