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Key to the Citygate

Have gas prices fallen victim to speculation?

Fortnightly Magazine - January 1 2001

Schiori and Tracy presented a detailed spreadsheet analysis showing what a just and reasonable wholesale market price for electricity ought to be. They suggested a price of between $88 and $111 per megawatt-hour for a simple-cycle gas turbine with a five-year investment payback and a capacity factor running between 25 percent to 40 percent. For a combined-cycle unit (same payback, but capacity factor of 75 percent to 90 percent) they put the price at between $61 and $66 per megawatt-hour. And Schiori and Tracy really did their homework.

Their study assumes a range of variables such as heat rate, fixed and variable O&M costs, income and real estate taxes, depreciation rates, debt costs, return on equity, front-end equity investments, and any balloon payment on early refinancing. But surprisingly, it says NO x emissions credits make no difference. () Their study is superb. You should read it. Among other things, SMUD recounts some of its discussions with investment bankers and current industry practice for gas turbine project financing.

But there's a problem. SMUD's beautiful spreadsheets assume a natural gas price of only $4.50. Nice work if you can get it.


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