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Taking a different view on merchant development.
Fortnightly Magazine - January 15 2002

recent and subsequent to the Sept. 11 attack. As such, it's fairly indicative of market trends. Demand is relatively low during the end of September, enabling generation owners to minimize use of highly inefficient units.

In the aftermath of the attack, with a serious recession taking hold in the midst of a light-demand autumn, highly inefficient units generated on average 13,216 MW per hour (over all hours off-peak, as well as peak). This is a tantalizing target for merchant plant developers.

Opportunities vary over time, and from market to market. The figure shows that the market share of highly inefficient units is diminishing in the Boston Harbor, ERCOT, New York-Downstate and PJM East markets as efficient new plants come online (including retrofits).

Figure 2 shows the actual operation during the last week of September 2001 of the "Top 100 Clunkers." A generating unit gets on the list by scoring poorly against four measures of inefficiency during the 91-week period of Jan. 1, 2000 through Sept. 30, 2001. Only frequently run coal, oil and gas-fired steam units are considered, and only if they operate in markets free of severe transmission constraints (eliminating from consideration six of the 21 markets).

Again, if there was a time not to run the clunkers, the last week of September 2001 was it. Yet, 29 of them ran at or greater than 40 percent capacity factor off-peak! These are among the juiciest targets for merchant plant developers.

As in most other investments, one cannot be assured of healthy returns on merchant plant development. The fleetest players acting on the best market analysis will leap through the windows of opportunities as they open and before they shut. That being said, experts such as Vaninetti might be more cautious before so boldly pronouncing gluts in generation.

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