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Gas Turbinemania: The Merchant Power Plant

Why it happened? Who lost in the bust? Who will survive to build another turbine?
Fortnightly Magazine - June 15 2002

As a rule of thumb, many analysts take the delivered gas price in $/MMBtu and convert it to a $/MWh power price by a ratio of 0.7 times 10. This assumes a 7,000 Btu/kWh heat rate. Accordingly, a $3.50/MMBtu delivered natural gas price is equivalent to a $24.50/MWh power price. This gets the unit to competitive price levels in all non-coal regions and against environmentally challenged northeast coal units and older, smaller coal units in a few other eastern regions.

The data confirm the potential efficiencies of the new CCGT technology; a 7,500 Btu average heat rate for units operating in the 45 percent capacity factor range appears attainable. But the data also shows that the heat rates of the low capacity factor CCGTs outside the oil-gas steam regions are not impressive and certainly not bankable.

Efficiency is laudable, but is the power needed? Figure 7 shows the range of reserve margins for the NERC regions of the U.S. and the entire U.S. The figure shows that due to turbinemania some regions have projected reserve margins approaching 90 percent, while other regions are below 10 percent. Historical margins have been around 20 percent.

Turbinemania has struck and the shake out is well underway. Like real estate, the early data shows the key to CCGT success is location, location, location. CCGTs need high cost gas and oil units to back out in order to achieve acceptable capacity factors and efficiencies.

Even in Texas and Arizona-Nevada, EVA's data show CCGT saturation is still likely. But outside these regions, the outlook is not good for new CCGTs. Siting new CCGTs in reliance on electricity growth of 2.5 percent per year will not support very many CCGTs. Many players are leaving the field (canceling projects). Whether or not there will be enough demand to bring the turbine market toward equilibrium must be addressed on a regional basis.

  1. See EVA's "Tracking The Boom of New Power Plants in the U.S.", March 2002, p. 16.
  2. In the U.S. in 2002 AES has 1,584 MW of new turbine tolling capacity operating, 2,566 MW of merchant capacity operating, and 1,266 MW of merchant capacity under construction. See AES 2001 SEC Form 10-K report, p. 13-14. In February 2002 AES's Board of Directors decided to exit the competitive power supply business. See , February 19, 2002, p. A4.
  3. Calpine press release dated January 16, 2002.
  4. PP&L SEC Form 10-K Report, p. 56.
  5. 2001 Entergy Annual Report, p. 38.
  6. Ibid, p. 6.

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