Business & Money

Deck: 
An evolving market demands a greater focus on power prices and required return on equity.
Fortnightly Magazine - May 1 2003
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An evolving market demands a greater focus on power prices and required return on equity.

Valuation can be difficult even in stable markets, and executives setting their company's strategic course need to understand how the market for power projects is evolving and what may lie ahead.

Under traditional rate base regulation, significant emphasis was placed on historic or embedded costs for valuation of electric generation property. However, considering the electric industry's restructuring activities and the increase in sales of electric generation property during the past 10 years, there has been a reasonable and logical shift to examining and emphasizing the income approach for valuation. Risks associated with the cash flow expected from electric generation need to be carefully assessed during the valuation process. Further, such risks in many cases have changed rapidly as deregulation and financial pressures from many sources have evolved. Much more change is in store.

Trends in Value

Like volume in the market for power projects, value too has evolved. Figure 1 depicts changes in volume in the market for power projects since the late 1980s, and Figures 2 and 3 show several measures of trends in value. Dollars per kilowatt ($/kW) for fossil-fired projects appears in Figure 2, and the pro forma after-tax return on equity (ROE) expected by buyers appears in Figure 3.

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