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What Is Your Power Portfolio Really Worth?

Change is the only certainty in today’s market.

Fortnightly Magazine - October 2005

10 percent from our last forecast, deriving their value increase from forecasted higher gas prices.

Figure 1 indicates the range of values for a standardized combined-cycle asset across the North American markets.

While limited in number, actual sales of merchant assets continue to validate the Power Generation BlueBook analysis, with discount rates using our cash flow estimates and actual sale prices falling in the wide range of 9 to 20 percent. Based on a real 15 percent discount rate, Global Energy is of the opinion that the average value of a “generic” CC plant in North America is $405/kW, with a range of $325/kW to $714/kW. 1

However, the overall asset value for the total power generation fleet across North America is down 5 percent from 6 months ago in Global Energy's forecast, driven primarily by the long-term market view that more new coal-fired generation will enter the market in response to sustained higher gas prices. We forecast that once power prices revert to an equilibrium level, there will be a slightly lower valuation level than previously forecasted. However, the value change varies by region, plant technology, and fuel type.

For existing CC plants in North America, the average is $379/kW 2—approximately 60 percent of a new build cost (based on an average new build cost of $629/kW). The low initial-year values and differing rates of recovery result in significant variation in CC plants across the regions, ranging from $85/kW to $760/kW. 3

Figure 1 also shows that Entergy and the Southeast no longer remain the most depressed regions. The significant number of new merchant combined-cycle plants being completed in the WECC brought many Western markets into a value position similar to Entergy. 4

New York City, Florida, portions of New England, Colorado, and ERCOT are relatively stronger merchant energy markets. Depending on the market, this may be driven by some combination of these markets having predominantly gas plants on the margin, thus setting market prices, or near-term supply being more in balance with near-term demand. Besides this, in the Northeast markets, capacity revenues, which are not included here due to their speculative nature, can also be a major source of revenue for the distressed assets.

The overall average value of coal assets across North America is $804/kW compared to a potential new build cost of approximately $1,200/kW for a pulverized coal plant. However, given that the majority of existing coal plants are between 20 and 50 years old, this may well be higher than existing book values in many cases. While coal assets have not been immune from the overbuild situation, over the past several years they have seen an increase in value from the run-up in gas prices relative to delivered coal prices.

New Coal Plants: Capital Costs

The simple two-part answer is: resource planning and timing. As part of their resource planning process, a number of utilities (investor-owned and public power) see additional resource requirements in the medium term. Coal looks like a more cost-effective solution than gas in many areas. And even though some coal prices have