Like a physician with her stethoscope at the outset of a check-up, astute shareholders and directors should use the level and trend of a utility’s market-to-book ratio (MtB) as one of the first...
Will Calpine's "Plan B" Restructuring Work?
The resource overbuild in the West complicates the company’s efforts.
Council (WECC), particularly California, is beginning to be perceived as having resource-adequacy problems again. Forward markets keep some premium in prices to cover these concerns over the possibility of resource shortages.
However, generation additions in the WECC between 2001 and 2009—including plants currently under construction—add up to about 53,000 MW. When added to a base of 160,000 MW in 2000, there is significantly more generation than needed to cover a WECC load forecast expected to peak at almost 150,000 MW in 2007.
Two-thirds of the 53,000 MW of the primarily gas-fired generation built since 2000 or under construction in the WECC is located in the California, Arizona, and southern Nevada areas. This dependence on natural-gas-fired generation, along with a strong push to include a higher percentage of renewable resources (such as wind) into the resource mix, has policymakers turning their focus toward new transmission.
Despite some retirements of older, inefficient power plants, planning reserve margins are running at around 36 percent on a WECC-wide basis in 2006. Global Energy’s current forecast reflects almost 1,000 MW more of gas-fired generation to be built in the next couple of years than it had forecast six months ago. 1 These additional plants generally are being built near load centers by (or under contract to) utilities (see Figure 4 on p. 16).
Despite adequate capacity in the broader WECC, locational resource adequacy concerns are real in certain areas, including the San Diego Gas & Electric (SDG&E) and Southern California Edison (SCE) service territories, where transmission may constrain full access to the surplus of power in the WECC during extremely high-load conditions. To address these concerns, decision makers are focused on reliability concerns, the improvement of path ratings, and the management of imports across paths.
Our valuations for California assets clearly indicate that this resource overbuild in the West will decrease revenues for merchant generators in the next few years. This could be a potential problem for Calpine’s recovery since a majority of their assets are located in the West.
Furthermore, revenues from geothermal assets in Northern California are not susceptible to any fuel-cost movements. As low-cost generators, these assets have healthy margins when the gas prices are high. When the gas prices go down, the cash flows from these assets will be affected directly unless there are hedges in place. Calpine’s existing contracts with utilities and any trading hedges in place may alleviate these potential problems.
On the other hand, some of the fixed-rate contracts may work against Calpine, as in the case of Los Angeles Department of Water contracts. A few years back, when the gas prices were lower, these contracts were above market and were generating healthy cash flows for the company. Calpine has enough resources in the West to supply the energy requirement for these contracts, but the fuel to generate was not hedged properly. When the gas prices spiked, these contracts suddenly became cash outflows for the company.
1. Notable reductions in generation capacity from the fall 2005 Global Energy WECC reference case include retirement of the 660-MW Clover plant in