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What's That Power Plant Really Worth?

An analysis of current valuation trends explains why some assets command better values than most.

Fortnightly Magazine - January 2007

Average North America power-plant asset value is at $725/kW. 1 Compared with our winter 2005-2006 analysis, this figure has barely changed; however, we have seen significant value movements based on region, fuel, and asset types. Important findings include:

Nuclear plant values have increased by almost 25 percent. Average nuclear value is now around $1,730/kW. This increase is primarily driven by higher energy costs across all fossil fuels.

Average coal-fired generation values have dropped more than 10 percent. Coal plants continue to enjoy healthy spark spreads because of higher gas prices in the short term; however, compared with our last valuation, average coal-fired generation values have dropped more than 10 percent. That is driven primarily by the significant amount of new coal generation activity, particularly in the Midwest and eastern WECC regions. Global Energy now expects more new coal-fired generation will be built in the long term. That suppresses the values of the existing coal plants in these regions.

Generators in load pockets such as New York and eastern PJM still are enjoying healthy cash flows. In New York City, a typical new gas-fired combined-cycle plant can be valued from $1,100/kW to $1,500/kW depending on the leverage of the investment. 2

Capacity payments are a key component of recovering asset values in the Northeast and Mid-Atlantic regions. Projected revenues from capacity markets account for $188/kW in eastern PJM, over $450/kW in New York City, and around $216/kW for New England markets.

Despite all the confusion in the Western market about resource adequacy, we are projecting the WECC market getting into a larger overbuilt status. Particularly in California, without the support of a contract with a utility, the assets will have a hard time generating enough revenue from energy markets only. Obtaining a contract with a utility is a critical risk as there will be more resources competing for it.

The gas-fired generation values are slowly recovering in Southeast markets. Liquidity and transparency are still key issues in these markets and generally transmission access is the primary source of conflict between IPPs and utilities. Realizing the full option value of an asset in these markets is challenging.

Figure 1 summarizes the net present value (NPV) range of all the assets we have analyzed. Each bar represents the lowest and the highest NPVs we have calculated for a plant and fuel type. 3 Some of the low or negative NPVs are driven by the must-run or cogeneration obligations of the plants. Because of these operational obligations, these units are not dispatched economically, but they are forced to stay on line at all times. In this analysis, we capture the operational characteristics, market revenues, and operating costs of these plants; however, the contract revenues are not included

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