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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.
called the Reliability Pricing Model. One key difference from the New England model is that PJM wants to use a downward sloping demand curve similar to the New York capacity market, where excess capacity has value. Figure 7 shows a generic gas turbine (GT) net revenue projection in eastern PJM including capacity revenue based on the Reliability Pricing Model. The intrinsic value of a GT is fairly low, and the major value lies in the extrinsic value and capacity payments. Considering that PJM’s control area level reserve margin is about 25 percent for 2006, this new model should supply some cash flow support for critical markets, such as eastern PJM and ComEd, when it is implemented in 2008.
Current market activity has been stimulated by decreasing reserve margins, some retirement and mothballing decisions, and the perception that future plant cash flows will increase. Sellers are trying to capture the market’s perception that extrinsic plant values are increasing. Buyers are trying to get into the market before all players embrace these trends.
Recently, we have seen single assets and several small and mid-sized portfolios on the auction block. Northeast Utilities’ Select Energy finalized the sale of its New England portfolio just after FERC approved the forward capacity market settlement. The sales process for Lake Road, a natural-gas-fired combined-cycle (CC) plant in New England, and Liberty, a natural-gas-fired CC plant in eastern PJM, has just begun. Calpine has indicated it is considering selling all of its assets outside of its core market, and New England is one such area.
The acquisition of Calpine’s Dighton asset by BG is, at press time, going through the bankruptcy court approval process. And, the sale of Calpine’s Westbrook asset, a natural gas-fired CC plant in New England, has been considered. Lowell Power (owned by Delta Power), B.L. England (owned by Atlantic City Electric Co.), and Benton Falls (owned by BayCorp Holdings) are a few other assets which appear to be on the auction block.
1. Unless otherwise noted, Power Generation BlueBook asset values have been calculated as the NPV of the unleveraged EBITDA-level expected stochastic merchant cash flows for 20 years, using a 15 percent real discount rate. This applies to all assets, even those insulated from merchant risk due to ownership by vertically integrated electric utilities.
2. NPV range is calculated with 10 percent and 15 percent real discount rates.
3. We have pointed out the median value, instead of the mean in the graph, because the mean value of NPVs can be calculated in two different ways: 1) the simple average; 2) the capacity (MW) weighted average. The first method biases the mean toward the smaller sized units’ NPVs, while the second biases it toward the large units’ NPVs.
4. As we compiled this article, LS Power and Dynegy announced their agreement on combining their portfolios.
5. Source: JPower April 6, 2006, news release on Tenaska plant acquisition.