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Credit-quality concerns join fuel and market factors to affect power-plant valuation
high enough to support a full recovery until the 2011-12 time frame. Therefore near-term capacity needs of the market likely will be met by projects with some contracted revenue support. Not every location in ERCOT, however, shows the same revenue potential. Local differences will be more prominent as this market moves to locational-marginal pricing (LMP). ERCOT will be the test ground to see if the industry learned the lessons of the last overbuild cycle.
• New York also needs new generation. However, most of the need is in the Eastern region, particularly in New York City and Long Island. New transmission projects into Long Island and New York City will alleviate some of the near-term resource needs, but the problem is not completely solved. Additional resources or more transmission projects will be needed in the near term.
• In New England, transition-period capacity payments have boosted cash flows for generating assets and brought market stability. This is another market where reserve margins are decreasing fast with high load growth and aging fleet retirements. Location is key in New England as some areas such as Southwest Connecticut and Boston are relying heavily on imported energy from other areas. Major transmission investments now underway are targeting these locations, however. This creates an economic uncertainty for new generation projects, because the economic impacts of these projects are not clear yet. Finally, the Regional Greenhouse Gas Initiative (RGGI) has been creating another complexity threatening the economic viability of some of the old coal units.
• PJM reserve margins are eroding fast. Although there are excess reserves in the West PJM (ComEd, AEP, APS), Virginia Power and East PJM reserves are critically low. The coal-powered generation in the region is enjoying a healthy spark spread with the support of high natural-gas prices. On the other hand, energy revenues for gas-fired generation have been mediocre at best. Despite tightening reserve margins, this trend likely will hold for at least a few more years.
The key to value is an asset’s location in PJM. Auctions held recently in the forward capacity market returned higher-than-expected capacity clearing prices for Eastern PJM. This is a significant boost for assets located in this area. The result of these auctions is another indication of tightening reserve margins in some PJM sub regions.
• Western power markets as a whole are projected to be overbuilt for several years. Compared to our summer 2006 projections, the average asset value in the WECC region has decreased by 10 percent to $548 /kW. 2 The merchant cash flows for gas-fired generation in WECC likely will be problematic for several years. More efficient units are benefiting from the better spark spreads associated with higher gas prices. However, lower expected gas prices in the years ahead pose a major risk for these generators. WECC markets have not hit the bottom yet. Despite all the confusion in the Western market about resource adequacy, the WECC market will become more overbuilt than before. Particularly in California, without the support of a contract with a utility, the assets will have a hard