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Credit-quality concerns join fuel and market factors to affect power-plant valuation
time generating enough revenue from energy markets only to justify MW construction costs. We project a California combined-cycle unit’s expected net-merchant revenues will stay below $40/kW each year for the next five years. Obtaining a contract with a utility is a critical risk as there will be more resources competing for such contracts.
• Southeast markets are recovering with strong load growth but full recovery is still years away. There are some tight markets such as Florida, Virginia-Carolinas, and Oklahoma-Kansas, where new resources will be needed in the near future. Nearby, the Entergy, Southern and TVA markets are still in a slow, painful recovery phase. These overbuilt markets partially suppress energy prices in the adjacent tighter markets, making investment there in new merchant facilities uneconomic.
Compared to last year’s analysis, the average U.S. generating-asset value has changed by only 6 percent in nominal terms. However there are stark changes in valuations for different plant categories based on fuel or technology.
Coal-fired generation values have increased by as much as 30 percent. This is primarily driven by higher fuel prices. In particular, long-term natural-gas price projections are much higher due to international competition. On the other hand, expected future CO 2 regulation suppresses this increase moderately. The base CO 2 price projection starts with $2/metric ton for CO 2 in 2012 and escalates by $1/mton per year, and is capped at $15/mton. However there are several different proposals for GHG-emission regulation and the final market design and pricing is unclear. Despite the fact coal plants have been enjoying healthy spark spreads due to higher gas prices, uncertainty around GHG regulation poses a major risk factor for future cash flows.
This uncertainty, coupled with increased construction costs for coal plants, has driven several project delays and cancellations. As developers and state commissions have had second thoughts about new coal projects, almost 40,000 MW have been either put on hold or cancelled within the last two years. But the installed coal-fired base largely will remain.
Amid these market trends, nuclear plant values on average have decreased by almost 20 percent. The average value for an existing nuclear plant now is around $1,400/kW. Higher energy costs across all fossil fuels and future CO 2 regulation are improving the outlook for nuclear generation, but the increasing cost of uranium more than cancels these gains, decreasing overall plant values.
In recent months, uranium spot prices have been significantly higher than historical levels. In Global Energy’s projections, the average spot price of uranium will increase from $1.21/MMBtu in 2008 to $2.25/MMBtu in 2011. Then it will gradually decrease to the $1.30/MMBtu range by 2017 and continue decreasing by 1.5 percent per year after that. 3
Because all nuclear plants have long-term fuel-supply contracts, recent uranium price spikes have not been reflected in actual cash flows. As these contracts are extended or renegotiated, long-term financial impacts of higher fuel costs will become clearer.
For combined-cycle plants, based solely on the intrinsic revenue projections, most of the Western markets do not show any return on equity at all (see