Genco Risk: "Location, Location, Location"Vinod Dar's recent article, "Competition, Convergence . . . and Cashflow? The Power Business in the Next 20 Years" (Apr. 1, 1996, p. 31), highlighted some of the risks inherent in investments in new power generation plants in a restructured electric industry. Dar discussed issues related to liquidity, credit quality, and foresight, but touched only briefly on the importance of "positioning" - perhaps the most critical issue in determining the financial viability of a new power generating unit.
Now that the California Public Utilities Commission has encouraged California's three major investor-owned utilities (IOUs) to divest themselves of a sizable portion of their existing fossil plant - to avoid a concentration of market power in generation - certain questions arise: What is an old generating unit worth? Which plants will the IOUs offer up?
These questions call to my mind the three basic tenets of the real-estate market: location, location, location. A gas-fired unit's
installation cost, fuel-price risk, and the market price for its "product" are all related to its location.
A new unit, particularly in California, must meet a variety of siting and permitting requirements that add to the overall cost of installation. These costs rise dramatically as the site moves closer to a major load center. Existing units may even require expensive retrofits to make them environmentally acceptable. Thus, some investors may find it more profitable to locate a new generating unit farther from a load center, since the cost of transporting the unit's power to the load may more than offset the installation premium at a closer locale.