During the past year, more than 35,000 megawatts of generating assets have been put to auction. Much analyst discussion has focused on the price and premium above book value these assets are commanding in the marketplace. An equally important issue is the new owners' plans for the assets. These plans provide significant insight on where generation markets are headed.
In nearly every sale, the new owners intend to add value to the plant by reducing operating costs. Previous RDI analyses indicate that the electric utility industry has made significant efficiency gains during the past five years. Despite these gains, the new owners believe they can improve efficiency even further. This trend provides insights for the future. First, if all new plant operators are able to achieve these efficiency gains, it will reduce the marginal cost of generating electricity and put continued downward pressure on electricity prices. Second, it is possible that operating costs for units that appear uneconomic may be reduced to a level sufficient to keep operating. This will reduce the available demand that hungry merchant plant developers are ready to meet.
Another trend in the asset sales is the intention to increase the rated capacity of existing plants. In most cases, the new owners intend to achieve increased capacity at a cost substantially lower than the cost of building new capacity. In more complex cases, significant capital expenditures or changes in fuel procurement strategy and fuel equipment handling are required. While the increases are not large in percentage terms, they could have a substantial impact on market prices and generator profitability.