Private equity rolls the dice.
Gary L. Hunt is president, Global Energy Advisors, and Grant Thain is vice president, Global Energy Software—business units of Global Energy Decisions.
Overbuild in power generation markets causes a slow revenue recovery not only for combined-cycle, but for all types of plant within any region. Standard project discount rates do not apply to merchant plants and current market conditions find many merchant projects struggling. One way some new players in the power generation market are looking at the valuation is to separate out "extrinsic" value and apply a higher discount rate or "haircut." An alternative approach is to price the "whole curve" on a risk-adjusted basis.
Global Energy Decisions recently updated its Power Generation Bluebook, which assesses changing power-generation asset valuation for more than 5,000 power plants in North America, and confirms that the recent spate of private-equity purchases within the merchant generation sector is at dramatically higher discount rates than previously seen within the sector.
This blood-in-the-water signal is attracting private-equity firms looking to extract value from the merchant generation sector in this weak market environment. Why? The deterministic plant value is significantly depressed through the 2005-2010 time frame, with a significant chance of needing cash injection just to remain operational. Many merchant generators will not survive the experience.