The
massive dislocation in the merchant energy sector is changing the way
merchant power plants are owned and managed. Over a five year period between
1998 and 2003, non-load serving entities - IPPs and merchant energy companies
- quintupled their ownership of power generation assets in the U.S. from
70 GW to over 390 G W, corresponding to an increase from 9% to almost
40% of the domestic generation fleet.
“WHO
WILL BUY THESE GAS-FIRED MERCHANT ASSETS?”
The significance of this shift
was only realized in the last eighteen months when massive amounts of
new generation were put in service at the precise moment that the merchant
energy companies that were to provide newly-needed intermediation services
between energy generation (supply) and load (demand) began to fail. The
current wave of corporate and project company financial problems resulting
in the announced sale or foreclosure of over 100 GW is documented daily,
and our favorite speculation at industry gatherings has become “who
will buy these gas-fired merchant assets?”
With the exception of some
utilities targeting discounted investments in distressed generation as
part of their resource plans supported by their regulators, virtually
all prospective owners of merchant plants are banks or financial investors
motivated by prospects of capital gains linked to a recovery of spark
spreads and volatility.
NEW CLASSES
OF OWNERS
Unlike merchants, such as
Dynegy, Reliant, Mirant, Allegheny, PG&E NEG, Duke and Aquila, that
had comprehensive management and intermediation capabilities, the new
classes of owners are looking to third parties to provide the various
complex services necessary to extract value from a merchant power plant.
Asset management, operations and maintenance management, energy management,
risk management and customized intermediation services such bilateral
contracting are all critical and complex services needed by these owners.
These services will be provided by a new class of emerging firms with
highly specialized skill sets. The shift in ownership and the emergence
of these new firms providing services is resulting in an industry unbundled.
AN INDUSTRY
UNBUNDLED
This unbundling is
a natural and permanent evolution of capital intensive industries that
experience a bust following some external event such as deregulation.
The commercial real estate, airline, gas transportation and many segments
of the financial services industries provide relevant precedents where
financial owners - always active participants in capital markets - have
been the catalyst for the creation of specialized service pro v i d e
r s .
THE FLOW OF
CAPITAL
Ultimately the flow of capital
into distressed merchant assets will depend on the availability of management
services, and especially a full complement of risk management services
that provide some assurance that the considerable commodity price, volumetric
and credit risks of a merchant generation plant can be managed within
the risk tolerance of the owners. Load serving entities are most capable
of mitigating the risks of a merchant plant. Therefore realignment of
the merchant generator with those load serving entities, through effective
term intermediation services, is key to capturing full value in an industry
unbundled.
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