Industry publication, December 2001

NYC 9/11 Public Portal Document

/ r'E 'T O VER^IE Wl

plan in 2001. A few large merchant nuclear operators, includ­ 2001 has been away from continuing all-out expansion of capac­ ing Entergy, Dominion Energy and Exelon, are mulling new ity to gain market share and toward a more market-oriented reactor projects in 2002, the first in over 25 years in the U.S. Butstrategy focused on finding buyers for the new capacity and the Sept. 11 terrorist attacks created a major new security issue hedging production as far into the future as practical. This has for the nuclear industry. The public may simply refuse to accept tended to favor developers with integrated electric generation, !! building new reactors. gas and energy-marketing strategies such as Duke Energy, Mirant and Dynegy. Groups that may have less of an advantage TE^ANSMISSiOI^ are large generators such as Calpine Corp., NRG Energy and AES, A third major factor likely to restrict new powerplant construc­ which have been slower to develop marketing businesses. tion is the nation’s patchwork electricity transmission system, During late 2001 some developers, such as PG&E National which was not built to handle large-scale merchant traffic Energy Group and Constellation Energy Group, announced between regions. Several states have been forced to slow per­ slowdowns in new plant development, while others, such as mitting because local grids cannot handle additional load. The Calpine and NRG, held to ambitious pre-2001 capacity develop­ North American Electric Reliability Council, an industry group ment goals. But Calpine also said that it would pay attention to that loosely coordinates grid operations, has specifically warned changing market conditions. that excessive new plant construction may overburden trans­ The experience of the last few years has also shown that some mission systems in the Southeast, Southwest and Midwest. NERC potential restraints on powerplant construction have not mate­ reports that less than 10,000 miles of new transmission capacity rialized. There was wide concern in 2000 about a looming short­ will be built in the U.S. in the next 10 years. That 5% addition age of turbines. Many new plants were being proposed and to current capacity is energy companies com- well below likely gener­ mitt^ for dozens of tur­ ation additions. bines at a time to assure The Federal Energy availability. But it ap­ Regulatory Commission pears the actual turbine has begun to address demand in 2000 was these problems by man­ below expectations dating creation of a few because several plants large Regional Trans­ were canceled and the mission Organizations supply is now keeping r* (RTOs), which would up with demand. It also 1 have wide powers to I i appears that the sudden plan new transmission links. The administra­ tion also is considering ■‘tea halt in the move toward retail competition, due especially to the failure legislation to get emi­ of deregulation in Cali­ nent-domain power for fornia, has not notice­ transmission projects ably affected merchant deemed to be of nation­ generation construc­ S' L tion. al importance. A final major con­ PINCH POINT Old attitudes hamper delivery of power to load centers. While California ac­ straint to massive new tually did return its sys- investment in powerplants is money itself. Industry analysts esti­ tern to retail regulation this fall, generation there remains under mate that the power industry since 1999 has borrowed about control of merchant generators. The real issue for developing $50 billion to finance the new wave of plant construction. The new capacity in the state is that the rules for selling wholesale less optimistic forward energy price estimates and the recession power to the utilities remain unresolved. have created a new climate in which credit ratings for the com­ Overall, EPSA calculates that 36% of all generation in the U.S. petitive energy industry are expected to drop, making it harder is now operated on a competitive merchant basis, compared to to refinance existing loans and raise new capital. The chillier 8.5% in 1997. This includes both newly built merchant plants financial climate likely will most affect projects financed with and utility plants divested to competitive groups. short-term loans and selling mainly into volatile peaking mar­ Even with the fading boom in the U.S. generation market, kets. things are generally considered worse in international markets

I LU A related problem is Wall Street’s valuation of energy com­ where economic and politic instability and more recent terror­ pany stocks, which tend to closely follow up and down cycles in ism threats have forced U.S. developers to pull back. Jean-Louis wholesale electricity prices. After several years of increases Poirier of the PA Consulting Group, Washington, D.C,, says that through early 2001, stock values began to drift downward about 315,000 Mw of new capacity is likely to be built worldwide around midyear, according to Barry Abramson, an analyst with in the coming 10 years with a total value of $200 billion. He pre­ UBS Warburg. Abramson does not see a stock value drop as the dicts about 220,000 Mw of this will be in North America with “end of the world” and says that the power generation business much of the rest in Europe. as a whole will continue to be profitable and provide decent That means the U.S. will be the main attraction in the glob­ returns to investors. “It is Just that not everyone in the business al marketplace for new plant construction for the foreseeable ! will be able to do weU and a period of declining power prices future, replacing overseas markets that had boomed in the could help separate the strong players from the weaker ones,” 1990s. And despite the downturn in the market, prospects for he says. new construction are still better than they’ve been in years. □ ■I HI I For the merchant generation companies, the clear trend in By Paul Kemezis

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