As Independent Merchants Reorganize, Power Market Sees Sparks Fly
The last of the big independent energy producers, offspring of the federal government's attempt to push the power market into a competitive arena, was forced into bankruptcy last month. Market deregulation is not what some thought it would be, with new surprises in the mix. But industry observers foresee a new era in power production, as once-mighty merchant power firms emerge as smaller, restructured companies. "Competition will continue, just on a smaller scale," says David Dismukes, associate director of the Louisiana State University Center for Energy Studies, Baton Rouge. Construction industry firms, ever-adaptable, say they're already ready for the next step.
The Dec. 20, 2005, Chaper 11 filing of Calpine Corp., San Jose, Calif., America's largest merchant power producer with 27,000 MW of capacity, is the most recent in a cascade of independent power firm bankruptcies (ENR 1/2-9 p. 17). Many in the industry say the company was forced to its knees under the weight of the government's half-hearted attempt to restructure power markets, and then beaten to the ground by extremely high natural gas prices. Heavily in debt with its share price tumbling fast, Calpine had to move quickly to restructure and seek a cash infusion to maintain energy supply.
All but 2% of Calpine's projects were natural gas-fired. "Calpine needed to see improvement in the ‘spark spread' (the differential between the price of electricity and that of natural gas or other fuel used to generate electricity), which didn't happen quickly enough to be of help," says Paul Freemont, analyst with Jefferies & Co., New York City.
Natural gas prices, which recently rose to more than $13/million cu ft from $2/mcf in the late 1990s when deregulation began, will be the key driver of power markets in the future, says Freemont. "If you're selling at a fixed price and costs go up, you find yourself in a bad place immediately," says George L. Nash, Princeton, N.J.-based senior vice president of power business development for Washington Group International, Boise.
Requests for proposals (RFPs) for power "not generated by natural gas" already are appearing. Arkansas Rural Electric Cooperative issued one Jan. 3 for an unspecified amount of power, but it probably would not go beyond the capacity of a 600-MW coal-fired plant, says Ricky Bittle, co-op vice president of planning, rates and dispatch. Arkansas Rural plans to either build the roughly $1-billion plant itself or buy it from a developer, which could well be a next-generation merchant power producer. LS Power Associates, St. Louis, has received all necessary permits to begin building the 800-MW Plum Point merchant coal plant in Osceola, Ark.
Others are not far behind in their quest for fuel diversity. Cleco Corp., a small Louisiana utility opted last year to build a coal-fired plant to reduce its 70% dependency on natural gas fired generation. Shaw Group, Baton Rouge, has the design and construction contract for the $1-billion plant.
Entergy Corp., Clinton, Miss., which owns utilities in Mississippi, Louisiana, Arkansas and Texas plans to issue an RFP by month's end for 1,000 MW of solid fuel generation for its Louisiana companies, which now rely heavily on natural gas-fired generation.
Entergy already has benefited from the independent power producers' hard times. It was able to purchase the 718-MW Perryville powerplant near Monroe, La., which cost $340 million to build, for a mere $170 million after independent power producer Mirant Corp., Atlanta, filed for bankruptcy. Mirant which emerged from bankruptcy on Jan. 3 after 2-1/2 years, owned 50% of the plant.
Entergy now is completing the $88-million purchase of the 480-MW Attala powerplant in Mississippi from creditors who foreclosed in 2004 on its merchant owner, PG&E National Energy Group.
Rather than buying power from the market, more utilities are adding to their assets, through new construction or by buying "stranded assets," says Don Zabilansky, senior vice president in CH2M Hill Co.'s Atlanta office. "Regulated utilities...