Jean-Louis Poirier, Principal with Hagler-Bailly consultants in Washington, DC has long tracked the development of the independent power market. The U.S. power generation market, he says, has undergone a strong revival in the last two years, with more than 140 GW of new projects currently under development. This trend should continue given the rise in peak demand, the need to meet peak/intermediate power needs, and the expected behavior of many players who have announced their intentions to build strong asset portfolios of several tens of GW.
The coming decade should witness a vibrant market with more than 150 GW of merchant capacity additions between 2000 and 2009. More than 90% of these additions will be gas-fired merchant plants. The Southeast and East North Central regions, and Texas should experience the largest capacity additions.
This growth will allow many players to build solid market positions. By combining the development of greenfield plants with the acquisition of utility divestitures, some players will amass portfolios of 30-50 GW within a period of 5 to 7 years. Less than 30 major players will emerge by the middle of the next century. The top players will generally adopt the model of a fully convergent gas-electric manufacturing company equipped with its own trading and large account marketing division. As the market develops over the next ten years, three factors will be increasingly important: critical mass, asset portfolio balancing, and risk management.
The top 25 merchant power project developers in the United States now control 70% of the capacity under development. Several of them (e.g., SEI, PG&E/USGen, American National Power, Calpine, Duke, Panda) control over 5 GW of merchant power capacity under development. This is consistent with recent announcements by several strong players about very ambitious merchant power growth plans - often setting individual targets of 15 GW to 30 GW for the amount of merchant plant capacity (both new and divestitures) to be controlled in the next few years.
Many players (e.g., El Paso, Enron, PG&E Generating, Sempra, Sonat, Southern, Tractebel) trade power to enhance the value of plant outputs and several are involved in gas trading as well. These players now want to control more assets to back up various types of trading products such as reliability and outage coverage services (for generators), load following and peak management offerings (for traders), full-service contracts (for munis), demand-support contracts for distribution companies, and load balancing help for retail energy providers.
The amount of additional capacity needed in the United States is a function of many factors and is subject to many uncertainties. Of course, it is driven by projected electricity demand, which appears to be increasing at a faster rate lately. The nation's overall peak demand growth rate is now closer to 2% than the 1.6% level advocated two or three years ago (in the Southeast and Texas, that rate is closer to 2.5%). On a ten-year basis, this translates into an extra 20 GW.
Many factors in addition to demand will determine future capacity additions:
* The amount of plant shutdowns by incumbent generators. Three years ago, the consensus was that 15-20 GW of nuclear plants might be shut down, but less than 3 GW have actually been shut down to date. Likewise, many forecasts predicted that anywhere between 30 and 50 GW of plants would have been retired by 2002. This does not seem to be the trend yet. Finally, it is not clear how many QF projects will be shut down. About 8-9 GW have been canceled (or their contracts purchased), but some of these units are coming back on the market to provide peaking power.
* Utilities' ability to squeeze down on capacity margins, improve transmission capabilities, and become increasingly sophisticated buyers of wholesale power. There has been a significant increase in three- to five-year power contracts, which can help many midsize incumbent utilities to satisfy some of their needs.
* The way independent system operators and power markets work. This will affect how quickly expanding wholesale power trading will absorb the remaining pockets of excess capacity. In some cases, increased trading will accentuate the vulnerabilities of some units that are performing poorly and create opportunities where transmission bottlenecks will develop.
* How new owners of divested utility assets will operate, improve, repower and/or expand their new assets. This will also dictate the level of local reserve margins. For example, our analysis of the current merchant plant backlog reveals that some 20% of the capacity under development involves expansions at sites acquired as a result of utility divestitures. With the number of divestitures increasing over time, the proportion of brownfield merchant plants may possibly rise to 35-40%.
* The extent of plant shutdowns by new owners. By 2005, over 300 GW of utility assets will have been divested. The owners of these assets may decide to progressively shutdown some of these plants while they expand the sites that are under their control.
* The impact of environmental regulations which could accelerate the retirement of existing capacity controlled by both incumbents and new owners.
Many have predicted that 1999 could be a record year for new merchant plant financial closings, but we may have to wait until 2000-2001 to see signs of significant increases in merchant plant capacity additions. Annual additions could exceed 15 GW by 2001 and reach a record of close to 18 GW in 2001-2002. Thereafter, annual capacity additions may fluctuate between 14 and 17 GW for three to four years and then approach the 18-20 GW level if capacity retirements multiply after 2005.
By 2009, over $25 billion should be invested in merchant power capacity additions in North America through 2009. These new plants will generate annual revenues of $25 billion by then and support at least $60-65 billion of wholesale trading.
About 30 major generating companies will emerge by the mid-2000s. They will comprise a dozen or less national players with portfolios in the 30-50 GW range, another dozen or so regional dominators with portfolio sizes around 10-15 GW, and a few niche players in the 4-8 GW range that focus on more speculative assets.
A progressive concentration will take place, mostly at the expense of midsize players and to the benefit of top players. By 2003, the top 15 players will control nearly 55% of the North American IP capacity in operation; their combined holdings will exceed 150 GW.
Generally speaking, the winners will be those firms able to broaden their generation activities and implement a fully convergent and integrated business model across the wholesale/retail value chain. Over half of the top-20 IP players in North America are pursuing this model.
In addition, success calls for maintaining the right balance between asset optimization and revenue management, which can be particularly difficult for traditional developers who have fine-tuned an asset development mentality. In many cases, these developers may have to decide that they need to resell some of their assets or restructure their power sale agreements.
Rolling out this type of winning model can take three to four years of dedicated efforts, hefty doses of intellectual capital, and serious investments (of several hundreds of millions of dollars) in IT and risk management systems.
