Shakespeare with a twist. Visualise: the financially troubled power plant developer cast as Shakespeare’s character Shylock imploring: “If you prick us do we not bleed?” The scene came to mind when reading a recent story about the increasing trend of developers considering mothballing merchant plant in the US. But as the audience, should we feel remorse for Shylock; the hard-done-by man now out of pocket?
Indeed, the merchant power plant operators are suffering, especially in the US. In a recent press statement, International Power said its North American operations – American National Power (ANP) – were hurt by “low wholesale prices,” “weak spark spreads” and “low trading liquidity”. The company said that going forward, these factors could put “severe pressure on its profitability” in Texas and New England and that it was consequently actively considering mothballing part of its operational capacity in the US.
ANP is not the only operator considering closing its merchant plant in Texas and New England. During the last two years, American Electric Power said it would mothball 16 gas fired plants in Texas because they cannot compete with more efficient plants built since deregulation. So far, nine of the 16 plants have been mothballed with another due for closure.
Also in Texas, Houston-based CenterPoint Energy Inc’s majority-owned Texas Genco Holdings Inc. subsidiary said it would mothball nearly 3000 MW of gas fired generation due to the state’s over-capacity situation and resulting low power prices.
Meanwhile, in New England, Exelon Generation, a subsidiary of Chicago-based Exelon Corp. has asked the region’s grid operator for permission to shut some of the older power plants around the Boston area.
And so, the merchants are now keen to have things back to the way they were. Kevin Cox, a spokesman for ANP, recently told the press: “No one in this business is building power plants without power purchase agreements anymore.”
Such a statement is ironic. For a few years developers had been criticising the IPP model in Asia, arguing that countries in Asia and developing regions should completely open their markets and let the merchant market flourish. At this year’s Power-Gen Asia in Vietnam in September, it was almost a case of ‘please bring back the good old IPP’. This general feeling prompted the question: well haven’t we all seen this before? To which one banker replied: “Yes but it has been said that a banker is like a gold fish in a bowl: every journey around the bowl is a like a brand new experience.”
We may have been talking about Asia but the comments at the conference caused me to reflect on where the market was going globally. Sometimes it is difficult to decide who is teaching who in our business – the developed or the developing countries. In Asia, they have learned a few fundamentals – two important ones being: legal contracts underpin projects but economics underpin contracts; and that demand forecasts are more often wrong than right. One speaker noted that quite often there is only really a need for peaking plant, not large baseload plant. Certainly, this is something that merchants need to analyse closely when looking at the fundamentals of each project.
Vijay Sethu, director and head of power, Asia ANZ Investement Bank, made an important observation in noting that: “We can’t [automatically] assume IPPs will have a role to play. They should have a role to play but they need to figure out how to play.” The statement was made in reference to the Asian market but in truth applies to the markets that have developed in the US and the UK.
An interesting point raised by Martin Endelman, senior cofinancing officer, Asian Development Bank, Philippines, was that “we need a new model”. He alluded to public/private sector cooperation in the power sector.
For ‘developed’ markets, such a set up may be no longer possible. So in the meantime, the merchants will have to play the game under the rules that made them happy to invest just a few years ago. They say that when the going gets tough, the tough get going – but ‘they’ never said in which direction. This business should not be about cashing in when the going is good and making a sharp exit when it gets tough. Perhaps the merchants need to realise it is also about shouldering the responsibility of providing what we (in developed countries) now see as a basic human necessity.
And so my heart bleeds not for Shylock. Perhaps it is he who should pay with a pound of flesh.
Junior Isles, Publisher & Editorial Director