Subject: macro questions
i hope this gets mark what he needs . let me know .
- - - - - - - - - - - - - - - - - - - - - - forwarded by kevin m presto / hou / ect on 03 / 13 / 2001 03 : 45 pm - - - - - - - - - - - - - - - - - - - - - - - - - - -
george hopley
03 / 13 / 2001 03 : 40 pm
to : kevin m presto / hou / ect @ ect
cc :
subject : macro questions
is the country facing sustained tight markets ? :
in general , capacity margins have been falling over the last few years as utilities have refraind from building baseload capacity , and others have focused on developing primarily peaking capacity . the last large building boom of coal plants ended in early 1970 ' s and nuclear boom dropped sharply after three mile island incident in 1979 . during 1990 ' s , projected capacity margins have fallen from the 15 - 20 % toward 10 % and below . outside of the california situation , nyc also poses a potential risk for this summer .
if general , however , by 2002 - 2003 , the amount of capacity proposed in each region more than covers normal load growth for meeting peak hour demand . remaining question relates to performance of existing coal and nuclear stacks , also what happens during periods of persistent drought .
will voaltility and prices remain high or lessen ? :
to the extent that more capacity becomes merchant oriented focusing in marginal cost economics , and transmission congestion persists , increased volatility will continue , especially in iso / pool type environments . prices will reflect primary fuel dynamics , especially the interplay between gas and oil . the case for lower prices will reflect an overbuild scenario beyond this year , coupled with slowing economic activity and low incidence of extreme weather events .
how fast can generation be added and what returns should be expected ?
the variability in development of greenfield capacity depends on time to permit at state or local levels . construction time is fairly constant . in general 18 months is reasonable time frame from concept to first fire . to the extent that power plants are project financed with minimum 30 equity , returns should be consistent with other comparable project financed opportunities available to fund managers . we do not expect any more fully debt financed facilities in the near term .
can companies make major profits owning generation long term ?
above average returns over time will reflect superior plant management skills and effective use of strategic market information . portfolio approach will aid in this case . if an oversupply situation occurs in the 2003 - 05 timeframe , significantly lower returns on capital could materialize .
is this the time to sell generation ?
because of recent market events in west , capacity has higher than historically observed
values . depending on overbuild scenario this may be an attractive time to sell capacity to those still in queue or hoping to build in near term . recent pool experience shows that capacity owners still have significant market power
how will supply demand balance change in various regions of country ?
weather normalized demand growth fairly consistent at 2 - 3 % on average overtime . future dynamics depend on economic growth , which suggests more load on coastal and in tech - concentrated areas . short - term demand reflects weather dynamics ( year 2000 a non - event for eastern interconnect , opposite in the west ! ) . aggressive capacity growth suggested in nepool , ercot , ecar , main and spp over next two years .
will natural gas continue to capture all the growth ?
virtually all capacity due on line is gas fired , however , incremental supply growth could come from investments in existing coal and nuclear stack , which can be more economic .
marketing ?
growth business will appear as more interaction solicited from enduser , and rates can become more dynamic .
too late for new entrants ?
most states still do not have switching of energy service providers , so still time to enter . barriers to entry include capabilities in brand management , retail marketing , effective integration of risk management and billing ability .
will only handful of customers be big winners ?
to the extent economies of scale and aggregation opportunities exist , there will be success to larger players but not to exclusion of niche player existance .
how diffentiated are the strategies ?
to date marketing is focused on lower rates and giving an alternative to existing service provider . this will have to develop beyond that .
how significant is the retail opp ?
in markets where retail rates are high , order of magnitude limited to 10 ' s of dollars / mwh . however gives opportunity to trade around , similar to supply asset .