Power Plant Overbuilding in Southeast

Power Plant Overbuilding in Southeast -- A Problem and an Opportunity

5.12.04

Chris Neil, Senior Consultant, Summit Blue Consulting

Duke Energy, Teco Energy and Entergy announcements in recent weeks underscore the problems and opportunities caused by massive overbuilding of power plants in the southeastern United States. Duke and Teco are abandoning hope that this market will recover any time soon. Entergy has taken advantage of the situation by buying a plant at a deep discount. Other firms may also have problems because of the overbuilding in this market or may be able to respond to the opportunity presented by the overbuilding.

Table 1 lists most of the plants built in the southeastern United States and shows that nearly 28,000 MW was built or is under construction. The plants listed are mostly in Alabama, Arkansas, Louisiana and Mississippi. Duke’s two Georgia plants are included in Table 1 to show all of Duke’s southeastern plants.

Duke has placed its southeastern U.S. plants on the market and has written off about $2.8 billion for these plants and others whose value has decreased or whose development was cancelled. Duke has seven plants in the Southeast with 4,650 MW of capacity. Duke was especially hard hit because it built a number of peaking plants in a market now awash with combined cycle capacity. Four Duke plants representing 2,270 MW are simple cycle combustion turbines plants that are not likely to operate very much with lower cost, combined cycle capacity around. Duke also has three combined cycle plants representing 2,380 MW competing with the other plants.

Teco announced that it is turning over to lenders its 2,200 MW Union combined cycle plant in Arkansas along with the 2,145 MW Gila River plant in Arizona. Teco is abandoning its equity investment in these plants of roughly $762 million. The Union plant near El Dorado, Arkansas, started operation in January 2003. At that time, it was touted as the largest independent power facility in the nation. It was developed with Panda Energy of Dallas. Entergy recently took advantage of the overbuilt southeastern market by buying the Perryville plant for $170 million or $237/kW. This price compares favorably with the cost of a new combined cycle plant of about $550/kW or a combustion turbine of $350/kW. Perryville consists of a 562 MW combined cycle unit that begin operation in 2002 and a 156 MW combustion turbine that started up in 2001. It was originally developed as a joint venture between Cleco and Mirant and is now owned by a subsidiary of Cleco.

Table 1 Generating Plants Constructed in the southeastern U.S. Region (includes primarily Alabama, Arkansas, Mississippi and Louisiana)

Not all plants in the Southeast or other overbuilt markets are in dire straights. Some plants have purchase power contracts or are utility rate-based plants. Plants with contracts may be financially viable if their contracts hold them over until demand absorbs the excess capacity. This could be years away, however.

Some regions of the country are like the Southeast and are overbuilt. Overbuilt areas include Texas and the Southern Nevada-Arizona area where Teco’s Gila River plant is located. Some observers considered the New England market overbuilt, but the possibilities of blackouts during cold weather in January 2004 indicated otherwise. Other regions need new capacity or could require new capacity in a few years. These include New York, California and others. The key for developers is still to find those areas where capacity is needed.

Companies located in overbuilt areas have an opportunity to buy existing plants at a discount, like Entergy did with the Perryville plant. These companies may be able to take advantage of the situation and obtain additional capacity at an attractive price. Companies not in an area of overcapacity may be able to take advantage of the situation using a buy and move approach. Moving a simple cycle combustion turbine would not be significantly more involved than obtaining a new unit. Moving the heat recovery steam boiler of a combined cycle facility would be more complicated, but may be justified if the purchase price is low enough. Thus, all companies that need additional capacity may want to consider the opportunity represented by plants in overbuilt markets.