Bankers wonder about future of plant projects in wake of TXU

Washington (Platts)--1Mar2007

The pledge by two private equity firms to reduce the number of coal plants
they will build, if their effort to take TXU private comes to fruition, could
have a significant impact on the number of coal plants built in the US in the
coming years, according to an investment banker with experience in assessing
coal plant prices.

John Cogan, a director of Credit Suisse's investment banking energy group,
said Wednesday in Houston that while there are more than 100 pulverized
coal-fired power plants that have been proposed for the US market, now,
following the TXU proposal, he believes only "a really small number" are ever
likely to be built.

Cogan said he believes that this is due to the "sea change around carbon that
has been remarkable."

The positive reaction to the proposed reduction in the number the proposed
coal facilities could make it difficult for other companies to win approval
for new coal plants in other states.

Cogan and other bankers, who spoke at the Platts Texas Power Markets Forum on
Wednesday, also concluded that they felt the prospects had improved for
integrated gasification combined cycle plants.

Nazar Massouh, a vice president in Goldman Sachs' commodity risk management
group, said that maybe IGCC is the only type of coal-fired facility that will
be able to get approval in the near future.

The problem, he said, is that the Electric Reliability Council of Texas is now
estimating that the state will drop below its mandated 12% reserve margin by
2009. There is a general estimate that 8,000 to 10,000 MW of new baseload
capacity is going to be needed in Texas. TXU had proposed 9,079 MW of new coal
capacity by 2010. The private equity firms Kohlberg Kravis Roberts and Texas
Pacific Group say they will pass on building 6,900 MW of capacity and build
only 2,200 MW over the next five years (PCT 2/27).

Lehman Brothers' Neil Bresnan noted that NRG is planning to add roughly 2,400
MW of nuclear capacity at its South Texas Project, but he and Massouh agreed
that isn't going to be enough, and if approved, the project won't come online
until late in the next decade. Both bankers agreed that, eventually, the state
will have to turn to coal.

Credit Suisse's Cogan said that interest in coal-fired plants would be waning
even if the price of building one had not already been on the rise. Cogan
noted that the last time there was an active market for building coal-fired
facilities -- in the early 1980s -- the price tag was roughly $1,500/kW.

Cogan says that inflation since that period has to be considered, but a
"one-off" coal-fired power facility, including IGCC, built today would cost
$2,500/kW. He said labor shortages and higher copper and steel prices are
largely responsible for the higher price.

--Jeffrey Ryser, jeffrey_ryser@platts.com