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Study: Private Equity Firms Buying Merchant Power Assets at High Discount Rates

Study: Private Equity Firms Buying Merchant Power Assets at High Discount Rates

The recent wave of asset purchases within the merchant generation sector by private equity firms are at dramatically higher discount rates than those previously seen within the sector and are betting on a recovery in the electric power market, according to a study recently released by Global Energy Decisions LLC.

"These private equity players are betting on improving market conditions alleviating the current lack of demand for electricity -- it's all about timing; if the market recovers as expected they will see significant returns for their investors," said Gary Hunt, president of Global Energy Advisors, a Global Energy business unit.

So are market prices for wholesale electricity recovering? Not yet is the message from the "Power Generation Bluebook." While coal and nuclear power generation asset values have increased, gas-fired combined cycle power plant prices continued to decline between 2003 and 2004 with overall combined cycle values falling by 11%.

"A delay in recovery of a couple of years will destroy their returns and result in the same assets being sold in a few years time," Hunt said.

With significant uncertainty still surrounding asset valuations the recent sales confirm that the private equity players are buying merchant generating assets despite project discounting at real, pre-tax rates of 20%, according to Global Energy Decisions. This compares with utility rates closer to 12%.

"This differential reflects the significant risk the private equity players are taking in buying merchant assets in locations where limited liquidity and limited transmission means that there may be no natural home for the power in the current market," according to Grant Thain, Global Energy's vice president of planning and risk.

The Power Generation Bluebook is a comprehensive study that values 5,000 generation units across North America, providing stochastic analysis of the expected asset value for every power generator over 50 MW for use as a portfolio benchmark service. Global Energy Decisions ( provides energy organizations with solutions based on a common framework of software applications, energy markets data and advisory services.

Global Energy's Power and Gas Market Advisory Service updates its analysis of electricity and gas supply and demand fundamentals every six months across every region of North America. The service is used by Fitch Ratings and more than 100 energy companies, utilities and energy investors as a source of independent, transparent analysis of changing market conditions, wholesale expected prices and how they are formed.

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