The future of merchant power will be inhibited unless there arenew approaches and new perceptions about the technical, economicand political approaches applied, according to a panel of expertsat GasMart/Power 2000 Tuesday in Denver. Regardless of what preciseindustry changes are made, not all of the proposed new power plantswill get built, and distributed generation ultimately will have toplay a role to satisfy the expected growing demand that equates toabout 5 Tcf of added gas over the next 10 years, according topanelists discussing “The Runaway World of Merchant Power.”

Richard Carlson a consultant with Sacramento, CA-based HenwoodEnergy Services, is advocating a new economic modeling approach tomerchant plants called “real options valuation” to replace thetraditional “discounted cash flow” (DCF) approach that was moreapplicable in a regulated, monopolistic generation business. Inessence, unlike DCF which Carlson sees as biased toward baseloadgenerating units, the real options model give value to an array ofancillary services and other uncertainties of the developingrestructured power industry.

Joining his fellow panelists’ assessment that price caps areharmful to the orderly development of new merchant power plants,Carlson emphasized that the caps make it very difficult for anyeconomic model to work adequately as they complicate priceforecasts.

“Price caps in one market can be a de facto cap in other marketsthrough arbitrage,” Carlson said. “It is hard to predict the leveland the timing of price caps.” A counter to this hurdle is beingprovided, he said, through various “rational buyer rules” that havebeen adopted by the California independent system operator(Cal-ISO) and replicated by others in the East Coast and Alberta,Canada under other names.

Even though Cal-ISO recently raised its price cap for thissummer from $250/MWh to $750/MWh the economic incentives are stillinadequate to develop more ancillary services in the Californiamarket, said Reliant’s John Stout, vice president in charge of its8,000 MW of merchant plants in six states. He said last year hecanceled plans made a year earlier to build 500 MW of new ancillaryservices regulated power because of the price caps.

Stout mentioned aside from his formal presentation that he isconcerned about adequate amounts of new merchant plants gettingbuilt because of what he terms the “price police” among variousstate and regional regulators who want to eliminate the ancillaryservices market and make it a regulated, monopoly service.

But the ultimate solution to an orderly market and adequatemerchant power goes beyond the current crop of proposed new plants,Stout said. In the next five to ten years, he said, there needs tobe what he calls “an influx of demand elasticity technology,”meaning applications such as microturbines and fuel cells that willbegin to shave peaks in the demand curve. “Without a new shaping ofthe loads,” there will never be a downward pressure on pricing.

In the meantime, Stout said outside of his formal remarks, the”political factor” will drive the merchant plant developmentbecause the public policymakers will continue to try putting inrules that mask the real prices of power during peak periods.

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