A few weeks ago, my colleagues and I, power market consultants at Webb, Scott & Quinn, scanned back at some old PJM forwards and compared them to current forwards...noting that there was a major drop in PJM prices.  I promised to come back with more detail, including a breakdown of peak and off-peak prices as well as a view of impied heat rates and spark spreads.  So here goes!

We looked at forwards for June 2009 delivery, as traded in April 2008 and February 2009.  We also looked at corresponding gas prices for Columbia-Appalachia.  Here's what we found:

Gas and peak power prices tracked downward together, falling by 55% and 57% respectively.  OK.  Implied heat rate dopped by about 4%, very consistent.

The major difference between the two periods, of course, was spark spread, the real measure of marginal profitability, and it's not good for merchant generators.  Spark spreads for units in the 7000-9000 Btu/kWh heat rate range drop by about 60%.  For example, an 8000 heat rate unit would see its margin drop from $38.44/MWh to $15.00, based on these forwards.  Of course, these are just based on forwards, and just for PJM.  But they are reflective of all U.S. power markets, at least directionally.

The implications for power plant valuation are pretty obvious.  Gas-fired plants face a bleaker outlook on operating profit and hence cash flow.  Likewise, coal plants lose value, but are still more profitable/valuable on a go-forward basis...sure the so-called "dark spread" takes a huge hit, but the spreads are still a great deal higher than those of their corresponding gas competitors.

Jim Letzelter

Jim is an energy consultant at Webb, Scott & Quinn.

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