Utility Valuations at Risk from Greenhouse Gas Regulations

NERA Economic Consulting has developed a new model for valuing of electricity generation plants that suggests a higher degree of financial risk for electric utilities than might be expected.

The stochastic valuation model aims to take into account such factors as:

• How does greenhouse gas regulation impact the value of coal plants? How does uncertainty in relation to such regulation affect the economics of extending the life of these assets and/or retrofitting them with advanced pollution control measures?
• How do the capacity factors and economics of intermediate power plants change as a result of additions of significant amounts of renewable resources and energy efficiency measures?
• How does the value change for flexible resources that can provide ramping and balancing requirements to integrate intermittent resources?
• How will new generation technologies, energy efficiency and DSM impact the requirements for new fossil fuel power plants?

NERA says its case study suggests that a conventional portfolio of gas- and coal-fired resources is subject to significant economic performance risk under a number of reasonably likely scenarios.

The fact that the results indicate a significant amount of risk in the portfolio should not be a surprise, although the quantification of the level of risk and potential for financial distress may be more than expected.