Overview

RESOURCE ADEQUACY RESOLUTION TRUMPS SPARK SPREAD RECOVERY

With the worst apparently behind the merchant power sector in North America, many believe the single key dimension of value recovery will be the gradual working off of the generation oversupply. But perhaps surprisingly, the most important driver is not necessarily tightening markets and associated power prices and spark spreads, as most power markets in North America will not rely on energy prices alone to provide market signals to encourage supply.

- It is very likely that most power markets will rely on "resource adequacy" mechanisms to provide the economic incentive to keep demand and supply in balance. By modeling typical assets, CERA demonstrates that resource adequacy resolution could have a huge impact on plant value.
- Because resource adequacy issues will be resolved by political process, the impact on value recovery will not be smooth, steady, uniform, and predictable-it will choppy, sporadic, varied, and volatile.
- Three other factors-absorbing the generation oversupply, the effects of regional and local transmission issues, and the challenge of environmental compliance for merchant coal-may also have a large impact on the value of any given asset.