A power plant can be thought of as a money-making machine. Its value is a function of what it costs the machine to produce relative to the value of what is produced.
When an old power plant has production costs that are much lower than the market value of electricity, there can be huge value in the plant – much more than the remaining mortgage (if any) on the plant or the entire initial cost of the plant.
When natural gas prices escalated dramatically during the past decade, Texas’ wholesale electricity prices surged and averaged about $75/MWh in 2005. Coal plants have historically had low production costs (about $15 per MWh). Those were happy days for coal plant owners, with each MWh sold into the Texas market averaging a profit of about $60/MWh.
Even for Austin’s minor (1/3) share of the Fayette Power Project, which can produce more than 4 million MWh annually, there was enormous value: either to sell power into the market for a profit, or to help keep Austin’s electric rates lower than those elsewhere in Texas. Had Austin sold all of the production from FPP into the market, it could have netted a profit of about $250 million in 2005 (4 million MWh x $60/Wh). If Austin were to think about selling the money-making asset, the market value of the plant would be a multiple (perhaps 5X or more) of what the plant would be expected to earn in a single year.
But times change.
Today, natural gas prices are more than 75% lower than their peak in 2005 and current wholesale market prices are roughly equivalent to the Fayette Coal Plant’s higher production costs. Throw in pending carbon regulation and the market value of the Fayette coal plant in 2009 has largely dried up.
