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Power – How MarketBuilder helps inform your decisions

What can you expect for future generating margins for your existing and prospective plants and how will CO2 and renewables affect these margins?

When making strategic decisions, there are many unknowns that must be analyzed and understood, such as the answer to the question above, in order to make informed choices for your business. We’ve categorized important questions addressing many issues to be considered in making strategic decisions, questions that MarketBuilder can help you answer. Each category is listed below, with two questions included as examples. Following the question section below is a brief introduction of how MarketBuilder can help you answer these questions in making strategic decisions.

  1. Generation
    • How will future added gas capacity impact gas and power prices? How much coal generation will be retired, retrofit, co-fired, or augmented with onsite solar or wind?
    • What is the future of renewables and will it impact coal, gas, nuclear, and oil thermal generation and as a result your business?
  2. Emissions prices
    • If the SO2 and NOx markets are not dead, are emissions allowance prices destined to equilibrate to the difference between the price of gas and the price of coal, to a plant retrofit, or some other phenomenon?
    • Realistically, where will the CO2 price be under cap and trade regulation at different levels of “strictness,” i.e., different offsets? What specifically is the effect of gas or coal price on CO2 price?
  3. Environmental policy
    • When EPA announces the revised CAIR, what will that mean for the electricity markets? If cap and trade markets are replaced with command and control, should you retrofit your plant or build new or shut down?
    • What will the effect of the state by state RPS and REC policies be? If you own assets in multiple jurisdictions, how can you limit portfolio risk?
  4. Coal
    • How is coal generation expected to change if greenhouse gas legislation is passed?
    • What will happen to the generating margins of coal plants in the face of greenhouse gas regulation?
    • For each pipeline or upstream asset you might consider owning, what is the maximum price you should be willing to pay for it?

How MarketBuilder helps you make decisions in power

Companies calculate the profitability of assets they build, buy, or sell as depicted in Diagram 1. They estimate the capital cost, operating cost, and energy efficiency of the asset (bottom Diagram 1); they specify the time and risk preference, book and tax parameters, and taxes and other “takes” (top of Diag. 1); and they project the price of the output over time (top left – Diag. 1) and the price of the input over time (bottom left – Diag. 1) and then use the results in a profit calculation (e.g., Discounted Cash Flow or DCF).

What do they find? They often find that the most important determinant of profitability is the difference between the expected price of the output and the expected price of the input. That difference is a key driver of asset profitability, and yet, often, this is the least accurate component of the analysis.

Diagram 1

MarketBuilder models the supply curves forth input and output commodities for regional power markets, treating each component as a competitive independent agent simulating the way the real market works. As a result it helps you to calculate the estimated price of both the output (electricity) and the input (fuel—gas or coal) providing a justifiable price difference for each of your generation and transmission assets. MarketBuilder enables you to calculate the forecasted profitability, forward through time, of new or existing generation and transmission assets, depicted in the shaded area of Diagram 2, using time-tested technology and data. Diagram 2 illustrates that margins are not level, normalized, or annuitized, and they are determined by simulating market behavior forward through time. Having a tool you can use to project prices and the profitability of each of your assets through time is central to your strategic and asset decisions.

Diagram 2

MarketBuilder with its flexibility, sound methodology, ease of use, and time-tested accuracy, help you to easily adjust parameters to model potential market and policy changes (e.g., shale gas cost, CO2 policy, renewables, etc.) and incorporate them in your analysis.

Returning to the question: What can you expect for future generating margins for each of your existing and prospective plants and how will these margins be affected by CO2 and renewables?

MarketBuilder creates the supply chains throughout the electric power sector, treating each component as an independent, profit seeking, competitive agent, as in real-world markets. With the thoroughness of this approach and MarketBuilder’s many other easy-to-use capabilities, it helps you forecast market prices and analyze the effect of CO2 and other market changes on market behavior. MarketBuilder also places renewables at the appropriate points in the supply chains helping you to analyze their impact on the power sector. MarketBuilder specifically enables you to calculate the margin over each plant in the model and its reporting capabilities help you to visualize how plant input and output prices apply to your business by asset, by business, in aggregate, etc. for each scenario you analyze.

As used in this document, ‘Deloitte’ means Deloitte LLP (and its subsidiaries). Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.