"Spark spread" sets value, but as prices diverge from system
lambda, merchant plant buyers will be flying blind.
Many power plants will be bought and sold in the next decade. Some utilities will divest power plants as required by regulators; others will sell for strategic reasons. Most of the plants sold likely will become merchant plants, with no guaranteed market for their electric output. Merchant plant activity is already significant and growing. The value of these plants will depend on how well they can perform in an uncertain market.
Plant owners in a competitive market constantly will re-evaluate their portfolios of generating assets. In so doing, their expectations of plant financial performance may differ, based on market prices, risk-return requirements, tax factors, upgrade plans or operational practices. Indeed, alternative valuations will make many plant sales transactions feasible. How will potential buyers and sellers set a value on merchant plants?
Current or prospective owners likely will use several new measures of a merchant plant's value. Of those, the "spark spread" will prove the most critical (em and the most uncertain (em as wholesale power prices evolve from a simple mirror of short-term variable costs (system lambda) to reflect more long-term fixed costs. Moreover, buyers must time their investment to anticipate a positive spark spread for the specific niche in which the plant operates.
Valuation: Price vs. Fuel Cost