Theory Becomes Practice In AEP Move To Shut Power Plants
Wednesday September 11, 5:43 pm ET
By Kristen McNamara and Jon Kamp, Of DOW JONES NEWSWIRES
NEW YORK -(Dow Jones)- American Electric Power Co.'s announcement Monday that it plans to mothball 16 power plants in Texas by the end of the year is a sign that electric competition is beginning to work as intended, power market analysts and observers said.
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Independent power producers like Mirant Corp. (NYSE:MIR - News) and Calpine Corp. (NYSE:CPN - News) have long argued that their more efficient generators would displace aging power plants. That process has yet to get solidly under way, though analysts expect other companies to follow AEP and announce plans to shut inefficient units across the U.S.
AEP's move was unusual in that the company chose to mothball so many plants at once, but isn't surprising given the glut of generating capacity in Texas, analysts said.
"This is a clear-cut example of competition working," independent industry analyst Paul Patterson said. "They're shutting down plants because prices don't support them."
While AEP's move is generally positive for merchant generators struggling to pay down mounds of debt at a time when power prices are weak, widespread shutdowns that could clear up some of the oversupply caused by the merchants' overagressive buildup aren't likely to happen in the near term, analysts said.
In Texas, AEP has asked the organization that operates the power grid in most of the state to determine which of the gas-fired units can be mothballed without making electricity service less reliable.
AEP wants the Electric Reliability Council of Texas to cover the units' costs if it determines they're needed to keep the lights on. The company said the reduction in operating and maintenance costs could produce annual pretax savings of up to $40 million, depending on the number of units shut.
Dynegy Inc. (NYSE:DYN - News) President and Chief Operating Operator Steve Bergstrom said last week his company was looking to close unprofitable plants and predicted other operators would follow suit.
"Clearly we're finally seeing some of the correction we know had to happen given the oversupply," said Sharon Reishus, associate director at Cambridge Energy Research Associates, an independent research firm outside Boston.
The units have a total generating capacity near 3,900 megawatts. If all the plants go inactive, AEP will still have more than 6,000 megawatts of capacity on line in Texas.
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