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Power — Using MarketBuilder to Inform Key Decisions

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

PowerICON-2

In North American power markets, the accelerated retirement of coal power plants, the growth of renewable energy, and low relative natural gas prices for fuel are disrupting the equilibrium across regional markets. Regulatory pressure and dramatic changes in the capital and operating costs of different fuel types undermine the economics of new plant construction and threaten the profitability of existing power plants in many power markets. Fortunately, making sense of change in market fundamentals  is a 'sweet spot' for Deloitte MarketPoint. The GEMS modeling system on which today's solution is based saw its first application for electric power planning in 1972. Today, our multi-fuels Integrated Energy Markets solution has been updated to provide a complete modeling simulation. It not only models fuel demand for power generation (power demand), but also integrates models for each fuel and technology type, regional renewable alternatives, and emissions reduction—all in one model.

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 of Diagram 1); they specify the discount rate, book and financial parameters, and taxes and other "government takes" (top of Diagram 1); and they project the price of the output over time (top left of Diagram 1) and the price of the input over time (bottom left of Diagram 1. Then they use the results in a profit calculation (e.g., Discounted Cash Flow or DCF).

Asset ProfitabilityDiagram 1: Asset Profitability
For Illustrative Purposes

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. Yet this is often the least accurate component of the analysis.

MarketBuilder models the supply curves for the input and output commodities for regional power markets, treating each component as a competitive independent agent and simulating the way the real-world 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) by providing a justifiable price difference for each of your generation and transmission assets.

MarketBuilder lets you calculate the projected 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—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.

Margin CaptureDiagram 2: Margin Capture
For Illustrative Purposes

With its flexibility, sound methodology, ease of use, and time-tested accuracy, MarketBuilder helps you easily adjust parameters to model potential market and policy changes (e.g., shale gas cost, CO2 policy, or renewables) 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 project 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 to help you analyze their impact on the power sector. MarketBuilder specifically lets you 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—for example, by asset, by business, or in aggregate—for each scenario you analyze.

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