STRATEGIC ANALYSIS
Power Updates and Still More Scenarios
We have gone through our annual overhaul of our economic dispatch
model (supply/demand) for the power markets, updating and tweaking for
observed actuals while also adjusting some of our core assumptions.
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We are now seeing greater evidence of renewables impacting power
prices – notably in ERCOT and also MISO – and we are now layering in
existing under construction renewables (mainly wind) into our model.
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We are lowering our 2009 demand growth forecast to down 2.8% from
down 1.7% to reflect worse 1H09 demand with our 2H09 held the same as
before. We are also focusing our demand drivers by customer class which
brings us to 2.25% growth in 2010 (albeit still a bit hazy). We now think the
US market will not return to 2007 demand levels until 2011 most likely,
further diluting the power market recovery story.
Never content with one set of prospective estimates, we have updated our
earnings and valuation scenarios (interactive comp sheet to come) for:
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Natural gas price scenarios beyond our $8 long-term assumption to
include the end Q209 strip (should best match company guidance), a recent
mark-to-market with lower curves, and long-term assumptions of $5 / $6 / $7.
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Renewables will have a meaningful impact on power markets (as we
discussed in Adventures in Power Market Transformation, 12/22/08), so we
also ran scenarios to again include a 15% federal renewable standard plus a
scenario only assuming the 31 states with existing renewables programs hit
their targets (which actually point to meaningful market impact on their own).
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2010 power demand assumptions including our 2.25% baseline as well as
a more muted 1.8% and more optimistic 3.0%. We still like our long-term
growth assumptions which assume energy efficiency programs reduce the
rate of growth.
En masse, we see more headwinds than tailwinds for the Power stocks as
the combination of weak demand (for power and commodities) and impact of
prospective energy policy put additional pressure on power prices. The upshot
for the stocks, however, is that many have hedges in place to mostly bridge
near-term power price weakness although bulls on the group need to keep
working harder to support the thesis.
Our updated estimates are down moderately in 2010 (1%) but show more
deterioration in 2011 and 2012 as hedges roll off; we think these trends
could create challenges for the Power stocks longer term. We continue to
prefer names that have geographic / mix advantages like ETR and PEG.