Study: Smaller power plants may be more popular with buyers

OKLAHOMA CITY, July 1, 2002 — Economists at C. H. Guernsey & Company determined buyers place a market premium on smaller oil, gas and hydro units according to a study of 72 recent electric power plant sales, totaling over 89,000 megawatts.

This finding contradicts the long-accepted belief regarding the benefits associated with economies of scale, or bigger-is-better, in power generation.

Shaun Ledgerwood, Ph.D., GUERNSEY Economist who directed the study, found that in the current, less regulated power markets, there is less risk and a perceived advantage in having multiple, smaller plants in order to respond to market opportunities.

Dr. Ledgerwood said, “Although the engineering benefits of size, or the efficiencies of larger scale production, are still inherent in the plants, the market valuation tells us there are benefits from smaller units often outweighing those efficiencies.”

There has been an increased market for operating power plants resulting from the restructuring of the wholesale power market, in which utilities sell power to one another. State regulators have encouraged, or even mandated, utilities sell generating facilities in order to create a more diverse ownership of power generators in many instances.

As part of this investigation, GUERNSEY economists determined buyers of power plants paid a higher price per megawatt for smaller units even before the power market debacle in California. Consequently, this was probably not a short-lived phenomenon.

This study was reported in the June 2002 edition of the Competitive Edge, a GUERNSEY economic and energy strategies publication. To obtain back issues of the Competitive Edge visit www.chgeconomics.com.

C. H. Guernsey & Company offers high quality engineering, architectural and consulting services to clients in the United States and abroad. The firm has provided innovative solutions for over 73 years. GUERNSEY has its headquarters in Oklahoma City with offices in Amarillo, Texas; Atlanta, Ga.; Dallas, Texas; Colorado Springs, Colo.; Honolulu, Hawaii; Orlando, Fla; Tulsa, Okla.; Rock Island, Ill.; and Tallahassee, Fla.

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