Calpine owns more than 90 power plants with the capacity to generate 28,000 megawatts of electricity. This experience must mean that its recent decision to “bolster its position in Texas [by] buying a natural gas-fired power plant near San Antonio for $625 million” is backed by a strong likelihood of profitability.
Profitability is exactly what Calpine’s CEO Jack Fusco pointed to in announcing the acquisition, “We strongly believe in the potential of the Texas market as electric demand increases and reserve margins tighten. … The Guadalupe acquisition exemplifies our commitment to making disciplined capital allocation decisions that will enhance shareholder value.”
Calpine is one of four corporations behind Texans for Reliable Power, which recently ran an add claiming that Texas was heading for rolling blackouts unless Texas consumers fork over about $4 billion a year to subsidize investments like Calpine’s. But being a publicly traded, multinational corporation, it is doubtful that Calpine would invest in Texas unless the move made sense in the current competitive market without the subsidies.
Looking at Mr. Fusco’s statement, it appears that is the case. Calpine is bolstering its position in Texas because it believes it can take advantage of increasing demand and tightening reserve margins. The law of supply and demand tells that in such a case, prices should increase, thereby making Calpine’s investment more profitable. The nearby graph shows us that is exactly what is happening.
It also shows us that the recent declines in the reserve margin are nothing more than simple economic laws at work. Reserve margins peaked in 2010 and have been following prices down. But now that reserves are lower, prices are on their way back up, which means more investment and a return to increasing reserves.
Folks who think reserves will keep dropping until we have rolling blackouts just need a quick lesson in economics.
“