U.S. Coal Power Surges – TXU Plants Fall Prey to Private Equity Politics

RelevanceThe proposed TXU buyout by KKR and TPG includes a commitment to cancel 8 (out of 11) TXU coal power plants. This has more to do with KKR/TPG’s exemplary presentation skills than an industry move away from coal. The proposed TXU plants were to use the older “pulverization” technology which, although cheaper to build, is not as clean “clean coal” and “coal gasification” technologies. Utilities across the U.S., in response to high gas prices, will continue to use the newer coal technologies to build around 100 coal fired power plants. We may say that this is the end of the use of pulverization technology in coal fired power plants, but it is definitely not the end of coal power.

AnalysisU.S. utilities continue with their diversification away from natural gas (whose price has doubled – tripled in recent years) using plentiful supplies of relatively cheap domestic coal. Up to 100 new coal fired plants are proposed. Industry watchers expect coal to increase its share of the US power market (from a starting point of just over half of all power capacity).

TXU had already run into political trouble in the Texas legislature by proposing the old, less environmentally sound pulverization technology, and this has provided KKR/TPG with a gilt edged opportunity to deflect public concern away from the increased presence of private equity (with its cloak of secrecy and light regulation) in their TXU deal. In this respect they have furthered their local creditability by bringing in James Baker and Donald Evans to their deal team and by promising lower prices to consumers. Utilities remain a highly regulated and politicized industry and KKR/TPG’s approach has been impressive so far.

Remaining political risk is at the Federal rather than at the State level. While the White House continues to promote coal power generation there has been little indication as to the direction of the Democratic controlled Congress on this issue.

2 March 2007

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