Must-know: Dynegy’s operational strategy

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Dynegy’s operational strategy

Economies of scale are important characteristics attributed to electricity production. Economies of scale help companies with a large generating capacity achieve better fuel efficiency and higher margins than firms with a smaller capacity. Of the 12,500 megawatts (or MW) being acquired, 7,075 MW are gas plants. Dynegy will be able to decrease its dependency on coal. It will be able to operate in a more diversified fuel mix.

These plants will transform Dynegy’s (DYN) existing assets. They will also transform its retail business. They will add significant scale and fuel diversification in the PJM and New England markets. The PJM market includes 13 states in the eastern region of the U.S.

Region

Both the markets are well structured. They’re very attractive to power producers. Since the region’s supply is still limited, the average residential prices have soared by 11.4% year-over-year (or YoY) in New England—against a national average of 3.2%.

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The regions are important for power generators like NRG Energy (NRG), Calpine Corporation (CPN), and NextEra Energy (NEE). Calpine Corporation recently acquired the Fore River Generating Station in New England. The components of the Utilities Select Sector SPDR (XLU) have a presence in these markets.

How much will these markets contribute to Dynegy?

The PJM and New England regions are unregulated for power producers. This allows electricity prices to be driven by the market. Regulated markets are cost-based. After the deal is complete, the markets will represent 25% of Dynegy’s gross margin. Currently, the markets only contribute 11%. The region’s generating capacity will increase significantly from 18% now to 60% after the deal. This will give Dynegy superior pricing power.

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