uploads/2015/01/Rationale1.jpg

Why was Dynegy interested in the acquisition?

By

Updated

Access to lucrative markets

In the previous article, we looked at Dynegy Inc.’s (DYN) deal with Duke Energy (DUK) and Energy Capital Partners. These deals give Dynegy access to the highly lucrative PJM and New England markets.

The PJM market includes 13 states in the Eastern region of the United States. New England markets include six Northeastern states in the United States.

Article continues below advertisement

Why are PJM and New England markets so lucrative?

The PJM and New England markets are well structured and offer great potential for power producers. Both markets have seen large-scale retirements of power capacity in the recent past and are tight on power supply. This has pushed up electricity prices in these markets.

As you can see in the above chart, the PJM had the highest year-over-year increase in wholesale electricity prices among all major markets in the United States in 2014. Wholesale electricity prices in New England are the highest in the United States.

American Electric Power Company (AEP), FirstEnergy Corporation (FE), and Calpine Corporation (CPN) have a presence in these markets. American Electric Power and First Energy are part of the Utilities Select Sector SPDR (XLU).

With the acquisition, Dynegy will gain a strong foothold in these markets. Once the deal is complete, Dynegy will add 9,000 megawatts (or MW) and 3,400 MW of capacity in the PJM and New England markets, respectively.

Economies of scale

Apart from the factors already mentioned, Dynegy will be able to scale up through this deal. Economies of scale are important characteristics attributed to electricity production. Economies of scale help companies with large generation capacity achieve better fuel efficiency and higher margins than firms with a smaller capacity.

Advertisement

More From Market Realist