Considerations for underwriting gas generation assets and related revenue modelling

The rapid expansion of AI-driven data centres is fundamentally reshaping US power demand, creating new opportunities for natural gas power generation investments. This comprehensive analysis demonstrates Wood Mackenzie's sophisticated analytical capabilities for modelling gas-to-power operations and profitability in today's evolving energy landscape.

Proof of concept: ERCOT Houston case study

Using detailed case study of a 605 MW combustion turbine plant in ERCOT Houston as a proof of concept, the report showcases how Wood Mackenzie's fundamental and stochastic modelling techniques can accurately forecast revenue dynamics and assess investment viability. The analysis reveals that whilst spark spreads show a strong correlation with power prices, revenue forecasting requires far more nuanced optimisation considering multiple vairables including:

• Start-up costs
• Variable O&M expenses
• Transmission constraints

Market fundamentals drive positive outlook

Key findings indicate that power demand in ERCOT Houston will outpace supply growth, driving price appreciation and creating favourable conditions for gas generators. The modelled asset demonstrates strong projected gross margins with healthy unlevered and levered IRRs above the expected weighted average cost of capital. Despite positive fundamentals, the analysis highlights notable risks, with gross margin at risk representing a substantial portion of projected margins throughout the forecast period.

Market entry strategies and revenue innovation

The report also addresses critical market realities, including the stark economics preventing new construction – with capital costs significantly exceeding M&A transaction values – making acquisitions the primary viable market entry strategy. Additionally, the analysis explores innovative revenue streams for smaller generators, including Virtual Load Ratio Hedges that help commercial customers manage transmission costs.

Wood Mackenzie's analytical framework

This resource provides energy investors, lenders, and operators with Wood Mackenzie's proven analytical framework for navigating the complexities of gas generation asset valuation in an increasingly dynamic power marker driven by AI and data centre growth.

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