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 Geothermal only produces about 30% of Calpine's revenues, however; the balance (70%) comes from natural gas. Calpine's dependence on gas means its margins are heavily dependent on natural gas prices, which have fluctuated unpredictably over the past few years. The volatility of natural gas is offset, however, by the flexibility of gas-powered plants, which let the company more easily adjust electricity production. In regions where temperature fluctuates heavily through the day and over a year, like the West Coast and Texas, these plants let the company cut operating costs by reducing production when it isn't necessary.
[edit] Business and FinancialsCalpine is an energy company with 24,000 MW of generating capacity, including 60 natural gas powered facilities across the U.S. and 17 geothermal plants in the Northern California Geysers region[1]. Its primary customers are industrial electricity users, government agencies, and electric utilities; 10% of its revenues come from the California Department of Water Resources.
Most of Calpine's operations are in its "West" segment, which spans California, Arizona, Colorado, and Oregon, as well as its Texas segment. The company's margins were highest in the West, possibly because of the price premium attached to energy from the company's geothermal plants in California. The West and Texas also have higher energy prices because of seasonal temperature fluctuations, leading to higher sales prices for Calpine. [edit] NRG Energy Made an Unsolicited Acquisition OfferIn May, 2008, NRG Energy made an offer to purchase Calpine worth $10.8 billion. At the end of the month, Calpine rejected the offer, and NRG has stated that it has no plans to raise the bid. [edit] Trends and Forces[edit] Calpine Recently Emerged from BankruptcyOn January 31st, Calpine finished its Chapter 11 proceedings, and started trading on the New York Stock Exchange once again. The company went bankrupt in 2005 because of debt incurred through financing of 70,000 MW expansion projects that was cut short by the Enron scandal and the subsequent power market crash. In the process of coming out of bankruptcy, the company cut $7 billion in debt, closed 19 offices, and laid off 1,100 employees. Calpine argues that, despite the regulated nature of the power market, it will be able to turn a profit because its power plants meet the "green" demands of modern energy consumers; though natural gas is rarely considered to be environmentally-friendly, it is far cleaner than its alternative, coal, while geothermal energy really is a "green" technology. Calpine is also playing it safe to avoid another financing crisis, by increasing its capacity incrementally; the company announced plans to add between 1,285 and 1,601 MW - a far cry from the ambitious 70,000 MW that put the company in the red[5]. [edit] Calpine's Margins Move with Natural Gas PricesOut of the $7.97 billion in revenue that Calpine pulled for 2007, $5.68 billion went to paying for fuel and purchased energy[6]. Since over 23 of the 24 GW of energy that Calpine and its subsidiaries can produce comes from gas plants, most of these fuel costs stemmed from the purchase of natural gas. Over the past few years, natural gas prices have been very volatile, rising to record highs, dropping, then rising again. The company sells power in long-term contracts; when gas prices are high, Calpine's margins shrink; when prices fall, margins increase. Exposure to the volatility of the natural gas market, which moves at the slightest event - from a new reserve discovery to the threat of terrorism - makes Calpine's margins almost as volatile. Furthermore, a long-term decline in the availability of natural gas, due to any range of causes from pipeline infrastructure damage to peak oil and the decline in fossil fuels, would greatly damage Calpine's ability to produce and deliver electricity profitably. [edit] Utilities Regulation Can Affect Calpine's Energy PricesCalpine's margins are further affected by the regulation of electric utilities in the U.S. and Canada. Regional governments set electricity prices to ensure both profitability for utilities companies and accessibility for all consumers. Because of utilities regulation, the prices that energy companies charge the utilities companies must be low enough for the utilities to make a profit; this leads to price competition and depressed margins for the whole energy industry. Calpine remedies this problem by selling energy that is considered "cleaner" than many other types; natural gas does not emit the particulate pollution that coal and oil do, and it has no dangerous wastes, like nuclear. Geothermal energy is almost completely clean. With cleaner electricity generation methods, Calpine can compete based on electricity users' preferences, as well as on regulatory grounds; without the need to install costly scrubbers and filters, it can sell electricity for slightly cheaper than its coal competitors. [edit] Calpine's Use of Natural Gas Makes it Regionally CompetitiveUtilities regulation can vary by region, depending on electricity use patterns and the dominance of certain energy sources. Calpine's main markets are in the Western U.S. and Texas, where electricity use tends to come in peaks and valleys because of temperature changes depending on season and time of day. These regions tend to see higher set electricity prices, making natural gas plants useful; though gas is more expensive than most base-load plants, it can be used to provide variable amounts of energy, allowing Calpine to reduce production (and costs) when demand is low. This allows the company to maximize the price at which it sells its electricity. [edit] Legislative Support for Renewable Energy Makes Calpine's Geothermal Plants More CompetitiveState governments across the U.S. are implementing legislation to encourage alternative energy production, due to political pressure from public concerns about climate change, oil prices, and energy independence. Twenty-six states have set Renewable Portfolio Standards that set varying targets for the amount of energy to be obtained from renewable sources by certain dates. California, where all of Calpine's geothermal facilities are located, has targeted reaching 20% renewable energy usage by 2010[7]. What this means is that there is now a "premium" on the price of all energy that comes from renewable sources in California, including Calpine's geothermal plants. Electric utilities are scrambling to reach the allotted mix, and Calpine has benefited both from the growing demand for renewables and the hike in geothermal energy prices caused by it. In February 2008, for example, the company made a deal to sell 175 MW of geothermally-produced electricity to western utilities powerhouse PG&E - a deal that will bring the ratio of PG&E's renewable electricity contracts to the required 20%[8]. [edit] Climate Change Regulations Have the Potential to Increase Calpine's CostsDespite the climate-friendly nature of Calpine's geothermal plants, with just 725 MW[9] out of 24,000 MW[10], they amount to just about 3% of Calpine's total energy mix. The rest comes from natural gas, which is cleaner than coal or oil in terms of particulate emissions but still emits large quantities of greenhouse gases. In the event that the U.S. government, or individual state governments, levy carbon emissions limits, Calpine's operations will be significantly compromised. For this reason, Calpine actively lobbies against carbon control initiatives. [edit] CompetitionAs an energy company, Calpine faces a wide range of competitors.
As one of the few major geothermal operators in the U.S., Calpine competes with:
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