PF Archive

Small mercies

19 11 2008

The credit crunch could be the least of US power finance bankers' worries. An economic downturn and the collateral damage from the collapse of Lehman Brothers could redraw the contours of US power market. The 2001 economic downturn in the US was a distant memory by the time credit markets hit their 2006 peak. For equity investors, the bankruptcy of Enron, formed, with scandals such as Tyco and Worldcom, part of a broader picture of corporate malfeasance. For power markets, Enron's collapse was more traumatic, and its effects on the market's structure were much more profound. But the credit crunch has exposed the weakness of this market structure. Meanwhile, newer technologies, which have only really known this post-Enron landscape, may be the biggest sufferers. The 2001-3 period was marked by distressed asset sales, the withdrawal of commercial banks from large parts of power finance, and a drastic reduction in the number of standalone energy traders. Enron's bankruptcy, however, was only the proximate cause of the market's collapse, since several power markets had excess power capacity, and several power producers were overleveraged. The 2008 downturn threatens to marry the weakness of the post-Enron structures to a more general economic downturn. A contraction in commercial bank appetite for select power projects may be the least of the sector's worries. Optimism about the private power sector's prospects rests on two assumptions. The first is that the financial services sector can respond as quickly and creatively to the present problems as it did from 2003. The second is that...