This has been a grim month for the merchant electricity generators, and it is not even half over.
The key event was Duke Energy's announcement of the sale of its merchant gas generating assets in the south-eastern region. These gas turbines, which cost between $500 and $600 a kilowatt to build, went for an average price per kilowatt of capacity of just $89.
Last spring, when the industry faced what looked like an insuperable barrier of refinancing requirements, the more pessimistic Wall Street credit analysts estimated that merchant gas turbines were worth $100 to $150 a kilowatt. At the time, I checked in with an executive with Calpine who sneered at their lack of understanding of the prospects for the industry. When I tried to reach him last week, he had lost his job, and Calpine's secured bank debt was trading in the mid-$80s.
Last year, the merchant generators were facing $25bn in debt maturities. Most of them were saved from bankruptcy by a series of refinancings pushed through by worried lenders, though Mirant and units of NRG were forced to file under Chapter 11.
The lenders decided they did not want to take the hit just then and made a bet that "spark spreads", or the difference between gas and electricity prices on which the generators live, would recover in a couple of years. That bet is not looking good.
The problem is that the spark spread is being squeezed between the high price of gas and an electricity price that is being depressed by sales from increasingly efficient coal plants. The hope among owners of gas-fired generators and their bankers was that clunky old coal plants would be retired, making room for a rise in the spark spread. But, as we will see, that will not happen.
Peter Rigby, the Standard & Poor's analyst of utilities, energy and project finance, calculates that there is $65bn of debt at the merchant electric generators coming due by the end of the decade, out of a total debt burden of $125bn. It is not clear to him what that paper is really worth. "Even for debt secured with new combined cycle gas turbines [the most efficient generators], the recovery is going to be less than what it cost to build. The rise in gas prices is really hurting. It seems like the best way to make money on natural gas is to own a coal plant."
That is exactly the $3.5bn message Mike Morris, chief executive of American Electric Power, is sending the merchant generators. Mr Morris, who became AEP chairman, president and CEO at the beginning of the year, spent thirty years in one part or another of the natural gas industry.
AEP is the largest coal-based utility, and this spring Mr Morris decided to spend those billions on environmental upgrades of his coal-based generating stations. Based on his experience in the gas industry, Mr Morris has decided not to put up AEP's money to bid on distressed gas generation assets.
"Those asset sales [by Duke] were a giveaway," he says. But even getting them for free wouldn't be good enough. "With $6 gas, the most efficient combined-cycle gas turbines can generate power for $35 a megawatt-hour, without paying for the capital in the plant. With my coal plants, even with all the new environmental capital cost, I can generate power for $20 a megawatt-hour. When I've satisfied the demand for my traditional customers of my regulated utilities, I can sell the rest of the power into the merchant market.
"The industry believed that combined-cycle gas plants could provide baseload power because coal plants would have to be retired prematurely. Not true. Not happening. Combined-cycle gas plants will be for peaking demand, not baseload."
The problem for the gas turbine owners is that the revenue from just meeting the extra demand for power at peak times is not enough to pay the capital costs.
If Mike Morris had been a lifelong Midwest coal plant engineer, then they could have persuaded themselves that he was just a special pleader for his industry sector. Unfortunately for their peace of mind, he spent decades in their business.
The gas-generating industry has been looking forward to the arrival of fleets of liquefied natural gas ships bringing cheap fuel from around the world. Not likely, says Mr Morris.
"LNG will not be coming into this country on the timeline that people have been hoping for. When the gas does arrive here, it will not be at a dollar or two an MCF but at $5 or $6. The Gulf of Mexico resources may be at a tapped-out level of production. When [North American] producers find more reserves, they last maybe four years rather than 20 years. You will continue to see pressure on the supply side of the gas business."
Mr Morris's view is echoed by natural gas traders. Bill Wallace, a gas trader with EDF Man in New York, says: "A year ago none of us would have expected gas prices to be up here. Too many people in the industry have been short-sighted, just managing their day-to-day risk."
So, Mr Morris, should the lenders to the merchant generators be working on Plan B?
"That would be a good idea."