in the domestic US power generation industry. Historically the industry has been dominated by
regulated electricity monopolies selling to captive customer bases. Many of the utilities’ gener-
ating facilities have been considered old, high-cost and inefficient. Industry trends and regulato-
ry initiatives are creating a more competitive market in which users buy electricity from a variety
of suppliers, including nonutility generators, power marketers, public utilities and others.
Until recently there appeared to be a significant need for additional power generating
capacity throughout the United States, both to satisfy existing demand and to replace old and
inefficient generating facilities. Because of environmental and economic considerations
Calpine’s management believed that this new capacity would be provided primarily by gas-
fired facilities. It saw significant opportunities for efficient low-cost producers that could sell
power at competitive rates.
As deregulation unfolded the competitive landscape and composition of power plant
ownership in the United States appeared to be changing. Numerous utilities were selling
power generation facilities in order to focus their resources on transmission and distribution,
while industrial companies sold plants in order to focus on their core businesses. Many IPPS,
each owning just a small number of plants, were finding themselves at a competitive disad-
vantage and were selling to larger producers.
Calpine’s strategy
Based on the significant opportunities that it saw in the US power market, Calpine’s strategy
was to continue its rapid growth through development and acquisition programmes. The com-
pany’s goal was to have about 100 plants in the western, southern and northeastern regions of
the United States with a total capacity of 70,000 MW, enough to light 70 million houses by
- To implement this strategy and achieve a competitive advantage, Calpine developed a
fully integrated approach to the acquisition, development and operation of power plants. The
company relied primarily on in-house expertise in design, engineering, procurement, finance,
acquisitions, operations, construction management, power marketing, and fuel and resource
production. It realised economies of scale through a standardisation model similar to those
employed by McDonald’s or Wal-Mart.
In order to capitalise on its integrated approach the company looked for acquisition
opportunities where it could assume full responsibility for operation and maintenance, and
development opportunities where it could control the entire process, and avoid the need for
turnkey engineering, procurement and construction (EPC) contracts with outside parties.
Many of the markets that Calpine has entered have been deregulated, but have continued to
be served primarily by old and inefficient gas-, oil- or coal-fired plants. The company has
therefore had opportunities to become a lower-cost IPP by building combined-cycle, clean-
burning gas generation systems, which are estimated to be 40 per cent more efficient than
coal-fired plants. The company has also tended to buy or construct several plants in a given
region and operate them as a system, enhancing profitability through coordinated sales and
operations. For example, it has reduced costs by rotating some of its staff among several
plants and reduced inventory through central pools of spare parts such as rotors or blades.
Financing methods
Calpine has raised about US$12 billion from banks, institutional investors and private equity
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