It's Hot Out There, And So Are Power Prices
Scorching temperatures in the Northeast and Midwest made for an
exciting Monday in the power market on a day when a new study
predicts gas-fired generation development in the Northeast could
easily cause gas demand in the sector to double by 2010. And even
with the addition of Sable Island gas, the Northeast will need to
continually add capacity to keep up with new generation additions.
Developers embracing the rush to build gas-fired power
generation in the Northeast may wish to consider these facts and
others as a warning against overbuilding the generation
infrastructure from Virginia-based consultancy ICF Kaiser.
"Although the [power] market is tight now, the supply response
in the Northeast-particularly in New England-could swamp the
region's need for new capacity in the long term if it does not slow
down," said Judah Rose, the director of the ICF Kaiser study on the
ICF's news came on a day when the New England power market was
so fired up by high temperatures that ISO New England issued a
power warning lasting through today for the entire New England
region. Nearly a fourth of New England's generating capacity is out
of service for maintenance and repairs. Utilities were scheduling
power imports from Canada and New York to meet demand.
Monday the North American Electric Reliability Council (NERC)
said this summer should see enough power to meet demand but warned
of possible interruptions in parts of the Midwest, New England, and
western Canada. Prices in the New England Power Pool Monday reached
$1,000/MWh, and prices in the Midwest surged 1,000% from $25/MWh to
$250/MWh. Detroit Edison was asking its customers to conserve
electricity in light of high temperatures.
ICF's analysis of the Northeast points to a number of key
near-term implications. Tight market fundamentals are creating a
high-value capacity market in the Northeast, with fundamentals
supporting prices of $80 to $100 per kW-year during 1999 and 2000.
This market strength is one of the main factors attracting new
generation. The premium value for capacity is supported by the
likelihood of additional nuclear plant closures. In ICF's view, at
least two more nuclear plants could be retired on economic grounds
The study also evaluates the long-term future of the Northeast
market. Load growth will create a capacity need of about 10,000 MW
by 2005, primarily in the New York and PJM sub-regions. While this
need is substantial, it could easily be overwhelmed by the volume
of announced new capacity, which totals about 30,000 MW in NEPOOL
In the absence of such an overbuild scenario, energy prices will
increase modestly in real terms, with the PJM region likely to see
the greatest price appreciation. These increases are driven
primarily by increases in gas prices and, to some extent, fuel oil
prices. Near-term premium values for capacity (i.e., $80 to $100
per kW-year) will moderate over time as the market brings forth new
capacity. In an extreme overbuild situation, capacity values could
be driven to low levels as early as 2002 to 2003.
ICF's analysis of the western market is part of the 1999 Bulk
Power Outlook, an assessment of North American regional bulk power
markets through 2010. The Outlook is available for six regional
markets-West, Northeast, Midwest, Southeast, South Central and
Canada-as well as a national subscription, which includes the six
regional studies and a North American summary volume. For
information, call Aldyn Hoekstra, (415)507-7188.