American Electric Power’s (AEP) announcement last week that it plans to mothball several power plants in Texas by the end of this year is likely to be just the start of what is expected to be a “sizable economic displacement” of incumbent utility generation, a new report by a Williams Capital Group analyst concludes.

“We expect tens of thousands of megawatts to be mothballed nationwide as low electricity prices and over-capacity in most regions squeeze the profit margins on inefficient, high heat rate power generation assets,” wrote Williams Capital analyst Christopher Ellinghaus in a report issued Thursday.

AEP has asked the Electricity Reliability Council of Texas to determine which of its 16 natural gas-fired power plants that have remained idle for most of this year, have to remain activated (see related story). The plants have a total generating capacity of 3,866 MW.

“While theoretically inevitable due to the heat rate efficiency advantage enjoyed by the influx of new plant construction, this announcement is the first tangible realization of the economic disadvantage of older power plants,” Ellinghaus said. He said that AEP’s announcement is “something of a watershed event” for the electric utility industry.

Ellinghaus said that the retirement of older power plants “could obviously have an important and dramatic effect on capacity margins throughout the U.S. over the next several years.” That, in turn, should help to accelerate the restoration of power market capacity margin equilibrium and ultimately higher electricity prices as a result, the analyst noted.

“However, it also has ramifications for the earnings power of many incumbent utilities,” wrote Ellinghaus. Certain utilities will benefit and some will suffer and greater volatility will “clearly be introduced into utility earnings.”

Meanwhile, the analyst also believes that merchant generators will “clearly benefit” on the margin as utilities get more incentive to sign bilateral power supply agreements with the merchants. “As economic displacement gains momentum, the power market is likely to benefit from a resumption of greater commodity trading market activity and more long-term bilateral contracts.”

The AEP announcement is an indication of the beginning of corrective action in the “anemic” power market, Ellinghaus concludes. “The market is working,” he wrote.

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