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It's Hot Out There, And So Are Power Prices

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 topic.

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 by 2000.

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 alone.

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.

©Copyright 1999 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.

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