Scorching temperatures in the Northeast and Midwest made for anexciting Monday in the power market on a day when a new studypredicts gas-fired generation development in the Northeast couldeasily cause gas demand in the sector to double by 2010. And evenwith the addition of Sable Island gas, the Northeast will need tocontinually add capacity to keep up with new generation additions.

Developers embracing the rush to build gas-fired powergeneration in the Northeast may wish to consider these facts andothers as a warning against overbuilding the generationinfrastructure from Virginia-based consultancy ICF Kaiser.

“Although the [power] market is tight now, the supply responsein the Northeast-particularly in New England-could swamp theregion’s need for new capacity in the long term if it does not slowdown,” said Judah Rose, the director of the ICF Kaiser study on thetopic.

ICF’s news came on a day when the New England power market wasso fired up by high temperatures that ISO New England issued apower warning lasting through today for the entire New Englandregion. Nearly a fourth of New England’s generating capacity is outof service for maintenance and repairs. Utilities were schedulingpower 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 warnedof possible interruptions in parts of the Midwest, New England, andwestern 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 conserveelectricity in light of high temperatures.

ICF’s analysis of the Northeast points to a number of keynear-term implications. Tight market fundamentals are creating ahigh-value capacity market in the Northeast, with fundamentalssupporting prices of $80 to $100 per kW-year during 1999 and 2000.This market strength is one of the main factors attracting newgeneration. The premium value for capacity is supported by thelikelihood of additional nuclear plant closures. In ICF’s view, atleast two more nuclear plants could be retired on economic groundsby 2000.

The study also evaluates the long-term future of the Northeastmarket. Load growth will create a capacity need of about 10,000 MWby 2005, primarily in the New York and PJM sub-regions. While thisneed is substantial, it could easily be overwhelmed by the volumeof announced new capacity, which totals about 30,000 MW in NEPOOLalone.

In the absence of such an overbuild scenario, energy prices willincrease modestly in real terms, with the PJM region likely to seethe greatest price appreciation. These increases are drivenprimarily by increases in gas prices and, to some extent, fuel oilprices. Near-term premium values for capacity (i.e., $80 to $100per kW-year) will moderate over time as the market brings forth newcapacity. In an extreme overbuild situation, capacity values couldbe driven to low levels as early as 2002 to 2003.

ICF’s analysis of the western market is part of the 1999 BulkPower Outlook, an assessment of North American regional bulk powermarkets through 2010. The Outlook is available for six regionalmarkets-West, Northeast, Midwest, Southeast, South Central andCanada-as well as a national subscription, which includes the sixregional studies and a North American summary volume. Forinformation, call Aldyn Hoekstra, (415)507-7188.

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