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Hot Temperatures Igniting Power Prices in NE, Midwest

Hot Temperatures Igniting Power Prices in NE, Midwest

Scorching temperatures in the Northeast and Midwest made for exciting times in the power market last week, which also saw the release of three portions of a nationwide power study that predicts more excitement ahead.

Virginia-based consultancy ICF Kaiser released sections of its "1999 Bulk Power Outlook" dealing with western, midwestern, and northeastern markets. Sections detailing the outlook for the Southeast, Southwest, and Canada, as well as a national summary, are due out later this month and next. ICF also is considering the power outlook's implications for gas demand and infrastructure issues and sees a bright future ahead.

"I think in general we expect the gas market will experience continued relatively aggressive growth at modest prices [$2.10 to $2.40]," said Mike Godec, senior vice president and director of ICF's gas consulting practice. "We think prices in that level will sustain demand."

Godec said strong power generation demand should push the gas market to 32 Tcf by 2010. Combined-cycle technology will dominate new power plant construction. The offshore Gulf of Mexico will remain a dominant supply source, and there will be production growth in the Rockies as well as in tight sands and coal-bed methane production, Godec said. Canada will play a large supply role in the United States, but eventually demand growth there will absorb more Canadian supply.

As for power markets in the three regions for which reports are available, ICF looks for "extreme price volatility this summer and next" in the western power market. The Midwest will remain "North America's Best Peaking Market," and those active in the Northeast need to be wary of overbuilding generation assets.

The Northeast: Too Much Would Be Too Much

ICF 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 gas 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.

"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 study.

ICF's news came on a day last week 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.

Last 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.

The Midwest: Risk of Nuke Outages

In the Midwest, peaking will be the name of the game, according to ICF. "The Midwest is a victim of the worst type of transition to more competitive markets - rapid moves to deregulate the wholesale market coupled with extremely slow, uncoordinated and ineffectual efforts on the part of states to open retail markets. This combination further exacerbates what would already be a difficult transition into a hazardous one," Rose said.

A tight supply/demand balance in the Midwest will allow suppliers to bid-up prices above competitive equilibrium levels in the near-term. While peak summer prices are unlikely to reach the stratospheric, $7,000 per MWh levels seen in the summer of 1998, extremely high prices in the short-term should be expected at least through 2000. The Midwest market - especially the MAIN sub-region - remains particularly dependent on troubled nuclear plants to meet customer load. Unexpected outages of these plants, even if very short in duration, will compound the region's delicate supply situation and lead to further upward price pressure.

As in 1998, hot summer weather would force prices to skyrocket again to levels beyond what otherwise would be expected in this tight market, and potentially lead to a repeat of last year's events.

Long term, the Midwest faces an immense need for new capacity - at over 40,000 MW by 2005, the region's capacity need is the largest ever seen in a single marketplace. Energy prices will continue to rise as the region transitions from a predominantly coal-based generating system to one in which gas-fired generation increasingly provides the incremental megawatt-hour. Capacity values will moderate somewhat in the long-term but will need to remain relatively high given the ongoing race to add capacity fast enough to meet need. And gas demand for power generation in the Midwest is likely to increase more than ten-fold between 2000 and 2010 given a dramatic move to gas-fired generation to meet the region's incremental electricity needs. Gas prices, however, are likely to rise only modestly in response because the Midwest will remain the focus of a dramatic increase in gas supply from both the United States and Western Canada.

The West: Price Spikes Highly Likely

Extreme price volatility this summer and next is on the horizon for the western power market, ICF said. "The west stands at least a one in three chance of experiencing price spikes similar to those seen in the Midwest market during the summer of 1998," Rose said.

The region is in a delicate supply-demand balance, with most sub-regions or the West relying on a capacity surplus in the Pacific Northwest to meet near-term peak capacity requirements. Because demand growth outpaces supply additions, deficits will only become more extreme over the next two years. A fifth consecutive year of above-average hydroelectric generation - the main cause of the Pacific Northwest power surplus - will again mask the West's precarious supply-demand balance in 1999. But if drought conditions of the early 1990s resurface, the West will find itself at an even greater risk of price spikes. Power prices in the West are on an upward trend this year and next, resulting from higher regional spot gas prices and the increasing value of "pure capacity" to ensure reliability for consumers.

Long term in the West, underlying demand growth is strong, creating a regional capacity need of more than 18,000 MW by 2005 provided the region faces no serious economic downturn. Energy prices have a negative real trend for growth through 2010, but the region will remain susceptible to near-term volatility while the market evolves and new supply is added over the next few years. Current low capacity values will continue to rise, but remain below many other regions, as more efficient generation is added. Gas demand for power generation is poised to more than double by 2010, with the most explosive growth in the Rockies and southwest sub-regions. However, the West's vast gas supply potential appears capable of meeting growth with little, if any, price appreciation through 2010.

For information on obtaining The Outlook, call Aldyn Hoekstra, (415)507-7188.

Joe Fisher, Houston

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

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