Scorching temperatures in the Northeast and Midwest made forexciting times in the power market last week, which also saw therelease of three portions of a nationwide power study that predictsmore excitement ahead.

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

“I think in general we expect the gas market will experiencecontinued relatively aggressive growth at modest prices [$2.10 to$2.40],” said Mike Godec, senior vice president and director ofICF’s gas consulting practice. “We think prices in that level willsustain demand.”

Godec said strong power generation demand should push the gasmarket to 32 Tcf by 2010. Combined-cycle technology will dominatenew power plant construction. The offshore Gulf of Mexico willremain a dominant supply source, and there will be productiongrowth in the Rockies as well as in tight sands and coal-bedmethane production, Godec said. Canada will play a large supplyrole in the United States, but eventually demand growth there willabsorb more Canadian supply.

As for power markets in the three regions for which reports areavailable, ICF looks for “extreme price volatility this summer andnext” in the western power market. The Midwest will remain “NorthAmerica’s Best Peaking Market,” and those active in the Northeastneed to be wary of overbuilding generation assets.

The Northeast: Too Much Would Be Too Much

ICF predicts gas-fired generation development in the Northeastcould easily cause gas demand in the sector to double by 2010. Andeven with the addition of Sable Island gas, the Northeast will needto continually add gas capacity to keep up with new generationadditions.

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.

“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 study.

ICF’s news came on a day last week when the New England powermarket was so fired up by high temperatures that ISO New Englandissued a power warning lasting through today for the entire NewEngland region. Nearly a fourth of New England’s generatingcapacity is out of service for maintenance and repairs. Utilitieswere scheduling power imports from Canada and New York to meetdemand.

Last Monday the North American Electric Reliability Council(NERC) said this summer should see enough power to meet demand butwarned of possible interruptions in parts of the Midwest, NewEngland, and western Canada. Prices in the New England Power PoolMonday reached $1,000/MWh, and prices in the Midwest surged 1,000%from $25/MWh to $250/MWh. Detroit Edison was asking its customersto conserve electricity 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.

The Midwest: Risk of Nuke Outages

In the Midwest, peaking will be the name of the game, accordingto ICF. “The Midwest is a victim of the worst type of transition tomore competitive markets – rapid moves to deregulate the wholesalemarket coupled with extremely slow, uncoordinated and ineffectualefforts on the part of states to open retail markets. Thiscombination further exacerbates what would already be a difficulttransition into a hazardous one,” Rose said.

A tight supply/demand balance in the Midwest will allowsuppliers to bid-up prices above competitive equilibrium levels inthe near-term. While peak summer prices are unlikely to reach thestratospheric, $7,000 per MWh levels seen in the summer of 1998,extremely high prices in the short-term should be expected at leastthrough 2000. The Midwest market – especially the MAIN sub-region -remains particularly dependent on troubled nuclear plants to meetcustomer load. Unexpected outages of these plants, even if veryshort in duration, will compound the region’s delicate supplysituation and lead to further upward price pressure.

As in 1998, hot summer weather would force prices to skyrocketagain to levels beyond what otherwise would be expected in thistight market, and potentially lead to a repeat of last year’sevents.

Long term, the Midwest faces an immense need for new capacity -at over 40,000 MW by 2005, the region’s capacity need is thelargest ever seen in a single marketplace. Energy prices willcontinue to rise as the region transitions from a predominantlycoal-based generating system to one in which gas-fired generationincreasingly provides the incremental megawatt-hour. Capacityvalues will moderate somewhat in the long-term but will need toremain relatively high given the ongoing race to add capacity fastenough to meet need. And gas demand for power generation in theMidwest is likely to increase more than ten-fold between 2000 and2010 given a dramatic move to gas-fired generation to meet theregion’s incremental electricity needs. Gas prices, however, arelikely to rise only modestly in response because the Midwest willremain the focus of a dramatic increase in gas supply from both theUnited States and Western Canada.

The West: Price Spikes Highly Likely

Extreme price volatility this summer and next is on the horizonfor the western power market, ICF said. “The west stands at least aone in three chance of experiencing price spikes similar to thoseseen in the Midwest market during the summer of 1998,” Rose said.

The region is in a delicate supply-demand balance, with mostsub-regions or the West relying on a capacity surplus in thePacific Northwest to meet near-term peak capacity requirements.Because demand growth outpaces supply additions, deficits will onlybecome more extreme over the next two years. A fifth consecutiveyear of above-average hydroelectric generation – the main cause ofthe Pacific Northwest power surplus – will again mask the West’sprecarious supply-demand balance in 1999. But if drought conditionsof the early 1990s resurface, the West will find itself at an evengreater risk of price spikes. Power prices in the West are on anupward trend this year and next, resulting from higher regionalspot gas prices and the increasing value of “pure capacity” toensure 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 2005provided the region faces no serious economic downturn. Energyprices have a negative real trend for growth through 2010, but theregion will remain susceptible to near-term volatility while themarket evolves and new supply is added over the next few years.Current low capacity values will continue to rise, but remain belowmany other regions, as more efficient generation is added. Gasdemand for power generation is poised to more than double by 2010,with the most explosive growth in the Rockies and southwestsub-regions. However, the West’s vast gas supply potential appearscapable of meeting growth with little, if any, price appreciationthrough 2010.

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

Joe Fisher, Houston

©Copyright 1999 Intelligence Press, Inc. All rightsreserved. The preceding news report may not be republished orredistributed in whole or in part without prior written consent ofIntelligence Press, Inc.