The saturated power market and significant downsizing and belt tightening among merchant energy companies will result in a sharp decline in the number of gas-fired power plants added to the market over the rest of the decade. “The construction boom is finally nearing its end,” Virginia-based consulting firm Energy and Environmental Analysis Inc. (EEA) said in its latest Monthly Gas Update.

EEA said that it expects a total of 112 GW of gas-fired generation to be added between 2003 and 2010, with 52% (58 GW) of that total reaching the market this year and the remaining 48% being added in sharply decreasing increments over the next seven years.

EEA forecasts a dramatic decline from 2004 through 2007 with only 10-13 GW/year added. “After 2007, the only likely new construction will be peaking capacity in a few selected markets,” EEA said.

“By the end of this year, reserve margins in most regions will be at record high levels,” EEA noted. “SERC and ERCOT are by far the most overbuilt regions.” The North American Electric Reliability Council (NERC) said in its recent summer assessment that SERC will have 22 GW of additional capacity this year compared to last while peak demand in the region is expected to be flat. That will give SERC and effective reserve margin of 45%, according to EEA (NERC excludes merchant power plants in its forecasts so its estimate of SERC’s reserve margin is substantially lower). ERCOT’s reserve margins are at similar levels, EEA said.

“Ironically while capacity will continue to be added in overbuilt regions, the New York City market will remain very tight,” EEA added.

Given the abundance of power across most regions and the current high level of gas prices, the profit potential for operators will be slim for the next several years, according to EEA. Power prices will be increasingly linked to gas prices.

Despite the abundance and increasing supply of gas-fired power generation, however, gas demand from power generation actually is expected to fall because of the greater efficiency of the new plants being added, compared to the older plants they are replacing. “Our forecast, which is based on [the National Oceanic and Atmospheric Administration’s (NOAA)] 30-year normal weather, has combined power and cogeneration gas demand down 8% to 5,500 Bcf in 2003 from 6,000 Bcf in 2002.”

EEA noted that NOAA’s recent forecast calls for above normal temperatures this summer, which would increase gas demand from power generators. However, the lackluster economy should offset any significant weather related increases. Lower than normal hydropower this year and difficulties with the nuclear fleet also could help boost gas demand from power generators, according to EEA. But the net impact of all these factors is expected to be flat gas demand from the power sector in 2003.

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