The generating capacity boom may have crash landed, but energy markets should begin to renew their interest in building as soon as 2007, according to a report by Energy Security Analysis Inc. (ESAI). However, the Wakefield MA-based analysts said actual market conditions to support cash flow needs for new generators may not return until 2009.

The residual effects of the “boom era in generation” are continuing, with the last of the generating facilities developed yet to come on line, ESAI noted. However, as the market struggles with the “overhang of excess capacity,” the three Northeast power pools are looking ahead to meet future reserve margins, said ESAI in the latest issue of the Northeast Energy Watch Quarterly.

“PJM energy and capacity prices are inadequate to meet the cash flow needs of recent combined-cycle gas-fired start-ups,” said Paul Flemming, ESAI senior analyst. “With modest retirements, PJM may not require new capacity to meet reserve requirements until 2011, and as such, starting a new investment cycle somewhere in the 2007-2009 time frame would be adequate to meet needs in 2011.”

With the completion of the generation cycle in New England, ESAI is forecasting market-implied heat rates to bottom out in 2004/2005 and then begin a recovery stage.

“Transmission enhancements in the NEMA [Northeast Massachusetts] and SWCT [Southwest Connecticut] load pockets will allow the retirement of inefficient capacity that is currently under reliability must run contracts, and this will bring about a change in pricing structures favorable for consumers,” says Flemming.

According to ESAI, new investments in generating capacity will be required by 2010. New York energy markets did not experience the same generation investment boom as PJM and New England, and while ESAI said significant capacity additions from 2004-2007 will keep implied heat rates from expanding much in the near term, beyond 2007, prices and heat rates are “moderately bullish.”

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