The value of electric generating capacity has bottomed out, Energy Security Analysis Inc. (ESAI) concludes in its latest “CapacityWatch” report, a quarterly review of regional generation capacity markets.

“In some areas — notably New York and California — there is an immediate need to initiate new projects,” said Edward Krapels, ESAI’s Director of Energy Development Services. ” In these areas, new capacity will have to be ‘pulled in’ by clear signals from those in charge of the grids, which will be a varied lot, thanks to the allowance for regional diversity in FERC’s Wholesale Market Platform design.”

ESAI forecasts that generation assets in the future will be more strongly influenced that ever before by transmission policy. “Whether the RTOs with major load pockets (and that would be most of them outside the south) impose postage stamp or license plate transmission financing schemes is in the hands of FERC,” Krapels said. “If FERC approves the ISO-NE’s request to rate base the big ($600 million) Southwest Connecticut transmission project across all of New England, the postage stamp will be the favored mechanism for financing transmission and for relieving congestion, with huge implications for capacity values both inside and outside the load pockets.”

According to the report, New England will wrestle with overcapacity until 2010, though aggressive load growth would bring capacity in-line with reserve requirements by 2008-2009. Active discussions are taking place at the ISO Committee level regarding the possible implementation of a locational capacity market that would provide higher capacity payments to generators located in designated congestion areas. A locational market would provide additional revenue to critical load pocket generators.

Meanwhile, ESAI said that capacity in New York City will meet reserve margins until 2012. The capacity outlook for the rest of the state is somewhat tight, but with imports and demand side management, available capacity will exceed reserves until 2008. The capacity demand curve implemented by New York in May 2003 has established clearing prices in the capacity auctions and provides a more stable source of capacity revenues for generators, ESAI said.

As for PJM Interconnection, capacity additions will exceed reserve requirements in the region until at least 2010. Additional retirements, such as PSEG’s closing of a 245 MW unit at its Burlington, NJ generating station (see Power Market Today, Nov. 24), could shorten this time horizon. ESAI expects capacity market values under the current market design to remain under pressure until at least 2008.

Meanwhile, following the addition of 3,893 MW of new generation capacity in 2003, the outlook for new capacity hitting the California Independent System Operator grid in 2004 is bleak, with virtually no new generation coming on line. “Bankruptcies, environmental constraints, local opposition, and regulatory uncertainty have stalled new plant development.” ESAI projects a shortfall in capacity as early as 2006 unless there is a positive stimulus in the market that brings plants previously approved by the California Public Utility Commission back into active development.

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