Soaring power demand records far in excess of what was projected this year in many regions should be a wake up call that a new power market crisis could be developing right under our noses, according to a white paper from Pace Global Energy Services, a Fairfax, VA-based energy services and consulting firm.

The paper, which developed out of a panel discussion at the Edison Electric Institute’s (EEI) 2006 Annual Convention, points to declining power generation reserves, particularly in several major metropolitan areas in the eastern PJM Interconnection, California, parts of New England, New York and Florida.

“The ‘boom’ in construction of gas-fired generation between 1995 and 2001 provided a sizeable capacity cushion; however that cushion will be eroded in many regions withing typical planning and development horizons,” Pace said. “Recent events in California provide a warning: despite thousands of megawatts of generating capacity added in response to the crisis several years ago, California load has grown so dramatically — and so unexpectedly — that rolling blackouts are again being contemplated this summer.”

Pace said despite the apparent adequacy of generation capacity in regions as a whole, there may be subregions where reliability already is a concern. Some regions that rely on unregulated generation already are having problems providing the economic mechanisms that would support new generation construction. In addition, high fuel prices are taking a toll even in areas with adequate capacity. Meanwhile, growing demand has led to a surge in coal-fired generation usage despite environmental concerns.

Mike Niggli, president of Sempra Generation, warned the EEI convention that the U.S. is headed for another “California-like” energy crisis. Mirant CEO Ed Muller supported that conclusion and said the crisis might begin in the nation’s capitol and could be just around the corner (by 2010) because of growing demand and stagnant sub-regional capacity.

It was only a few years ago that independent power producers (IPP) were announcing dozens of new gas-fired power plants on a monthly basis. More than 200 GW of primarily gas-fired generation was initiated between 1995 and 2001 and was online by 2005. Many of these plants were merchant plants unsupported by long-term agreements. This boom period was soon followed by a bust between 2001 and 2005 in which little or no new generation was planned because of overcapacity. Financial distress of many IPPs followed, and the capital markets lost interest in the generation sector. In the meantime, natural gas prices tripled, resulting in much higher power prices despite the overbuild.

The bust period already has resulted in declining reserve margins in some sub-regions, according to Pace. “In some of our most important business and population centers, demand growth will soon reduce sub-regional effective reserve margins to potentially alarming levels. The time to act is drawing near.”

Pace estimates that the U.S. will need 130 GW of new generation over the next decade. By 2030, the U.S. could need 350 GW or more. On average that means 15 GW per year for the next 25 years.

History has shown that level of construction is possible. An average of 20 GW per year was added between 1995 and 2005. Most of that, however, was gas-fired generation, which can be installed quickly. “Additions of coal and certainly nuclear capacity at this pace will be more challenging,” Pace noted.

The Energy Policy Act of 2005 provided a number of tax incentives that are expected to accelerate generation development. Nevertheless, recent plans indicate that the industry is not keeping the pace required given the demand growth taking place. According to the North American Electric Reliability Council, generation resources rose 1.4% over last year despite an expected 2.2% increase in weather-normalized demand. “Over several years, that difference will create a material change in capacity adequacy, recognizing that year-to-year weather differences may mitigate or exacerbate the effect.”

For more from the Pace white paper go to https://www.paceglobal.com.

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