The right price signals and eventual resulting technologicaladvances are going to be needed to stimulate the number of naturalgas-fired merchant power plants needed over the next 10 years tosatisfy the projected growth in energy requirements, according to aReliant Energy executive. However, actions on both coasts(California and New York) have cast doubts on whether sufficientincentives will fully develop.

“In California right now energy prices are too low to justifynew generation,” said John Stout, Reliant’s Houston-based vicepresident of asset commercialization. “To make a project work inCalifornia you need to establish some of these extra values[ancillary services].”

California regulators over the past two years have changed therules and that “causes a distortion in price signals,” Stout toldan industry audience at GasMart/Power 2000 in Denver earlier thisweek. Those changes, he noted, caused his company to pull backplans to add about 500 MW of ancillary services into the Californiamarket. In the meantime, New York regulators have asked FERC toeliminate ancillary services markets and penalize power plants thatmade money offering these services recently in their state.

Stout said he didn’t think that the recent increase of pricecaps from $250 to $750/MWh by the California independent systemoperator (Cal-ISO) will resolve what he sees as a major inhibitorto the development of new power plants. The combination of everchanging rules and the price caps, however, are just symptoms of amore fundamental problem that is national in scope, he said. Thatproblem is a misperception by state and federal regulators thatmerchant operators are exerting abusive market power.

He cited a recent federal DOE report and its characterization innational industry trade publications as an example of thismisperception. Rather than report the essence of the federal study,trade publications relied on the analyses of several economists whoused calculations of the marginal cost of power and so-called”opportunity costs” for generators to compare with actual costs ofpower in several states, such as California. Stout questioned theentire methodology, and said that the DOE report itself does notlead to the conclusion that merchant operators are exerting marketpower.

In California, for example, Stout said, no merchant operator haseven 10% of the power market. Therefore, by the economists’ owndefinition they cannot have undue market clout.

“The fact is that we’re not exerting market power in California,and we (the merchant generators) are not causing customers to payexorbitant prices,” Stout said.

Ultimately, the solution from both the customers’ and thegenerators’ perspective is for flatter electric load curves thatwill take the extreme peaks out of price volatility, said Stout,who predicts there will be a four-phase evolution in this directionmoving from the new generation units to a final phase in which whathe calls an “influx of demand elasticity technology” will bring indistributed generation as a viable segment of the industry. The keywill be new approaches by public policymakers to help facilitatethis last phase, he said.

“Public policy for decades in this country has had the effect ofdampening price signals needed to send the right signs todevelopers of technology that is needed to flatten and lower pricespikes,” Stout said. “Regulators and elected officials continue toinsulate customers from feeling price effects, and as long as theydo that, the last phase is not likely to occur.

“When it does occur, you will see a complete change. We will seethe share of the load curve flatten out, and spikes won’t happen.Eventually, price volatility will tend to die out.”

Technological changes will not be limited to generation, butwill include transmission and other areas impacting the overallproduction and delivery of power.

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