U.S. electricity generating capacity margins are likely to peak in 2003, but fall in subsequent years with the possibility of power shortages appearing as early as 2006, according to an analysis of electricity and natural gas supply and demand unveiled last Monday by an energy analyst with New York-based investment bank Williams Capital Group.

In his report, Williams Capital analyst Christopher Ellinghaus forecasts a 19.1% generating capacity margin for next year, which equates to a 65,000 MW surplus, enough to provide a comfortable cushion against brownouts and blackouts, particularly on hot summer days, when power consumption peaks. However, he warns that the margin is likely to drop in subsequent years and shortages could occur again as early as 2006.

The peak in electricity supply is the result of a surge in power plant construction that began in 1999 and has resulted in the addition of 80,000 MW of generating capacity so far, according to Ellinghaus. By the end of next year, the “vast majority” of 200,000 MW of new power plants being built over the 2000-2004 period should be complete, he added.

The surplus is also likely to keep power prices in check in the coming year. Spark spreads, the difference between the cost of natural gas used to produce electricity and the wholesale price at which it is sold, have weakened over the past year as a result of excess capacity, the weak economy and the collapse of energy commodity trading markets. They are likely to deteriorate somewhat further next year due to the additional capacity being brought on line, Ellinghaus noted.

Consequently, power market economics are likely to remain soft through 2003 and 2004, he said. However, they should begin to improve as capacity margins drop off beginning in 2004. In 2005 and 2006, those margins are likely to fall to the 12-15% range, levels at which power supply and demand are considered to be in equilibrium.

After 2005, however, peak capacity margins trend downward, falling below the equilibrium level, according to Ellinghaus. Power shortages and higher prices for electricity are likely to occur as a result.

Ellinghaus said that an economic recovery will see peak power demand growing at a 2.5% annual rate, which has been the historic trend. However, after the current power plant construction boom ends, the generating companies will be unable to keep up with future demand, the report states.

A number of factors, including limited supply of new natural gas, the need for new transmission and distribution facilities and reduced access to capital, will keep the industry capacity constrained. To bridge the gap between gas-fired generation and growth in demand, as much as 100,000 MW of coal-fired and/or nuclear power plants may have to be built by the end of the decade, Ellinghaus said.

©Copyright 2002 Intelligence Press Inc. Allrights reserved. The preceding news report may not be republishedor redistributed, in whole or in part, in any form, without priorwritten consent of Intelligence Press, Inc.