Don’t let the high wholesale power prices seen in U.S. merchant power markets last year fool you. Those high power prices “by no means imply that there is a shortage of generation capacity,” Standard & Poor’s (S&P) said in a report issued Thursday.

“In fact, all evidence points to just the opposite,” S&P said. The oversupply of generation capacity in most regions “continues to persist and the situation may have worsened over the course of 2003.”

S&P said that for 2003 record high wholesale power prices were the defining feature of the U.S. merchant power markets. Generation capacity based in coal, uranium and hydro benefited greatly from the high power prices, while generation based in oil and gas benefited much less because their fuel costs also rose sharply. Coal prices rose significantly last year, but the effect on coal generators “was probably minimal because most (85% or more) coal generators have locked up their coal supplies under long-term fixed-price contracts.”

According to S&P, power prices across the U.S. continent generally rose on the order of 50% or more in 2003. The increase is mainly attributable to an increase in gas prices. Eastern regions generally experienced record high or near-record high prices. Prices in the western regions were also the highest on record outside of the 2000-2001 California energy crisis. The Midwest had the biggest jump (82%), while Florida had the smallest increase.

S&P said that off-peak prices also rose about 50% across the U.S. in 2003 and set record highs along the way in most regions. “This pattern runs contrary to the general assumption that off-peak prices and gas prices are only weakly correlated.”

The Midwest had a whopping 113% jump in off-peak prices, while Texas recorded an 86% jump. Western regions were consistently 60% to 70% higher compared with 2002. Florida was the only exception, where the average off-peak price actually fell 2%.

Meanwhile, the ratings agency said that market heat rates — a key indicator of supply/demand balance of generation capacity — have consistently dropped in all regions, setting a new low for on-peak market heat rate across the country. S&P said that a mild summer could explain some of the decline in market heat rates, “but, since non-summer month heat rates also declined in 2003, the trend is therefore probably not solely weather-related.”

According to the forward market, the decline in market heat rates around the U.S. is expected to continue, “but slowing down significantly and certain regions may even see some improvements,” S&P added. “Compared with the forward market for 2003, 2004 market heat rates are expected to worsen somewhat for most of the U.S., except for the South and California, which are expected to improve.”

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