[BETA] Fortnightly

RDI research finds that if you deregulate it, they will build.

Electric power shortages and high prices in many areas of the country have put the industry in the public spotlight, and sparked demands for re-regulation of the industry. However, our research indicates that these price spikes and shortages will be temporary, and that as early as next year, some regions could face a glut of oversupply in the wholesale electricity market.

In just two years-2000 and 2001-we expect more new capacity will have been added to the U.S. grid than was added during all of the 1990s-as much as 75,000 megawatts. More than 290,000 MW of capacity has been proposed. In regions such as Texas and the Northeast, additions will increase supply by at least 25 percent against an estimated demand growth of less than 5 percent. Due to transmission constraints that will hinder moving the output of the new power plants to other regions, oversupply conditions are likely to prevail for some time in regions like Texas and the Northeast. Oversupply will translate directly into lower prices for consumers, but generators also will have to bear lower returns on their new investments.

The table, "Forecast of Market Conditions," summarizes our findings for each NERC region. Bust regions are assumed to have 5 percent more capacity than needed, and boom regions are assumed to have at least 1 percent less capacity than needed.

We draw two important policy implications from our research. First, developers, power marketers, and capital markets have responded to power shortage conditions and rapidly are building new plants that will provide a reliable supply of electricity. New power plants are being built in markets with regulated reserve requirements-like NEPOOL-and in markets with no reserve requirements-like Texas and Western states. They are being built in regions with independent system operators, or ISOs, and in regions without ISOs. New power plants are even being built in markets with significant regulatory risk-like California-or significant permitting and environmental hurdles-like the Northeast. Our analysis indicates that developers should worry more about their investment returns than regulators should worry that plants will not be built in a deregulated market. Policymakers just need to ensure that the power plant development process is as easy, quick, and fair as possible.

Second, even though we expect most regions of the country will soon head into a period of low electricity prices, someday in the not too distant future, boom conditions will return to the market. Our analysis indicates that slight changes in the supply-demand balance can cause large changes in electricity prices. Markets with a 2 percent capacity shortfall have experienced significant price spikes, but regions with a 2 percent surplus have experienced low electricity prices. There is one unknown that could reduce the threat of extreme price spikes: If customers begin to develop demand that can be curtailed during peak hours, price spikes could be diminished. Development of such demand therefore should be a policy imperative.

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