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Urban Myth: Bush to Help Houston

Fortnightly Magazine - July 15 2001

One of the primary objectives of the Bush administration's energy policy is to increase energy supplies, including the supply of electric generating capacity. Opponents of the Bush plan argue that his plan is nothing more than a scheme to fill the coffers of "Texas"-based companies who supported Bush's election. According to RDI's analysis of the plan as it relates to electric generating capacity, Bush is creating incentives that are not needed to ensure an adequate supply of generating capacity. Moreover, rather than enriching generating companies, the plan ultimately may induce significant oversupply in some regions of the country, resulting in low returns for the generating industry.

The Bush administration argues that the United States. will need as much as 393 gigawatts (GW) over the next 20 years. To meet this demand for capacity, the Bush administration has proposed to expedite permitting processes, provide tax credits and accelerated depreciation schedules for cogeneration projects, provide tax credits for new landfill methane projects and certain renewable generation technologies, and provide funding for clean coal and renewables research.

One reason that RDI does not believe that some of these policies are necessary is that the market already has responded to high electricity prices and is building new generating capacity without the added tax incentives. As of May 2001, there were 430 GW of actively proposed or operating new power plant projects in the United States. These proposals alone could meet all of the United States' generating capacity needs over the next 20 years. Of this 430 GW of proposed capacity, 116 GW already are operating or under construction. Another 53 GW of projects are in the advanced development stages, with construction likely to start soon. This year alone almost 47,000 MW of new capacity will be brought on-line. According to the Bush administration's math, that is one new plant every two days. Most importantly, it shows that generators respond to price signals and can provide the level of capacity additions needed in the U.S. without additional tax incentives.

Market Indicators

Rather than helping the power supply industry, as opponents of the plan claim, Bush's recommendations most likely will hurt the industry. The Report of the National Energy Policy Development Group notes that there may be opportunities to build as much as 100,000 MW of combined heat and power (cogen) projects. In large cogeneration projects, a power developer often is able to achieve effective heat rates 30 percent lower than the most efficient combined cycle power plants. If new cogeneration projects are given a tax advantage over existing, already built combined cycle plants, a new cogen may be able to earn a sufficient return on its capital by taking the market away from a newly built combined cycle plant. Thus, regions with oversupply and cogeneration opportunities ultimately could face even greater levels of oversupply due to such tax inducements.

So what is the likely outcome of the Bush administration's proposed