Taking a different view on merchant development.

The Nov. 15 issue of included an article entitled "Power Shortages? Fuhgeddaboutit!" The article, by Betsy S. Vaninetti of RDI Consulting, projects a glut of generation capacity in the United States. "As things now stand, overbuilding is the real concern," Vaninetti wrote.

Later in the article, the author explains: "Merchant developers, encouraged by real or perceived capacity shortages and the lure of high wholesale electricity prices, have the market with new generating capacity. This , however, puts downward pressure on electricity prices and capacity prices ... which will likely make new plant construction less profitable." She adds: "And the of new gas-fired capacity that is currently being built is likely to depress prices and rationalize capacity development." [Emphasis added]

This conclusion, and the basis for it, is fundamentally flawed. A glut is unlikely. The misleading analytic basis rests upon outdated notions about reserve margins and, using the author's words, "capacity required."

Merchant plant development is primarily driven by the battle for market share. Efficient new combined-cycle plants are beginning to take market share from the "clunkers"-highly inefficient units that are long past their prime. Even before their owners relent and take the final step of retirement, the clunkers run less and less. No point sacrificing quarterly earnings on a unit that, despite its many years of loyal service and a good fuel contract to boot, is a loser on a multi-hour block basis. For example, as of the writing of this article, NiSource announced it is retiring the DH Mitchell station. NiSource wisely recognizes that DH Mitchell is a loser in the battle for market share. DH Mitchell 6 has held 84th place on the "Top 100 Clunkers," a highly inefficient cohort tracked by Energy Leader Consulting (more on this list below). This single-cycle gas steam unit was online 82 percent of the time, with a 72 percent capacity factor off-peak, during the 91 weeks ending Sept. 30, 2001, despite an actual hourly gross heat rate averaging 11,984 btu/kWh. Yes, gross.

The efficient new plants profit whether the reserve margin calculation, a holdover from integrated resource-planning days, comes out to 10 or 20 percent, and whether annual demand growth is 1 or 2 percent.

Other factors work against the credibility of the glut forecast. The broad pullback in plant development plans since the Sept. 11 attack is one factor. Counting up the announcements of new plants (even those "under construction"), particularly now, vastly overestimates the amount of capacity that will materialize.

Another factor works hand-in-hand. Vaninetti notes how quickly combined-cycle plants are permitted and built. Well, these projects can be shelved quickly, too. The upshot is merchant plant development ramps up and down fairly well now in accordance with the market.

Figure 1 shows the market share of highly inefficient units in the 21 generation markets in the continental United States. The table summarizes the actual operations of 2,672 fossil fuel units during the last week of September 2001, and the comparable week a year earlier.

The week of Sept. 24 to 30, 2001 is