FERC's Market-Power Test:
Why a new market-power screen-accounting for the relationship between customers and suppliers in the wholesale...
The industry has moved beyond the debate.
Steve Mitnick's response ("Overbuilding? Fuhgeddaboutit!", , Jan. 15) to my Nov. 15 article extended the great industry debate over whether the recent power plant construction boom would result in near-term over-supply. The only problem is, the industry has moved on. The debate is over, at least in the near-term. Even taking into account the recent acceleration of cancellation notices, most markets will face some level of excess capacity as a result of the current power plant construction boom. That does not mean that new plant developers are doomed. It just means it's going to be harder going than they had hoped.
Mr. Mitnick's response had two themes. First, he claimed that forecasts of over-supply (like RDI's) fail to take into account developer's ability to respond to forecasts and cancel projects. Second, he points out that new plants will likely chase older, less-efficient capacity from the market. But, RDI's forecast takes both of these dynamics into account.
In our recent study, , a study providing wholesale power market forecasts for each region in the country, RDI projects significant oversupply in many regions even though we assume that less than half of all announced capacity additions will be brought on-line. Less than half. While in recent weeks, cancellation notices have accelerated, there are enough projects currently under construction-meaning they've already broken ground-to ensure some period of over-supply in regions like the Midwest, Texas, and New England. Those projects are moving forward. Other regions may have more flexibility to avoid over-supply if cancellations continue to mount, but as of this writing, projects slated to begin construction in 2002 are by and large still on.
Included in RDI's forecast is the assumption that over 18,000 MW will be retired or pulled into long-term standby as a result of the construction boom. So, we've taken into account the signs that Mr. Mitnick's "clunkers" should be replaced. Problem is, the retirements really aren't happening yet. He cites one anecdotal example of a utility deciding to retire one of its plants. But, by and large, that trend has not taken hold. We've got a long way to go before the market retires 18,000 MW.
Mr. Mitnick also operates under the assumption that "merchant plant development ramps up and down fairly well now in accordance with the market." If so, wholesale power markets will be the first commodity market to not be plagued by boom and bust cycles.
Contrary to Mr. Mitnick's assertions, developers haven't been particularly nimble in ramping up and ramping back project development. Developers make decisions based on market signals-price signals in particular. There are often lags between market events and prices changes. Also, there's imperfect information regarding new supplies coming to market. One developer often doesn't know he is building into a market facing over-supply until it's too late. RDI believes this recent boom in development will have repercussions in the power markets in the near term, based on simple supply-demand economics. Demand for electricity between 2000 and 2003 will likely grow at somewhere around 2 percent annually-in