Taking a different view on merchant development.
The Nov. 15 issue of included an article entitled...
a good year. Yet, total generating capacity will grow by over 20.6 percent, 2.5 times as fast as demand. The end result in the short-term is too much capacity chasing too little load, which will likely drive down electricity and capacity prices.
Mr. Mitnick also asserts that forecasts like RDI's are based on "outdated notions about reserve margins" and states that new power plants will be fine because they will dispatch before the older "clunkers" in their region. We agree with that. But, how will they do against the 10 other new combined-cycle plants in a 100-mile radius that are all competing for the same load and are all taking gas off the same pipeline? Therein lies the rub. That's the challenge that new power plant developers face. They don't have to beat the existing plants, in the short-run; they have to beat all the other plants that are basically exactly like theirs. We agree with Mr. Mitnick that the most successful developers will get through "the windows of opportunities as they open and before they shut." It's just that we're guessing many developers are wishing the windows weren't opening and shutting so fast these days.
It has happened many times in U.S. history-development booms and busts. It happened in the railroad industry, in commercial real estate, and most recently in the telecom industry. And electricity generators are not proving to be immune. Utilities saw their first development boom in the 1970s, when population and industrial growth were reaching their peaks and the need for reliable generating capacity was strong. While development tapered off in the 1980s and 1990s, the industry charged forward with a second construction boom in the first decade of the 2000s. In fact, generating capacity additions scheduled to come online from 2000 to 2003 are on pace to match generating capacity additions for all of the 1990s combined. RDI Consulting projects that-as a result of the current construction boom-almost 160,000 MW of new electric generating capacity will be added to the grid by the end of 2003. Over 73,000 MW has already been brought into service in 2000 and 2001.
RDI believes that many new plants will succeed and that there are opportunities for future development. The boom and bust cycle will repeat. While the first development wave is coming to an end, the next wave will begin in the latter part of this decade. To be successful in the generation marketplace, companies will have to have several characteristics. First, they must be low-cost producers focused on profit capture. Companies must be technologically savvy to maximize plant operations and must take full advantage of risk management tools. Most importantly, they will have to time their strategies for building, buying, or selling assets to correspond with cyclical trends.
Betsy Vaninetti is Senior Consultant with RDI Consulting, a unit of Platts, in Boulder, Colorado. Will Dailey and Steve Piper, also Senior Consultants with RDI, assisted in the development of this piece. Platts is the energy information, research, consulting and marketing services business of The McGraw-Hill Companies.
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