The Economists: On the Future of Energy Markets

Deck: 

Uncertainty clouds direction of FERC’s market engineering.

Fortnightly Magazine - April 1 2002
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A boom-and-bust cycle has struck the electric power industry and economists are worried about its effect on industry restructuring. Many believe the latest boom period in power generation construction will now be followed by a period of insufficient generation capacity additions. If this prediction proves accurate, certain regions of the country could get hit with another generation capacity shortage in a couple of years, similar to the one that helped spark the price spikes and turmoil in California's electricity markets in 2000 and early 2001.

"The concern that should be on people's minds is whether we've set up a system that has an inevitable boom-bust cycle in it where we get these periods of demand growth, very tight markets and very high prices," says Paul Joskow, a Massachusetts Institute of Technology professor of economics and director of the MIT Center for Energy and Environmental Policy Research. "We see an over-investment in generation, so the market collapses. We then see companies going out of business and periods of no investment. I think that kind of a boom-bust cycle, as it emerges, is not going to be politically acceptable to many consumers and legislators."

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