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come on line, and analysts project that the national average reserve margin will peak at 37 percent in 2004. 3 The most recent reliability assessment from the North American Electric Reliability Council (NERC) finds that electricity demand is expected to grow 71 GW in the near term (by 2006), but that new resource additions of 159 to 263 GW are expected over the same time period. 4
But there are two important caveats concerning these high reserve margins. First, even with the widespread capacity overbuild nationally, there are concerns about adequate reserve margins in key regional markets. Regions such as New England and the PJM have succeeded in maintaining healthy reserve margins, but states such as California and New York have had far less success. New York continues to wrestle with how to convince developers to build sufficient reserve capacity, without imposing such strict penalties for failing to do so that developers will be discouraged from investing in the state. NERC's reliability assessment indicates that New York will not meet its 18 percent installed reserve margin requirement beyond 2004. 5 In May of 2003 the New York ISO (NYISO) called for the approval of 5,000 to 7,000 MW of new generating capacity in the next five years to maintain a reliable supply of electricity and keep prices competitive. NYISO President William Museler noted that "approximately 2,500 MW is under construction today but only another 1,000 is realistically on the horizon." 6
Second, since the recent capacity growth has come in the form of gas turbines used for peaking and intermediate loads, it is not clear that any glut exists in traditional baseload power sources. It likely will become necessary to rely on the new gas-fired capacity for a portion of baseload generation, a proposition that introduces, at a minimum, economic risk and in the worst case serious concerns about the reliability of supply.
Some analysts are concerned electric reserve margins could drop to dangerously low levels by the latter half of this decade if significant additional baseload capacity is not built. For instance, William Horton, research analyst for Platts Energy, says, "A continuing stream of new generating capacity is required to meet or exceed normal reserve margin requirements. … The country has enough generation for the near term, but … the abundance will be short-lived." 7
Thus, serious doubts remain regarding the effectiveness of deregulation in ensuring that adequate generating capacity is maintained. To guard against the strong possibility that competitive markets will fail to stimulate sufficient investment in generating capacity, the Federal Energy Regulatory Commission (FERC) has proposed a reserve adequacy requirement (RAR) within its standard market design (SMD) proposal, which it announced on July 31, 2002. 8 The RAR would mandate a 12 percent reserve margin in deregulated electricity markets across the country. (Many experts are skeptical, however, whether such requirements would actually be enforceable.)
Nevertheless, it appears likely that deregulation will continue, despite questions arising in the wake of the California energy crisis and now the Northeast blackout of Aug. 14, 2003. (The spread of retail competition nationally appears