California’s new feed-in tariff (FIT) is creating a burgeoning market for green energy investments, but the policy has sparked a fierce battle over state authority to dictate wholesale power...
West will go from its period of tight supply in 2000 to nearly 30 percent reserve margins by August. However, we don't expect this new capacity to further depress power prices because many of the new plant projects are being built by municipal utilities that want to ensure more reliable supply for their customers. As a result, much of this new generation is unlikely to be sold in the wholesale market.
IOUs Take Action
Investor-owned utilities are starting to get in on the action as well. Recently completed resource plans show several Western utilities building their own capacity. These projects are being justified by building in the right place in relation to transmission constraints, or by building more fuel diversity into their portfolio. These projects are likely to affect the market price on a long-term basis, but they will take several years to complete.
Variations in precipitation can have a significant impact on power markets in the WECC. In its long-term WECC planning forecast published in April 2004, Henwood assumed normal hydro conditions in all periods, starting in October 2004, based on average hydro generation from precipitation that occurred during the 1929 to 1978 historical period. For the period March 2004 through September 2004, the forecast also assumed that Pacific Northwest hydro would be at 92 percent of normal levels, and Northern California hydro would be at 109 percent of normal. Since April, recent runoff forecasts for the Pacific Northwest indicate that actual expected runoff will be lower. As of May 21, 2004, the runoff forecast has dropped to 74 percent of normal.
But hydro conditions are highly variable. While these lower hydro conditions can have upward pressure on prices, the impact is not expected to be as great this year as in 2000-2001, mostly as a result of the additional capacity that has been added since then. However because much of the capacity that has been added is gas-fired, power prices will be susceptible to higher gas prices. Overall, we could easily see higher prices in the Pacific Northwest-caused more by high gas prices than low hydro conditions.
Signs of Life
The WECC wholesale power markets appear to be emerging from their time in the wilderness. Signs of a lively market in the form of rising loads, high gas prices, delayed renewable energy projects, and a tight year for hydro collectively create better conditions for merchant generators. The new capacity brought on line in 2003 and 2004 likely will not drive down market prices but may well provide a measure of reliability to the market, possibly counteracting some of the usual price volatility seen in low hydro years. This is good news for the wholesale power business, and it signals that the industry is beginning to claw its way back from the near-death experience of the past few years.
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