Benchmarks

Last winter, many Californians found out the hard way what happens when there's not enough generating capacity to meet demand. So as spring turned to summer, power companies in New York and the Midwest were readying themselves for the onslaught of hot weather and the possibility that they too would be pushing their capacity to the limits. However, power plant developers had already seen to it that power shortages would not be be a concern across the U.S. As things now stand, overbuilding is the real concern. RDI's most recent study, New Coal-Fired Generation: The Race Is On, takes a look at the nation's need for new generating capacity and evaluates coal's potential role in the mix. According to the study's projections, roughly 50 percent of the 296,000 MW of additional capacity required to meet demand between now and 2015 will be built by the end of 2003.

Of the capacity coming on-line in the 2001 to 2003 timeframe 97 percent is gas-fired capacity that is either already online, under construction, or in advanced stages of development. This building boom affects some regions of the country more than others. In Texas (ERCOT), for example, 64 percent of the capacity required by 2015 will be built by the end of 2003, but in Florida (FRCC) only 30 percent will be built by 2003. Regions in the Midwest (ECAR, MAIN, and SPP), West (WSCC), Southeast (SERC), and in the Northeast (NPCC) are also at risk for over-build situations.

The surge in generating capacity development can be attributed in part to the entrance of a new player into the energy market-the merchant developer. Traditionally, regulated utilities had little incentive to build excess capacity because they were only guaranteed a fixed rate of return. Building new generating capacity was more a function of system reliability than maximizing profitability. Merchant developers, encouraged by real or perceived capacity shortages and the lure of high wholesale electricity prices, have flooded the market with new generating capacity. This excess capacity, however, puts downward pressure on electricity prices and capacity prices (the firm reliability component of the generating revenue stream), which will likely make new plant construction less profitable.

Developers looking at building new coal projects will need to be particularly mindful of capacity additions occurring in the areas where they are looking to build, as gas-fired, combined-cycle capacity can be permitted and built much quicker. By the time a coal-fired unit goes from the drawing table to construction (about six to eight years on average), three gas combined-cycle units could have been built consecutively. And the glut of new gas-fired capacity that is currently being built is likely to depress prices and rationalize capacity development. As a result, RDI estimates that approximately 11,000 MW of the proposed coal capacity will be built nationwide between now and 2015, and most of that capacity will be added in the latter part of this decade and beyond.

New coal plants should fare well once they are brought on-line. Historically, coal-fired generation has been successful because it is one of the lowest cost forms of generation based on average power production costs-typically dispatching before gas-fired units in most regions of the country. Keeping costs low, particularly fuel costs, will be important to the success of new coal-fired generation. However, because the capital investment required to build a coal-fired plant is relatively high, developers need to be concerned that the revenue generated by these plants is enough to cover those costs and make an adequate return on their investment, especially given the uncertainty stemming from the length of construction time.

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