Are developers building more power generation capacity than U.S. markets can bear?
NEWGen, a new database from RDI Consulting, reveals that U.S. developers and utilities propose 180,000 megawatts of new capacity nationwide. Of this amount, 10,000 MW is in operation. An additional 11,000 MW has been postponed indefinitely or canceled. That leaves 159,000 MW of competing projects in a market that most likely can absorb only 15,000 to 17,000 MW of additions per year.
As has been widely discussed, nearly 50 percent of all development activity is concentrated in the western United States, Texas and the Northeast. Only 10 percent of all proposed projects in the West, however, are in operation or under construction. Developers are having much more success in Texas, where 41 percent of all proposed capacity has moved off the drawing board and into the ground.
Of course, "success" in getting through the development stage does not guarantee success in generating markets. In both Texas and New England, current capacity additions far outstrip demand. In Texas, the amount of new capacity either online or under construction totals about 20 percent of today's demand for electricity. In New England, online or in-construction capacity totals 22 percent of current peak demand. RDI expects that reserve margins in New England and Texas could reach 35 percent by 2001 - even assuming a decline in development activity.
Such excess capacity in New England indicates a significant possibility that prices will never reach the levels needed to provide investors with an adequate return. However, according to NEWGen, developers and their investors are not necessarily the parties facing price risk.