The consequences of exuberance are all around us.
Edward Krapels is director of Energy Security Analysis Inc. Mr. Krapels also discloses that he holds a financial interest in the Neptune electric transmission project between New Jersey and New York, which would be affected by FERCʼs regulatory policy for transmission lines.
Much of the 160 GW of new generation capacity added to the U.S. inventory since 1998 is now under water, economically speaking. At a per-megawatt cost of $300, this represents $50 billion of investment-much of which is concentrated in Texas (23 GW), Illinois (14 GW), and Georgia (11 GW). The key question for both merchant and other plant owners is how long it will take for plant values to recover.
Although the value of electric generating capacity has probably bottomed out, the pace and extent of any rebound must be assessed on a county-by-county level. Some areas face an immediate need to build; others have enough generation for the foreseeable future. New capacity will have to be pulled in by clear signals from those in charge of the grids, which will be a varied lot thanks to FERC's diverse treatment of regional wholesale markets.
Investors put $50 billion into new generating capacity because they expected that electricity restructuring would lead to the formation of a small number of effective, regional transmission organizations (RTOs), which would make the location of a generating facility less important in the future. Based on that assumption, developers placed many plants close to a source of fuel, not close to market. For many companies, that has turned out to be a fatal mistake.