Building Boom Powers Pricing Roller Coaster

"It is not virtually certain that in 2001 and 2002 more generating capacity will be added to U.S. [electrical] grids than was added during the entire decade of the 1990s," conclude the authors of Outlook for Power in North America, an annual survey from RDI Consulting, Munhall, Pa.

The report also states:

• 95% of capacity additions between 2001 and 2005 will be gas-fired.
• 52% of current electric output is fueled by coal.
• 50% of all capacity that is projected to be needed by the end of 2013 will be commissioned by 2005.
• While natural gas is plentiful, there are key uncertainties regarding future deliverability from wellhead to burner tip.
• 68% of the power plant additions forecast to take place between 2001 and 2005 are already operating or under construction.

According to the report, more than 70,000 megawatts of new power will be generated by projects that were announced between August and October of 2001. Moreover, more than 40% of the additions set to come online between 2001 and the summer of 2003 will be in the Midwest and Southeast, with only 15% for the desert Southwest and California.

The upshot is that lower prices are likely, with a possibly problematic reliance on natural gas suppliers, according to the report. "Pricing cycles are likely to be much more pronounced. Prolonged periods of relatively low wholesale prices will likely result in a chilling effect on power plant investment. After the current wave of construction ends, capacity additions will plateau and remain flat for several years, until shortages occur and lead to price spikes."

In sum, the report argues that both in power-plant construction and electricity pricing, the United States is set for boom-and-bust cycles.

From Pure Power, Spring 2002.