By Ann de Rouffignac
HOUSTON, Oct. 25, 2001 — Texas wholesale electricity prices are entering the ‘bust’ phase of a classic boom and bust cycle associated with most commodities, electricity analyst George Given predicted Thursday.
Given, a power market analyst with Henwood Energy Services Inc., Sacramento, Calif., cautioned market participants not to ignore the lessons of other commodity markets such as natural gas. He spoke at the monthly meeting of the Gulf Coast Power Association.
Within the Electric Reliability Council of Texas, Given said he expected consolidation and mergers to occur among power plant developers that are beginning to feel stressed as a period of overbuild wears on.
Even though load declined 5-6% this year compared to last, there are 11,000 Mw of new plants under construction or in some stage of development, Given said. Since 1998, 11,200 Mw have already come on line, giving rise to the overbuilt situation.
“Some of these developers are looking at ways to convince bankers that they will be able to hold on. They are talking about selling ancillary services and arranging purchased power agreements to help manage risk through this period of overbuild,” he said.
During the time of capacity surplus, market demand in ERCOT can be satisfied with low heat rate power plants, he said. Gas steam plants with very high heat rates won’t be operated because of the capacity build up. Given said this implies the most efficient gas-fired combined cycle, low heat-rate plants will be the survivors.
The glut will, however, is expected to flatten prices. “We see prices very flat near-term at about $30/Mw-hr,” he said.
“This implies that it is better to be short generation and contract for power,” Given said. He cautioned market participants to note his analysis covered a single power region without regard for constraints in transmission.
“We didn’t look at markets with constraints,” he said. “Summer prices could become quite ‘peaky’.” Given observed transmission congestion costs soared in ERCOT in mid-August during a relatively mild summer. Presently, congestion costs are divided among all participants who schedule load in ERCOT.
Soon, however, electricity users that are directly affected by the congestion will become responsible for congestion costs. Congestion occurs when the number of electricity transactions exceeds transmission capacity.
“What happens when we really have hot weather?” he asked. “If we had had some really hot days, I can’t imagine what this would have done. It could have been a disaster,” said Given.