New Henwood study expects southeast power prices to remain low near-term but rise rapidly after 2006 as reserve margins decline

SACRAMENTO, Calif., Nov. 13, 2002 — In a new study released recently, Henwood’s Southeast Strategic Advisory Service examines the potential effects of FERC’s Standard Market Design (SMD) on deregulation issues throughout the Southeastern U.S.

Three RTOs have been proposed for the Southeast: SeTrans, GridFlorida, and GridSouth, while FERC would prefer a single RTO. At the same time, the southeastern stakeholders are going slow and guarding their markets and relatively low retail electricity prices from competitive influences outside the region, concerned that the creation of any RTO would not necessarily be in their best interest.

“Opponents of FERC’s standard market design are concerned about turning over control of transmission assets, and negative implications of introducing locational marginal pricing (LMP),” explained Gary L. Hunt, V.P. of Henwood’s Strategic Consulting Services.

Henwood’s newest study of southeast wholesale electricity prices and how they are formed takes a close look at the changing power market fundamentals in this important region. The report examines how regional overbuilding, low wholesale prices near-term, and pressure to change its market rules are all impacting the southeast market, including both electricity and gas prices.

“The Southeast Power Markets have often been the holdouts in the process of change,” explained Hunt. “The Southeast resisted retail electric competition and thus dodged the problems experienced in California and elsewhere. On the wholesale side of the electric power business, the South resisted merchant generators as long as it could but has seen substantial new construction by merchant plant developers, and some electric utilities responded to merchants by building themselves. This has resulted in a systemic capacity overbuild for the region.”

“Most areas within the Southeast have adequate reserve margins through 2010, but some areas may need additional peaking capacity as early as 2004,” explained Mark Griffith, the study’s principal investigator. “Portions of SERC still have low reserve margins and technically require additional capacity to meet reserve margin targets. Associated Electric and Virginia Power require in total 2,450 MW by 2005 to meet planning reserve margins.”

Overall, the study concludes that high reserve margins and the dominance of coal-fired and other baseload generation in the Southeast will keep power prices low. Henwood expects prices to rise rapidly after 2006 as the markets move toward equilibrium pricing, but do not reach levels to support merchant generation solely from the spot energy markets until after 2010. Prices could rise earlier if loads increase moderately such as from a prolonged weather event, old coal or nuclear capacity retirements, or a more rapid market evolution.

About Henwood: Henwood offers power generators, marketers, and retailers integrated EnerPriseà¢â€ž- Software solutions, comprehensive market intelligence data and information, and strategic consulting services to meet the challenges of restructured energy markets throughout North America, Asia, Australia and Europe. For more information why the top utilities and power generators rely on Henwood business solutions, call Chris Farrell at 916/569-0985, (e-mail cfarrell@henwoodenergy.com) or visit www.henwoodenergy.com.

Source: Henwood

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