Henwood forecasts low electric prices and high reserve margins near-term but rapidly rising expected prices mid-term

Oct. 15, 2002 — According to Henwood’s newest forecast report, “Midwest Electric & Gas Outlook: Gateway to Competition Under SMD,” the Midwest power market is characterized by a regional capacity overbuild, low prices, and the rapid evolution of the gigantic Midwest Independent System Operator (MISO).

The report provides Henwood’s perspective on these and other critical factors affecting the price formation process in the Midwest for the period 2002-2027.

“New construction by merchant plant developers has resulted in a systemic capacity overbuild for the region, but is not evenly distributed,” explained Mark Griffith, the study’s principal investigator. “In many markets there is sufficient capacity completed or under construction to meet the expected growth in demand for the balance of this decade. In other markets, there is a need for new capacity in just a few years.”

“Naturally, the capacity overbuild has led to low wholesale prices which are expected to persist for several years. This is good news for buyers and bad news for sellers. The reason is simple: there is too much supply relative to demand near term,” added Gary L. Hunt, Vice President of Consulting at Henwood. “However, wholesale prices are expected to rise rapidly mid term (2007-2012) as the excess is worked off.”

MISO is emerging as the leading provider for regional transmission service as required by the Federal Energy Regulatory Commission (FERC). Other regional entities such as Alliance, Crescent Moon, Mid Continent Area Power Pool (MAPP), and Southwest Power Pool (SPP) are becoming part of the MISO umbrella. MISO now faces the daunting task of organizing what will be the largest Regional Transmission Organization (RTO) in the U.S. while maintaining some level of equity among the participants.

The study’s other conclusions include: wholesale electricity prices in the Midwest will remain below equilibrium levels in the short term; these low prices will provide opportunities for buyers but be a source of financial stress for sellers; wholesale prices are expected to increase rapidly in the mid term as demand grows and reserve margins decline in the 2007-2012 time frame; price volatility is expected to remain a permanent fixture of competitive markets, creating risks for load serving entities and opportunities for traders and generators; and reserve margins will be high in most areas, although a few areas will need additional resources in the near term to meet reliability requirements.

The findings of Henwood’s Midwest study will be presented at a Power Market Advisory Service Workshop to be held October 22, 2002, in Carmel Indiana. Register for this workshop on line at www.henwoodenergy.com. For more information contact Mark Foster at 916-569-0985 or mfoster@henwoodenergy.com.

About Henwood:
Henwood offers power generators, marketers, and retailers integrated EnerPrise(TM) Software solutions, comprehensive market intelligence data and information, and strategic consulting services to meet the challenges of restructured energy markets throughout North America, AustralAsia, and Europe. For more information why all of the top 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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