BOULDER, Colo.—Electric power shortages and high prices in many areas of the country have put the electric power industry in the public spotlight and sparked demands for re-regulation of the industry. A new study released by RDI Consulting, a division of Financial Times Energy, predicts that these price spikes will be temporary and that as early as next year some regions could be facing a glut of oversupply in the wholesale electricity market.

“Identifying the Booms and Busts: An Assessment of Cyclical Trends in the U.S. Power Supply Business,” offers a carefully structured analysis of the electricity supply and demand balance, identifying the key sources of uncertainty and using quantitative tools to assess the impact of these uncertainties.

Poised for Overcapacity

Chris Seiple, director of RDI’s consulting practice, says, “In just two years, more capacity will have been added to the U.S. grid than was added during all of the 1990s-possibly as much as 75,000 MW. More than 290,000 MW of capacity has been proposed.”

In regions such as Texas and the Northeast, additions will increase supply by at least 25 percent against an estimated demand growth of less than 5 percent. Due to transmission constraints that will hinder moving the output of the new power plants to other regions, oversupply conditions are likely to prevail for some time in the systems where capacity is added. Oversupply will directly translate into lower prices for consumers, but generators will also have to bear lower returns on their new investments.

Deregulate It and They Will Build

Some policy makers and customer advocates initially expressed concern that no one would be willing to build new capacity in a deregulated market. The study debunks that myth, revealing that despite regulatory hurdles and environmental permitting difficulties-and irrespective of the existence or absence of independent system operators-developers are responding to shortages by building new capacity. The only market that runs a serious risk of encountering electricity shortages in 2001 is Florida.

A few U.S. markets, such as the Southeast, the Mid-Atlantic states, the Upper Midwest, and the West, may lag behind, but the study shows that the necessary development will likely happen in time for next year’s peak demand. Most other regions will be experiencing oversupply conditions early in 2001. Dr. Arnold Leitner, co-author of the study, says, “Investors, not policy makers, should be the ones worrying-about their returns in face of coming oversupply. Policy makers just need to ensure that the power plant development process is as easy, quick, and as fair as possible.”

Extreme Volatility

The study also highlights the fact that slight changes in the supply/demand balance can cause large changes in prices. Markets with a 2 percent capacity shortfall have experienced significant price spikes, but regions with a 2 percent surplus have seen very low electricity prices. The study predicts that most regions of the country will enter surplus capacity conditions over the next two years. However, as surplus capacity is absorbed by demand growth over the next decade, extreme price spikes will likely return. There is one unknown that could reduce the threat of extreme price spikes-if customers begin to develop demand that can be curtailed during peak hours, price spikes could be diminished. Development of such demand should be an important policy imperative.