Looking Ahead at the U.S. Power Market

Abstract

Given current demand, new build activity, and projected reserve margins, the authors forecast an overbuilt domestic power market for several years. The degree of overbuild may be more severe than what was projected in 2000 or 2001 due to the aggressiveness of developers seeking first-mover advantages but is not expected to be as severe as may be indicated by current forward prices. The authors believe the markets have over-corrected according to identifiable fundamentals including weather; California and Enron impacts on trading and market volatility; the lack of deregulation that has reduced the amount of “at- risk” market participants; and severe price volatility in 1998 and 1999, which has made many buyers over-hedge their purchases to avoid the spot market during peak periods. Overall, due to the dynamics of spot versus contract purchasing, even in the midst of the overbuild, many markets could realize a price run-up, particularly with an expected high level of buyers in the spot market.