Benchmarks
Are Electricity Capacity Margins Really Growing?
New England's experience may redefine the term.
April 2004
By Tom Wood, Ph.D.
During the 1990s, capacity margins in the United States declined almost one third, falling from 21 percent in 1991 to less than 15 percent in 2001. In some regions, margins shrunk to less than 10 percent. Concerns grew over electricity reliability and possible upward pressures on electricity prices. However, as new gas-fired power plants began to come on line in the late 1990s, the developing electricity generation capacity surplus began to raise concerns.
The U.S. capacity margin growth of 2002 should have eased upward pressures on electricity prices. However, electricity prices surged in many areas, such as New England, where surplus electricity capacity has developed.
This suggests that the standard definition of capacity margin may not be appropriate in the context of current market realities.
The improvement in capacity margins in 2002 reflected the large additions of new gas-fired electricity capacity. In 2002, U.S. central station capacity increased by almost 60 GWe; 95 percent of this new capacity was gas-fired. By 2007, 47 percent of U.S. central station electricity generating capacity will be able to use gas as its primary or alternative fuel.
The surge in gas-fired capacity since the mid-1990s has been accompanied by a growing concern about the availability of natural gas. Competition over scarce gas supplies has led to significant gas price surges and has introduced the term "demand destruction" into the gas industry vocabulary. Most analysts contend that North American gas production is currently at maximum capacity. In this world, gas sales to a new power plant will generally occur by displacing another customer.
Given the uncertainty about gas supply, can new gas-fired capacity be considered any more available to supply electricity demand than a coal-fired plant with no coal? Factoring in gas availability considerations suggests that a surplus of electricity generation capacity may not have developed. In fact, effective capacity margins may be declining, despite the large growth in gas-fired capacity.
Figure 1 presents the historical and expected trend in capacity margins for the lower-48 states from the Energy Information Administration's Electricity Annual 2002. Two scenarios for effective capacity margins also are presented. The first is based on expectations that North American gas deliverability peaked in 2001 and will not grow until new liquefied natural gas terminals are opened (expected by 2007). In this scenario, because of the lack of incremental gas availability on a national scale, continued expansion of gas-fired capacity can add little or nothing to the capacity margin without driving off other customers. The second scenario is based on an optimistic expectation that gas deliverability can be kept about 2-3 bcf/d higher than gas deliverability in 2001, thus allowing the new gas-fired capacity added in 2001 to be fully available. Both of the scenarios suggest that upward pressures on electricity prices are the result of the downward trend in effective capacity margins.
Contat Tom Woods at tomwoods@platts.com, or 720-548-5635.
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