Slide 6 of 33
Notes:
One of the more difficult aspects of this study has to do with the question of how much new generation is likely to be brought on line over the next few years in response to market forces. We are in a new world. Generation is now largely being built by independent developers. They do not have captive customers to, in a sense, absorb much of the risk of building new generation. Now developers need to be able to cover their costs and make a profit at market prices.
Capturing the decision process of developers is very difficult if not impossible. We have used a commercial model, Aurora, to estimate new market-driven generation. What that analysis suggests is, first of all, even if the market would support it, the lead times for plant construction are such that new generation could not come on line before 2002 at the earliest.
Beyond that, the model suggests that there will be substantial new development taking place beginning in 2004. But it is not enough nor soon enough to deal with the kind of infrequent, relatively short duration supply problems this study sees.
We are not 100 percent confident in our results. It may be that very high prices during periods of short supply could incent more development than our analysis suggests. Or the market for ancillary services may have an effect we are not capturing. There is the possibility of paying for new capacity to be built for reliability purposes, however at the risk of distorting the market. These questions need further analysis.
