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Record power demand points to supply need
The nationwide heat wave last week and new peak demand records for air conditioning power mean the U.S. grid should be adding more generating plants and beefing up reserve supplies to handle emergencies, analysts say.
"The price signal from the markets is there is an incentive to add more plants to handle the generating peaks. We need to have some extra reserve plants," said Peter Hartley, professor of economics at Rice University in Houston.
Power companies such as NRG Energy (NYSE:NRG - news), Mirant Inc. (NYSE:MIR - news) and Exelon Corp. (NYSE:EXC - news) are in position to gain from a push for more generation, analysts said.
Power markets must maintain reserve supplies of electricity beyond forecast peaks in order to prevent blackouts like the ones in California in 2000-2001 when the state did not have the power to keep up with demand.
Electricity grids in California, Texas, the Midwest, the Mid-Atlantic, New York and New England set all-time record peaks during the week as consumers cranked up their air conditioners.
California grid managers appealed to consumers to conserve power and directed energy companies to cancel maintenance work at their plants and on power lines to keep megawatts moving to customers.
With temperatures hitting 113 degrees in Palm Springs, 103 in Sacramento and 83 in usually cool San Francisco, the state grid set a new demand record on Friday, its second for the week, and was expected to be even busier on Monday.
Soaring temperatures were behind the new peaks, but "the results are still noteworthy in that last year's peaks benefited from a hot summer, implying that the increase is more reflective of economic growth," Merrill Lynch analyst Elizabeth Parrella said in a research report.
"In most regions, the new peaks exceeded the projected 2006 peaks by a noticeable amount," Parrella said.
The Pennsylvania-New Jersey-Maryland power region, or PJM, showed the biggest jump, with electricity demand at the start of the week topping forecasts by 4.7 percent.
The increase was the equivalent of 8 to 10 new coal plants and meant that reserve margins would have narrowed to 17.7 percent from 23.2 percent projected for this summer, Parrella said.
TIGHTER MARKET
"Even normalizing for weather, these results would imply that PJM is becoming a tighter power market earlier then expected," she said.
"This is the time when you put everything you have onto the grid, not only the most efficient natural gas units but peakers, everything," Danielle Seitz, analyst at Dahlman Rose & Co., said, referring to smaller generating units that supply power only during hours of high demand.
Merchant power producers Mirant, NRG Energy and utility Exelon are well positioned in the Eastern markets for growing demand, and Calpine Corp. (Other OTC:CPNLQ - news), which is working through bankruptcy proceedings, should be getting a strong summer boost from its California plants, Seitz said.
NRG Energy -- with generating plants in New England, New York, Mid-Atlantic, Texas and the West -- "is the best pure play in the generation sector," Parrella said.
The company operates nearly 23,000 megawatts of generation, plans to build 10,500 megawatts of additional capacity by 2015, and is eyeing expansion in the PJM region.
Added generating capacity would boost the reserve cushion, but Hartley at Rice University said consumers also could be encouraged to trim energy use in peak hours.
"What we need is smart metering which allows people to sign up with electricity providers to switch power use to off-peak hours and get reduced rates," he said.
"Send a price signal to consumers to conserve and that can free up more power for the peaks," he said.
California utility regulators last week approved a plan by PG&E Corp.'s (NYSE:PCG - news) Pacific Gas & Electric unit to equip its 9.3 million customers with new "smart meters," the largest program of its kind in the country.
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