Competition and electric power generation

The electric power industry is in the process of being restructured as the traditional way of regulating the industry gives way to a regulatory mechanism that will enable competition to play a much more significant role, especially in the generation sector. The creation of a more competitive environment will impact incentives and the behavior of firms. It is argued herein that increased competition could induce firms to prolong the life of existing plants, operate existing plants at higher utilization rates, and adopt new technologies which increase the overall efficiency of electricity generation. In addition, deregulation of the generation sector will enable new entrants to effectively compete in generation markets. The significance of all this is that estimates of existing and projected generation capacity may understate U.S. electricity capabilities. In the near term, the electric power industry could find itself with a "bubble" of capacity. Any bubble will contribute to downward pressure on electricity prices.