Consumers have a right to be wary of building new generation. After all, they were told in the mid 1990s that the nation was short power facilities and henceforth "agreed" to a massive build out. Everyone knows the punch line: Demand sank and so did a lot of unregulated generation companies that saw their stock and bond values rapidly tumble.
Now, five years after the worst of it, utilities are looking pretty good. A rebounding economy has driven up the demand for power and kept them cranking along. Their bottom lines, for the most part, are healthy. The offshoot is that the expected future demand for electricity and natural gas is expected to keep steadily rising and necessitate the building of new power generation.Today, neither lenders nor utilities will take risks unless the unregulated generation capacity is either fully contracted from the get-go or, in the case of regulated companies, the cost of construction and production can be passed through to customers. Regulators, meanwhile, are reluctant to dismiss rate cases if underlying commodity prices are jumping and affecting utilities' financial health. All this is occurring while the topic of global warming has come to dominate the national roundtable. That will have a profound effect on what types of generation get built.
"We made the mistake in the 1990s of overstating our needs," says Tony Earley, CEO of DTE Energy, at Edison Electric Institute's annual conference in Denver. "The public may think we want to make investments and then put them in the rate base."
That may be the perception of some consumers. But it is not the reality. According to the Energy Information Administration, the nation needs 50,000 megawatts by 2014 and 258,000 megawatts by 2030. That will cost about $412 billion. And that need comes atop a projected decline nationally in electricity reserve margins through 2015.
Obviously, those projections come in the wake of the 2003 Blackout -- one that cost the economy multi-millions in lost economic opportunity. The thinking among many of the utility execs who addressed Edison's conference was that industry could avert another colossal failure, but that the solution would be far less than ideal. Instead of building the needed base load generation that would be operational much of the time, they largely felt consumer groups and regulators would allow them to build a series of smaller plants.
Integrated Approach
Only Southern Co. expressed some degree of optimism. It uses an "integrated resource planning" model that relies on early and open dialogue with all stakeholders. Every three years it forecasts the demand for power in its service territory and what its future generation needs might be. The utility is therefore able to get preauthorized permission to build new plants.
The strategy works. "The southeast is the only area of the country where the reserves are actually increasing because we use an integrated approach," says CEO David Ratcliffe. "You need to certify how much and what you need. You can't presume when you get ready to file everyone will understand."
In Southern's case, it has built 35,700 megawatts of generation since 1988. Most of that has been combined cycle natural gas plants that are used during peak time periods when demand is highest. It is now trying to build a nuclear power plant as well as a demonstration integrated coal gasification facility by 2010. That plant would cleanse coal of its impurities before the emissions would go out the smokestack. Southern's tack involving integrated resource planning is the way to go, says John Rowe, CEO of Exelon Corp. And while the Southeast may be more conducive to building more generation, the challenge is more daunting in most of the rest of the country. The nation may need base load plants, he says. But the political reality is that there will be a lot of "ad hoc" solutions that will increase expenses.
Rowe accepts the premise that the industry will have to invest at least $400 billion in generation in the coming decades to meet future electricity demand and that all new plants will be in accordance with a carbon constrained economy. Such public policy would tend to push utilities to build renewable energy facilities, as well as nuclear ones that do not emit any greenhouse gases. But, he is quick to say that green energy is just one component of the whole discussion and that the country still has a ways to go before any utility will commit the billions needed to construct nuclear units.
The ultimate challenge, therefore, is to look at all available energy supplies and then to subsequently explain the constraints to regulators and consumers. Demand is going up and more generation is needed. At the same time, the country is backing strict pollution limits and specifically with regard to greenhouse gas emissions. If the nation intends to meet its power needs and do so in a way that is the most environmentally benign, it can expect its energy costs to rise as a result.
Will the country embrace these changes? "I am looking at the future and it doesn't work," says Exelon's Rowe. "It does not get us the kind of infrastructure we need."
That view is tempered by years of experience. But in recent times the nation has endured a wide-scale blackout along with potential threats of environmental devastation. Consequently, the nation appears to have softened and become open to new ideas.
To win the battle, it will take lots of investment in energy research and development along with the capital needed to build climate-friendly plants. Those choices include coal gasification, renewable and nuclear facilities that come at a premium today. The industry must henceforth work with stakeholders to build a groundswell of public and financial support. That, in turn, will lead to newer and more cost effective technologies, all of which will potentially spur the commercialization of cutting-edge projects.
More information is available from Energy Central:
Massive Build Ahead - Generation Shortage Looms - An Executive Summit,
EnergyBiz, Sept/Oct 2006
For more on this topic, visit the Energy Central
Generation Technologies Topic Center.
June 27, 2007
