Wholesale Power Supplies Struggle To Match Demand

April 17, 2002
Bottom Line Energy Issues - April 2002 - Part 3
V.P. Dick Cheney estimated the need for new power plants at “more than one new plant per week, every week, for 20 years running.” Merchant generators, the people who own and operate such plants for wholesale marketing to utilities, jumped right in and, as a result, about 100 new plants will come on line this year providing about 57,000 megawatts, enough to run 57 million average homes. Last year, 45,000 megawatts came on line. Two of the largest merchant plant owners account for nearly half of them. Duke Energy will open 11 new plants in seven states and Calpine will open 27 new plants this year and next. “There is enough to create a serious oversupply,” observed consultant Will Dailey at Platts/RDI Consulting. No kidding. Although demand will grow about 1.4 percent annually according to the Energy Information Administration, this sudden bulge in power supply poses interesting challenges and make take years to catch up to demand. But, it is more complicated than that.Power prices per megawatt in California have fallen to $28.75, down 54 percent since last year. That chafes Gov. Gray Davis, who is paying twice that much for power under long-term contracts negotiated at the height of his state crisis last year. Wholesale prices are down 6 percent in the Midwest and 22 percent in the Southwest. The wholesale price dropped to $18.05 in Texas, prompting cancellation of 16 plants out of 22 planned. But 17 plants under construction will be completed. Existing construction will give Texas a reserve of 22%, comfortably above the usual margin of 15% over summer peak demand. The prospect of a future drop in reserves caused warnings from consumer groups that the days of Texas surpluses may be numbered. PUC spokesman, Terry Hadley said, “We’re definitely going to study the issue more, and we may write rules requiring a certain amount of generating surplus.”There are two or more problems with this picture. One is summed up by Janee Briesemeister of the SW Consumers Union. She says, “The free market isn’t the best vehicle for allocating resources for electrical generation.”Another way of saying it is that under deregulation the supply and demand for power is not as easily balanced as it was under state-controlled monopolies. Under those conditions utilities built power plants for use in their own systems and forecasting load growth was somewhat, if not perfectly, reliable. Obviously, it is in the interests of consumers to support a surplus and drive down prices. But investors lose in that scenario. Calpine stock has declined more than 80 percent compared with 13 percent at Duke, 54 percent at Dynergy, and 62 percent at Mirant. Financial performance of these companies depends a lot on the time frame of their deals. Calpine generally sells power and buys its fuel under long term contracts, up to 20 years. Jim Donnell, president of Duke Energy noted, “What we care about is neither the gas [fuel] price nor the power [sales] price, but the spread between them.” That brings up the other issue. The retail price of power paid by consumers includes several charges in addition to the cost of generation. Among these is the cost of transmission and distribution. Distribution still is regulated by the states but interstate transmission tariffs are controlled by the Federal Energy Regulatory Commission. The situation is a bit like the era before federal highways, during which each state maintained its own road system. Now imagine a toll gate on each road at the borders between the states. You can imagine that the cost of running a loaded truck between several states could vary more or less, depending upon its routing. That is not unlike the present power delivery system. Since the power generated within a state may be delivered to consumers in another state, the pathway between supply and demand can affect retail pricing due to the transmission costs. Therefore, a retail utility buyer in deregulated states will try to buy power at the lowest delivered cost consistent with reliable transmission. This gives rise to so-called location based pricing. Siting a new power plant is risky since the location of customers can be uncertain and the transmission pathway moreso. FERC has yet to solve this problem, although it is attempting to encourage transmission system owners voluntarily to join into four main national regional transmission organizations and, thus, minimize the variations in point-to- point costs. The first such approval was granted to the Midwest Independent Transmission System Operator, Inc. to manage a vast electricity grid stretching from North Carolina to North Dakota and down to, but not including, Texas. Another problem is that electricity demand is weather related, and no one can predict that.

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