January 15, 2007

Investment in generation is heavy, but important needs remain

Kennedy Maize

Many consumer magazines make their annual forecasts at this time of year on a variety of topics, such as politics or celebrity shenanigans. The prognostications, though seldom correct, are entertaining but not to be taken seriously. POWER's purpose here is to gauge where we as an industry have positioned ourselves for future growth, to define the characteristics of that growth in generation resources, and to suggest a few key indicators to watch during 2007. We always strive to give readers the best data available. In this case, we'll also give you our opinions, with a reminder that your own careful consideration of the data should guide your decisions.

 

The power industry's spectrum of interests is wide and its information needs divergent. In preparing this 2007 industry forecast, we chose to explore a few hot topics that have seized center stage in the debate over America's energy future. We delve into the details of these debates in every issue of POWER. But in this article we take a "helicopter view," to define the direction and speed of progress on a front—and to comment on whether both are appropriate.

I don't expect every reader to agree with our studied perceptions of the industry. If you have a different perspective, we want to hear from you. Make your case with facts and statistics, and we'll publish the best comments in a future issue. Remember, this industry is unique for its users' expectations (instant gratification with a flip of a switch), the inability to store the manufactured product, and the industry's reality-based stance on issues shaping short- and long-term national energy policy.
 

The future is now

The Edison Electric Institute (EEI) has made the industry's growth priorities, and the obstacles to them, abundantly clear:

• Strengthen and expand the delivery system (with 12,500 miles of new transmission by 2014) to lessen congestion costs and meet reliability requirements and market realities.
• Build more than 50 GW of new supply by 2014 (and 347 GW by 2025) to meet growing demand, which is expected to increase 2% annually until then.
• Promote energy conservation.
• Cover environmental mandates ($50 billion worth for air emissions alone by 2025).

Speed of response lagging need for change. Transmission and distribution (T&D) upgrades happen slowly. T&D system constraints are slowly being unraveled, but action on major improvements had to wait for the August 8, 2006, release of the DOE's National Electric Transmission Congestion Study, mandated by the Energy Policy Act (EPAct) of 2005. The study provides analysis of generation and transmission capacity across the U.S. and identifies critical areas that need attention to meet growing demand.

"Completion of the National Electric Transmission Congestion Study is an important step on the path to modernizing our nation's aging electric power infrastructure and is a crucial step toward realizing President Bush's goal of a modern, more efficient electric power delivery system," Energy Secretary Samuel Bodman said. "I am confident the Department's actions will help facilitate the infrastructure growth necessary to meet the demands of our growing economy."

The report identifies three groups of congestion areas that merit further federal attention. The most severely congested areas—called "Critical Congestion Areas"—are Southern California and the Atlantic seaboard from the New York City area to northern Virginia.

Comments on the study were accepted from the public through mid-October, and volumes were submitted. The DOE is now working with the North American Electric Reliability Council (NERC), transmission operators, and others to improve the quality of the data required for their detailed analysis and decision-making. It appears that when sufficiently persuasive data are accumulated and all the stakeholders have been given time to make their case (one way or the other), then the DOE makes some decisions. Naturally, any decision made by the department is bound to offend more than one special interest and will undoubtedly end up in federal court. What happens next is anyone's guess.

An official statement from the DOE notes that it "will designate a National Corridor when the information needed to shape a Corridor appropriately in relation to a known congestion problem is available. DOE recognizes that designation of National Corridors is intended to facilitate construction of new transmission capacity where it is needed, so DOE is not looking for ways to prolong the process." But don't look for a quick solution, as the meal has so many cooks that it's not clear what's going to come out of the oven.

The DOE is on the hook to give an update to Congress one year from the report date, or in August 2007. Don't expect much in the way of firm decisions until that deadline draws near.

Will generation growth keep pace with demand? Two percent growth in electricity consumption per year doesn't sound like much, but when capacity numbers and compounding come into play, the number of new plants needed is staggering. EEI's 2% annual growth rate—which, by the way, is consistent with the latest Energy Information Administration (EIA) projections—translates into a nearly 50% increase in demand over the next 20 years.

If annual growth is indeed 2%, then over 20,000 MW a year of new supply (net of retirements and mothballed plants) will be required. That's daunting, but doable, given the industry's capability.

Industrial Info Resources (IIR, www.industrialinfo.com) contributed to this report by providing POWER with an exclusive summary of industry data covering the past decade that you'd be hard-pressed to find elsewhere. Table 1 is our industry report card detailing how the U.S. industry has kept up with demand growth over the past decade. The data, organized by market region, give a pretty good picture of where assets have been and are being developed. The rest of the picture can be gotten from an examination of regional capacity margins, addressed in the next section.

 

 

Because it contains a wealth of information, Table 1 is well worth your study time. The "Plants under construction" category is current through November 2006. The number of plants with "Announced construction kick-off 2007" is based on direct customer feedback. The numbers prove that developers are perpetual optimists: History suggests that only about 25% of the reported plants will actually break ground during 2007, for a total of 19,000 new megawatts.

Slicing and dicing the IIR data gives other insights into what technologies are being selected (Table 2) and what the favorite fuels are (Table 3). Here, too, developers seem to be very ambitious when reporting project starts for 2007. For example, it's obvious from the bottom right corner of Table 2 that wind project developers are irrationally exuberant about the coming year, when they anticipate starting construction of 22,389 MW of turbines, with 3,500 MW reaching commercial operation in 2007. The American Wind Energy Association (AWEA) is also predicting that between 3,000 MW and 3,500 MW will be deployed.

 

 

 

 

 

IIR projects a sharp increase in project investment for 2007 over the past several years (Table 4). A good portion of that investment could be attributed to the large number of selective catalytic reduction and scrubber projects now under way as a result of the new Clean Air Interstate Rule and other environmental mandates. Again, historically, actual investment has only been about one-fourth of the predicted level.

 

 

NERC: Long-term reliability not so reliable

Every year, NERC looks into the future and judges what needs to be done to improve the reliability and adequacy of the continent's bulk power systems. NERC's "2006 Long-Term Reliability Assessment," released this past October, presents a troubling view of what's ahead. (NERC President and CEO Rick Sergel discusses the subject in this month's Commentary)

Margins falling fast. The bottom line of the NERC view: "Electric capacity margins will decline over the 2006–2015 period in most regions." This trend, according to NERC, is a product of the "short-term resource acquisition strategy" that has dominated for the past decade. Over the next 10 years, says NERC, U.S. electric demand is likely to increase by 19% (141,000 MW), while Canada's demand will grow by 13%. Yet the council says the projected level of committed resources over this period (Figure 1) will be a mere 6% (57,000 MW) in the U.S. and 9% (9,000 MW) in Canada.

 

 

It's also a near-term problem, according to NERC. Capacity margins look as if they will drop below NERC's regional target levels in ERCOT, MRO, New England, RFC, and the Rocky Mountain and Canadian areas of WECC "in the next two to three years, with other portions of the Northeastern U.S., Southwest, and Western U.S. reaching minimum levels later in the 10-year period." Only the Southeast looks like it will have adequate capacity margins through 2015 (Figure 2).

 

 

 

Over 50,000 MW of what NERC calls "uncommitted resources" exist today. NERC describes these as generating projects "that either do not have firm contracts or a legal or regulatory requirement to serve load, lack firm transmission service or a transmission study to determine availability for delivery, are designated or classified as energy-only resources, or are in mothballed status because of economic considerations." Over the next 10 years, says NERC, uncommitted resources "will more than double." The commission says these resources "represent a viable source of incremental resources that can be used to meet minimum regional target levels."

Transmission trials. Then there's transmission. Given the predicted increase in demand, will the grid be able to deliver the goods? NERC is pessimistic. "Expansion and strengthening of the transmission system continues to lag demand growth and expansion of generating resources in most areas," says the electric reliability organization.

Total transmission miles in the U.S. and Canada, says the report, "are projected to increase by less than 7% in the U.S. and 3.5% in Canada." Without more transmission investment, says NERC, "grid congestion will increase, making it more difficult for available supply to meet demands and to allow full utilization of capacity/demand diversity; in some situations, this can lead to supply shortages and involuntary customer interruptions."

The same short-term focus that has retarded development of new generation afflicts transmission, says NERC. "With a few exceptions, the present transmission planning horizon is five years or less. Proposed solutions tend to address short-term problems without looking to longer lead-time facility requirements." NERC adds that the provisions in EPAct that give the DOE the authority to streamline transmission projects may help ease transmission problems, although the department has yet to complete its designation of "national interest electric transmission corridors."

The human factor. The NERC report also cites the aging U.S. workforce as an obstacle to reliability, as the grid rests on "the accumulated experience and technical expertise of those who design and operate the system. As the rapidly aging workforce leaves the industry over the next five-to-ten years, the challenge to the electric utility industry will be to fill this void." NERC says utilities need to "identify key personnel approaching retirement and establish mentoring programs to impart the experience realized by these individuals."

Utilities, says NERC, also need to "reassess compensation and benefits packages" so that they might be able to retain aging personnel full time or part time. Finally, says the report, the industry "as a whole needs to establish cooperative programs with academia to reinvigorate the power engineering education in North America."
 

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