The U.S. power industry’s story in 2009 will be all about change, to borrow a now-familiar theme. Though the new administration’s policy specifics hadn’t been revealed as POWER editors prepared this report, it appears that flat load growth in 2009 will give the new administration a unique opportunity to formulate new energy policy without risking that the lights will go out.
Astrange and funny thing happened on the way to a power generation boom last year. Wall Street collapsed under the weight of a mortgage crisis last fall, creating a credit crunch not seen, according to many experts, since the Great Depression of the 1930s. Then the U.S. economy, followed by the rest of the world, went into a free fall. Bye, bye, generating boom.
Fear and loathing in credit markets — to crib from the late, great gonzo journalist Hunter Thompson — quickly replaced optimism and trust. Lenders were reluctant to lend, preferring to sit on their cash. Borrowers were faced with no credit, or credit at rates that would eat the profits of projects they wanted to build. The result? Cancelled or delayed infrastructure projects, retreats on scheduled upgrades, and a hormonally driven urge to merge among financial firms and energy companies.
The across-the-board cramping up of international credit markets last fall quickly dimmed prospects for high-capital energy projects, including new generation and major high-voltage transmission ventures. Despite the $700 billion Bush bank bailout package of October 2008, as well as an extension of renewable energy tax credits in legislation enacting that bailout, the temporary collapse of credit markets in late 2008 rendered doubtful major new projects from nuclear to coal to wind and solar. Pitches for capital-intensive projects were met with the ruling, "You’re out."
How can producers get anything on the scoreboard? Gas generation — requiring less upfront capital, although the fuel costs are unpredictable — looks like the generating resource of last resort. On the plus side for gas, prices have been in major retreat during the economic meltdown. Also, gas generation can be built near load, obviating the need for expensive electric transmission. Other virtues: Gas projects go up quickly, and they can be modular.
Will capital markets rebound in 2009? As we write this in late 2008, the credit constipation appears to be clearing, although how quickly the clog will flush is still unknown.
Managing Expectations
The resounding election of Barack Obama to be president, and expanded Democratic majorities in the House and Senate, portend a somewhat different approach to energy politics in Washington in 2009. Though policy specifics have yet to be revealed, we do know that the president-elect is a fan of renewable power and carbon controls but does not support construction of conventional coal plants or the Yucca Mountain spent nuclear fuel repository. We also know that the prospects for global warming legislation, specifically for a cap-and-trade program (a new tax by any other name, according to some analysts), are greater today than they were four years ago. But John McCain had also supported the idea of legislating control of carbon dioxide emissions, and particularly power plant CO2 emissions.
Ned Helme, president of the Center for Clean Air Policy, a group that advocates climate legislation, said after the Nov. 4 election that his organization "is confident the Obama administration will embrace the very important challenge of collaborating with the new Congress to adopt national climate change legislation that includes a cost-effective cap-and-trade system and work to establish vital green jobs and green technology for the international economy."
Should Congress, where coal-state legislators in both parties remain an important bloc, balk at carbon control legislation, it seems likely that an Obama administration would move administratively. Jason Grumet, Obama’s energy and environmental policy advisor, has said repeatedly that an Obama administration believes it has adequate authority under the 1990 Clean Air Act Amendments to impose a regulatory regime on CO2 emissions. Grumet is rumored to be a leading candidate for energy secretary in the new administration.
But the new administration could also push new energy projects as part of a strategy to invest in infrastructure, loosely defined, as a way to jump-start the sluggish U.S. economy. This could include electric transmission, power plant construction (more likely favoring coal and renewables rather than nuclear), and subsidizing carbon capture and sequestration. Though some will call this pork-barrel spending, the conventional view in Washington is that one legislator’s pork is another’s porterhouse.
New Infrastructure Required
That the U.S. needs major new electricity generating plants and transmission infrastructure — including baseload coal and nuclear — seems indisputable. Almost every examination of U.S. electricity markets — from the Energy Information Agency (EIA) to the North American Electric Reliability Corp. (NERC), to the various state and regional power agencies — finds capacity margins a problem. Although there is no agreement on what is a prudent capacity edge (the 30% to 40% margins of the 1970s and 1980s were clearly excessive and too expensive), most analysts seem to agree that around 15% is reasonable (arrived at by a wet-thumb-to-the-air test, rather than any solid engineering calculations). Some reliability regions in the U.S. could be bumping up against that 15% figure not too far into the future, according to the NERC analysis.
But NERC’s latest forecast provides reason for optimism that blackouts are not in the picture for 2009. "Lowered load forecasts for the coming ten years and new market mechanisms have contributed to generally improved capacity margins for most of North America," said NERC in its late October "2008 Long-Term Reliability Assessment." Slower economic performance is a reason (U.S. gross domestic product dropped 0.03% in the third quarter of 2008 and may also drop in the fourth quarter). As of Dec. 1, the country was officially in a recession, and that will likely mean reduced demand for energy, including electricity. The recession will also reduce the strain on existing electric infrastructure (Figure 1).
1. U.S. total electricity consumption dropping. The economic slowdown will impact consumption in all sectors, particularly the industrial sector, which is now expected to decline by 2.5% in 2009. Source: EIA Short-Term Energy Outlook, November 2008
What is the best way to ensure that U.S. system reliability is robust enough to prevent major blackouts and brownouts in the coming year and years to come? Many experts agree that a combination of new generation and new transmission capacity are necessary, particularly if the nation is to begin integrating major increases in variable renewable resources, located far from electric loads, into the generation and distribution mix.
NERC CEO Rick Sergel said the most pressing problem facing the nation is a dearth of investment in transmission, not generation: "Transmission lines are the critical link between new generation and customers, yet we continue to see transmission development lag behind generation additions. Faster siting, permitting, and construction of transmission resources will be vital to keeping the lights on in the coming years."
As governments of the world scrambled to restore order to financial markets at the end of 2008, it appeared that money needed for energy infrastructure, including generation and transmission, would not be easily available. In the mid-to-late-2008 time frame, oil prices started heading south. So did natural gas prices. Though the retreat of energy prices relieved some political pressure as gasoline prices and the cost of heating homes fell, it left the future of new generation projects in doubt. Why invest new capital in a market where returns look as if they could be shrinking?
Kevin Book, energy analyst for FBR Financial Markets, predicted to a group of reporters in late October that the worldwide financial collapse will lead to vast underinvestment in everything from renewables to coal to transmission because of constrained credit markets and lower energy prices. Investors will be extremely cautious with their bets on the future. That could be foolish in the long run.
The downside of that underinvestment, Book predicted, is that when the next energy price spike occurs — as he confidently said it will — the results will be "really nasty." Having underspent in the wake of the current economic crisis, when higher energy prices hit in the future, said Book, the U.S. will be increasingly unprepared for the results. Those include energy shortages, blackouts, much higher prices, and pain and suffering across the economy.
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