Predicting the U.S. power industry’s 2008 performance requires understanding how utilities and other plant developers respond to risk and uncertainty. Three years ago, mercury controls had the undivided attention of every coal plant operator. Today, the imminent arrival of carbon controls has caused a tectonic shift in the industry. In years past, builders of new power plants focused on getting grandfathered out of new regulations. Today, developers are canceling plants before the climate change debate in Congress has ended, already assuming the results will be bad for them.
Even the mere anticipation of carbon controls, and the sea change they will bring to the U.S. economy, has created strange bedfellows and stranger enemies. Environmental groups are now embracing nuclear power because they perceive it to be the lesser of two evils—after coal. Proposed carbon cap-and-trade regulations have executives of nuclear and wind power utilities vilifying their counterparts at coal-based utilities, who are asking for “need” allowances to ease the transition.
Thirty years ago, America’s major utilities faced common challenges arm-in-arm. That time has passed.
PURPA’s legacy
For example, 30 years ago utilities uniformly opposed passage of the Public Utility Regulatory Policies Act (PURPA) as part of the National Energy Act. The Iranian revolution of 1978 began a period during which world oil prices doubled and some industry wags predicted $100/bbl oil. PURPA forced utilities to diversify their generation resources and to purchase power from privately owned “qualified facilities.” The transition was difficult for industrial plant owners and utilities alike for several years, but market forces prevailed. Today, non-utility generation provides 35% of America’s supply, and more than 44 GW of nuclear capacity is owned by independent power producers (IPPs).
PURPA also was instrumental in creating the U.S. renewable generation market. For example, PURPA-inspired revisions to interconnection rules, long-term power purchase agreements, and tax credits made early solar thermal projects economic in the 1980s. Some credit PURPA with opening the door for 12,000 MW of nonhydro renewable capacity.
As the IPP market matured, natural gas–fired combined-cycle projects became the rage for their high efficiency, ease of permitting, small footprint, and short construction time. Gas-fired plants generating over 150 GW were built by 2006, when skyrocketing gas prices demoted so many plants designed for baseload operation to peaking service. Some were even mothballed.
Which way forward?
PURPA was no longer needed once the U.S. generation market had become more market-driven and interdependent. Its death was sealed by the Energy Policy Act of 2005 (EPAct), but PURPA’s raison d’être remains: to promote the use of renewable energy, eliminate monopolistic market practices, and improve America’s overall energy efficiency.
Although we all approve of those objectives, the path forward remains uncertain. At no time in U.S. history have the options for generating power been so plentiful and the opinions of what is environmentally acceptable so divergent. Never have regulators and utility executives disapproved new plants based on expected legislation, rather than laws on the books. Financial uncertainty slowed new projects after the gas bubble burst in 2001. Future projects now must deal with regulatory uncertainty and other threats (see sidebar, “Top 10 strategic business risks facing U.S. power generators”) just as reserve margins in some regions are declining to worrisome levels.
Uncertain prospects for “acceptable” generation haven’t reduced America’s seemingly insatiable appetite for all things electric. Two months ago, the Department of Energy’s (DOE’s) Energy Information Administration (EIA) predicted that consumption would grow 2.1% in 2007 but slow to a 0.5% increase in 2008 (Figure 1) as the effects of energy efficiency and other demand-side reduction programs kick in (see sidebar, “Utilities to invest more in energy efficiency”). However, demand continues to rise at double-digit rates in several regions that saw record peaks last summer. Although residential electricity prices are expected to stabilize at a 2% growth rate in 2008 after a two-year spurt (Figure 2), look for significant increases in subsequent years due to more use of costlier, cleaner fuels.
1. Demand growth often down, but never out. America's electricity consumption continues its slow rise. Source: U.S. Energy Information Administration
2. Moderate price hikes. Residential electric bills are expected to be 2% higher this year than they were last year. Further out, they will certainly rise much faster if mandatory carbon caps force power producers to use costlier, greener fuels. Source: U.S. Energy Information Administration
Email
Comments
Print
Reuse
