Power cuts: Unfinished revolution in the energy market - Financial Times, August 6
Hillary Durgin explains why, when a heatwave struck the
US last week, the world's most industrialised nation
behaved so much like a third world country, with
'brown-outs' and power cuts in some areas
As the heatwave that struck the US last week lured
criminals to steal air conditioners and prompted
electricity companies to shut off power, energy traders in
Houston scrambled to line up supplies for transmission
to the country's hotspots.
Every 15 minutes, traders at Houston-based Dynegy,
one of the nation's largest power merchants, huddled in
their cubicles to secure power for customers in the next
hour. Consulting their phalanx of computer screens
pulsing with graphs and statistics, they leaned into tall,
microphone-equipped telephones and switched between
brokers on several lines to get the cheapest power
delivered along the fastest routes to areas of Texas, Ohio
and New England that were stifling in 100 degrees and
more.
Given this high-tech show, typical of the sophisticated
$215bn (E199bn) power industry, the effects of the heat
seemed surreal, not unlike the bright yellow cartoon
suns on the 24-hour Weather Channel showing on
monitors above the traders' heads. For some customers
were willing to pay 100 times the usual $20 to $30 per
megawatt while areas of the country suffered rolling
"brownouts" and power cuts.
The severe consequences of the heatwave - more than
100 people died - provoked the question: why did the
world's most industrialised nation behave so much like
the third world?
Blame the free market. The industry is undergoing a
huge transition, shifting from a system of monopolies
which have controlled the flow of power to their specific
regions to one in which a host of new power company
entrants want to give customers a choice of supplier.
And that transition is triggering market casualties.
"Electric power restructuring is caught in a muddle," said
Larry Makovich, director of research for Boston
consultant Cambridge Energy Research Associates'
North American power group. "It's being invented as we
go along. There are some serious structural flaws in
these emerging, restructuring power markets."
A key problem is that in many regions, utilities have
lacked adequate power supplies to meet demand as the
severe heat has prompted consumers to run their
electricity at full tilt.
Not knowing whether they would lose large chunks of
their customer bases to future competition, many utilities
have been reluctant to invest in new power generation.
Such caution, however, left them short last week.
Utilities, including New Orleans-based Entergy, cut
power to customers and pleaded with them to conserve
energy by doing laundry in cold water and after dark.
"It's strictly supply and demand," said Marce Fuller,
president and chief executive officer of Southern Energy,
the independent power arm of Atlanta-based Southern
Co. Last week, Southern Energy shipped some of its
excess power into Entergy's territory.
While the current supply shortage has triggered huge
rises in the price of electricity, Ms Fuller said it was a
signal to the markets that more investment was needed.
Some power companies, including Houston-based Enron
and Michigan-based CMS Energy, learned from the
power shortages that occurred last summer. Prices
reached about $7,000 per megawatt hour and those
companies were persuaded to build new generation
capacity.
The danger exists, however, that with the huge amount of
new generation capacity scheduled to be built over the
next several years, the current shortage will be replaced
by an oversupply. That could lead to a boom-and-bust
cycle that perpetuates the volatility in power pricing.
"When I look at our industry, I look at an entire industry
that has very little experience in a competitive market,"
said Victor Fryling, president and chief operating officer
of CMS Energy.
Power companies see another, more troubling problem
as the market makes the transition to a competitive
environment.
Some independent power companies, including Enron
and Dynegy, have found that they cannot ship power into
certain regions because the utilities that serve
customers in those areas want to operate the
transmission lines to benefit their own generation.
"It's like putting one of American Airlines' employees in
the control tower and only letting American Airlines'
airplanes land," said Steven Kean, executive
vice-president at Enron.
Not only are utilities trying to protect their so-called
"native load", but there is no incentive to promote
investment in transmission lines to expand capacity for
lots of new players to wheel their power around the
country. Systems and their operations are becoming
strained, and the overall reliability of the nation's
transmission grid is being called into question.
Beyond people not getting the power they need when
they need it, another casualty of liberalisation is the
process itself. Judging from current legislation pending,
less than half the country's customers will be able to
choose their power supplier as of 2003.
"The conventional wisdom is that this is a business
that's moving very rapidly to a competitive structure,"
Makovich said. "It's a very, very patchwork quilt. That gap
is going to remain for years to come." |
