Here's the hopeful news for California's power situation and a few more tidbits on wind and solar...
Gas and power costs to stay high
cbs.marketwatch.com
By Ned Randolph, CBS.MarketWatch.com
Last Update: 3:39 AM ET Mar 3, 2001
SACRAMENTO (CBS.MW) - As California struggles to speed development of power plants to head off electricity shortfalls this summer, the state may find itself being wagged by the same tail that drove power prices up to begin with -- expensive natural gas.
California Gov. Gray Davis has announced an aggressive plan to bring 5,000 megawatts online by the summer. Nationwide, some 50 to 70 power plants are either under construction or on the boards to meet the country's rising demand. The vast majority of all new plants will be powered by natural gas.
The conventional wisdom is that more power plants will lower electricity prices. But with surging plant construction adding to demand for natural gas, supplies are likely to remain tight and prices high for the commodity.
"Up until recently, that was surprisingly left out of the debate of the cost of (electricity) generation in California or anywhere else," said Peter Rigby, an industry analyst at Standard and Poor's. "When gas prices went up, the marginal fuel cost was enormous."
Increased reliance on gas to produce electricity has put generators in competition with residential heating customers, and western reserves once earmarked for California are exported to neighboring states with surging populations.
This heavy demand drove gas prices in California as high as $10 per thousand cubic feet in recent months - four times what it cost last April. In recent weeks, gas prices have hovered at more than $5.
While part of the price increase is clearly attributable to increased demand in California and elsewhere, supply issues are also a factor. Supply is restricted not only by a scarcity of new natural gas field production, but also delivery.
"Pipelines are running all out," said Rigby. "Well-head deliverability is one issue: do you have the transmission capacity?"
For example, last fall, after a new 1.3 billion cubic feet Alliance pipeline from Alberta to Chicago opened, prices spiked the next day because of a cold spell in the city, he said.
California, which produces only 16 percent of its natural gas, devours more gas than any other state. And the pipeline system spanning California has not been expanded since 1993, well before the new economy migration and population explosion.
Another supply crimp was caused by anAugust explosion on an El Paso natural gas pipeline, one of nine major import lines into California, which knocked it offline indefinitely, said Claudia Chandler, a spokesperson for the California Energy Commission.
Experts think that pipeline capacity will have to be increased 10 percent to fuel the new plants in Davis' plan.
At present, demand for natural gas in other places is also outstripping what the nation can supply from domestic drilling or importing.
In New York this year, unusually cold winter weather spiked heating costs to 15-17 cents a kilowatt-hour, said Rigby. That is three times what California was averaging until last summer - and an early warning that supplies are unusually sensitive to demand.
Of the applications for new pipelines with the Federal Energy Regulatory Commission only two have been approved, which will take over a year to boost capacity.
Other proposals are re-fitting existing pipelines to handle more gas compression and adapting crude oil pipelines for natural gas conveyance.
Good weather harsh lesson
In recent years, the country has enjoyed unusually mild weather, which buffered demand for gas that was being tapped gradually by the digital economy and steadily growing consumer demand. When the West Coast weather turned bad, the market was already at capacity.
"What seems to have happened is that the demand surged substantially in a very short period of time," said Bill Trapman, senior economist of the Energy Information Administration. "We think that some of the demand basics were expanding over a few years, new capacity was coming on line, but because of things like warm winters, it wasn't demanding much in terms of gas supplies."
Higher prices are drawing renewed interest in liquefied natural gas from overseas. Two major power supplies, El Paso Energy (EPG: news, msgs, alerts) and Enron (EXG: news, msgs, alerts) , have reportedly proposed building additional natural gas delivery terminals to refine less expensive imports from South America and North Africa. Right now there are two operating LNG stations in the country, in Boston and Lake Charles, La. Two more are being refurbished.
"That is a signal that those operators in the natural gas market expect natural gas prices to stay probably above $4 for a fairly lengthy period of time," said Chuck Linderman, Director of Energy Supply Policy at the Edison Electric Institute."
Viable Alternatives
Other options may be new cleaner coal plants, similar to the Red Hills coal lignite plant in Choctaw County, Miss. But regulatory hurdles for a new coal plant could take as long as five years, the same amount of time it takes to build a deepwater pipeline and drilling station in the Gulf of Mexico, say experts.
The renewable energy industry may have found the economy of scale they were waiting for. With electric prices above 5 cents per kilowatt-hour range, wind suddenly becomes a competitive alternative.
"We had pegged wind at about 5 or 6 cents a kilowatt hour in the past, that price is coming down quickly," said Linderman. "Certainly there are wind bids that have been received for production facilities in the 3 or 4 cents range."
California made a big push for more renewable energy in the 1970s, but the drive sputtered on a soft market and reluctance from utilities. Today, renewable sources account for only 12 percent of the state's electricity.
Though people may be excited about a renewed interest in clean energy, there are glitches. New wind farms, like a proposed 300-megawatt Stateline project in Oregon and Washington, generally take 12 months of meteorological data and assessment before construction can begin. So, the fastest way to produce wind wattage is revamping aging turbines in established locations. But finding turbines is a problem.
"The world capacity to build wind turbines is sold out," said Linderman. "There are multi-year orders ahead for wind generators that have sold out the market."
Solar equipment production is restricted by the same bottleneck, he said. Expanding production facilities for both wind and solar generators will take time and long-term monetary incentive. Meanwhile, California is moving forward on its plan to bring more gas-fired generators on line.
Gov. Davis has outlined a plan to provide developers with 35 pre-approved sites for power plants - including "peakers" or single cycle turbine plants that consume twice the gas of dual cycle plants -- in addition to retrofiting "real-time" meters to encourage consumer conservation.
According to the state's energy commission, six other natural gas-fired power plants, with a generation capacity of 4,308 megawatts, are under construction with 2,368 megawatts expected to be on-line by the end of the year, says spokesman Rob Schlicting. And by 2004, 16 new power plants - over 9,000 megawatts -- will be added to the state's grid. It takes one megawatt to power 1,000 homes.
"In the near term, we need to see expansion of pipelines," said Chandler. "We need to make sure that there are incentives in place for the generators to go into long-term contract agreements to store gas so they aren't going into the market and taking natural gas which drives up the price."
For now, California, which imports 85 percent of its natural gas, will continue to rely on the volatile market for its operating fuel, counting on drawing from stored reserves over the winter when spot market prices are their highest.
"That is the traditional way it's done," said Schlicting.
Ned Randolph is a reporter for CBS.MarketWatch.com in San Francisco. |
