Equity firms and utilities are betting on coal-fired power plants in Nevada,
where 5,500 MW of generation are being proposed. The potential return of
Southern California Edison's 1,580-MW Mohave in the southern part of the state
could boost the total amount of new or revived coal-fired generation in Nevada
alone to over 7,000 MW in the next two to eight years.
The recent volatility in natural gas prices has renewed interest in the
development of coal-fired plants, particularly in the West, where the thirst for
energy is growing and the expansion of generation capacity has lagged behind.
Market participants and analysts all agree the West is in a tight power supply
situation right now. A recent analyst report from Merrill Lynch outlined these
perceptions.
"A record hot summer in 2005 awakened concerns that generation capacity
shortages are becoming a risk in certain regions of the United States," the
report said. "More normal summer weather in 2006 could limit any tightening of
reserves in the coming year. … We expect power markets to continue to tighten
for the next three to four years, particularly in New England, Texas, the West
and the Mid-Atlantic. New generation could start helping in the West and Texas
by late in the decade."
According to figures from the Western Electricity Coordinating Council,
gas-fired power plants represent almost 40% of the summer peaking capability in
the region. The WECC includes Arizona, California, Colorado, Idaho, Montana,
Nevada, New Mexico, Oregon, Utah, Washington and Wyoming.
While making up the largest share of generating capacity, gas plants lately are
the most expensive to operate. Gas-fired power plants generated 183,542,895 MWh
in 2004, or approximately 24% of the total megawatt-hours for the WECC,
according to the Energy Information Administration.
Some market participants say generation is not expanding fast enough to keep up
with the growing demand and power plant retirements, and there is a growing
reliance on gas and not enough diversification in generation portfolios.
The majority of recent generation additions across the West have been gas-fired
because of their relative ease in permitting and building and their lower
capital costs. This year about 7,300 MW of generation capacity are expected to
come on-line, about 4,000 of that from gas-fired plants.
In its last 10-year Coordinated Plan Summary, the WECC projected peak demand
growth of around 2.5% annually for the region during 2004-2014.
In terms of generation capacity, "the West needs to play catch-up," said one
energy trader.
With the relatively low operating costs of coal plants, almost all of their
output goes into serving baseload needs rather than being used for wholesale
power markets, analysts said. But that may change given the high costs of
gas-fired generation.
Coal-fired generation represented the largest amount of megawatt-hours per year
in 2004, producing about 236,840,866 MWh, or 34% of the WECC total, according to
EIA.
The players proposing the new coal-fired plants in Nevada run the gamut from the
traditional utility looking to serve the needs of ratepayers to equity firms
looking for investment opportunities.
For the past two years, LS Power, a private equity firm, has been developing a
proposal to build a 1,600-MW coal-fired plant near Ely, Nev., along with a
transmission line from northern Nevada to Las Vegas.
LS Power's Eric Crawford said the company has "two years invested in the
community" and was moving "full speed ahead" on the Nevada project. He said the
facility would be for the wholesale power markets.
LS Power also recently announced it is acquiring about 6,200 MW of Duke Energy
North America's Western and Northeastern power plants. LS Power also has an
agreement for an option to buy Idaho Power's Southwest Intertie Project, a
520-mile, 500-kV transmission line proposed between southern Idaho and southern
Nevada.
Sierra Pacific Resources has also unveiled a plan to spend roughly $3 billion to
build two 750-MW coal-fired plants near Ely and a transmission line connecting
the northern and southern halves of the state.
San Diego-based Sempra Generation has a proposed 1,450-MW coal-fired plant in
Northwestern Nevada. And Sithe Global Power is moving forward with plans for a
750-MW coal-fired plant in southern Nevada.
Market observers have confidence some of these proposals will come to fruition.
And with the demand for energy continuing to expand quickly in the region, the
plant expansions may have little impact on the currently strong power markets.
Companies could build a few of these plants and not suppress power prices, one
Western energy consultant said.
Another impact of the expansion of coal-fired plants is that it may nudge some
of the marginal gas-fired units out of the market, said a consultant.
Analysts agree that if the coal-fired plants are going to be built, new
transmission lines will have to be erected to move the power to market.
California officials, concerned about environmental protection, are considering
a policy that could halt a good chunk of electricity generated from coal-fired
power plants from being imported into the state via transmission lines.
But market participants and analysts said it may be hard to police electrons on
the Western Interconnection. Further, with California being one of the
thirstiest energy consumers in the region, with one of the tightest capacity
margins in the region, particularly in Southern California, the state may not
have the luxury of picking and choosing what fuel is used to generate imported
electricity.
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