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A new report by the North American Electric Reliability Council (NERC) discusses at length why the bulk power system is stretched thin and why it is operating closer to its limits than ever before. Its message is that the nation is still short generation and transmission. Improvements, no doubt, have occurred in some regions, but in others the problems are real and will ripple through their local economies.

The areas of most concern in the United States are California, the Midwest, New England, the Rocky Mountain States and the Southwest. The matter is exacerbated because of the continued high level of dependence on natural gas in some of these areas, particularly the North East and Southern California. Unless those regions diversify their fuel sources and generation capacity, their difficulties are only going to deepen.

"New developments of wind, solar, and eventually nuclear - in addition to developments of more traditional resources - all have a common denominator: they need transmission to reliably integrate them into the grid," says Dave Nevius, senior vice president at NERC.

NERC says that by 2015 the country will need an additional 141,000 megawatts to accommodate an expected 19 percent increase in electricity usage. Only 57,000 megawatts are on the drawing board. At the same time, it says that significant investment in transmission is still required in many areas of North America and that such construction lags behind the growth of proposed new power plants.

National laws now on the books have encouraged development. The total number of transmission miles is projected to increase by 8.8 percent, or 14,500 circuit miles in the United States over the next 10 years. But NERC cautions that more investment is necessary as each peak season puts increasing strains on the network and particularly in those regions of the country that are already experiencing the most congestion.

Reliability Rules

For five years, utilities focused on the production and delivery of electricity while cutting their debt levels and trying to improve their rating scores. The economic retrenchment in the early part of the decade caused utilities to postpone their capital investments. The industry is now largely healthy while the demand for power has picked up. Altogether, Fitch Ratings says that the power sector has collectively increased its capital spending by 15 percent in 2005 and 30 percent in 2006.

Specifically, the ratings service points to Pacific Gas & Electric, Southern California Edison and Southern Company as three companies that are expected to spend a combined $8 billion annually to replace aging infrastructure and build new generation -- in part to meet new environmental standards. Fitch, meantime, expects spending on transmission to rise to $31.5 billion by 2009. That's 60 percent more than the last three years.

While the industry is much stronger than it was five years ago, it is evolving. Unregulated power producers, or merchant generators, still have a vital role - to supply electricity during periods when usage is greatest. Those facilities are modern and efficient and are able to deliver product in an eco-friendly way. But, the merchant operations must be better capitalized and work in partnership with other more financially stable entities to build and own power plants.

At the same time, the regulatory structure must allow those producers a fair opportunity to bid their resources into power pools. Many have been shut out of markets because they are unable to compete with the mandated lower prices that incumbent utilities offer. Energy prices, meanwhile, are on the rise and regulators are becoming less inclined to lift those price ceilings.

"Writing good rules take time and we need a better idea of who bears the risks and who bears the costs," says Robert Stoddard, a vice president in CRA International's Energy and Environment Practice. "Certainly, at this point, we need to get back into the saddle addressing reliability. We need a portfolio of options: Demand response, renewable energy and other low emission strategies and good ole fashion steel in the ground."

Nobody wants the lights to go out. But, no one wants the infrastructure necessary to keep that electricity turned on to be constructed in their backyard. Clearly, policymakers and regulators understand the need to keep capacity requirements in line with current and future demands and in fact, are streamlining the process for high priority transmission projects. That, in turn, is helping to give investors more certainties.

Along those lines, the Federal Energy Regulatory Commission has given NERC the authority to help enforce those new reliability rules. It cannot compel utilities or other entities to build generation or transmission, but it can recommend ways to improve dependability. Because the lead times to prepare for tomorrow's energy needs are long, NERC is advocating demand response programs. Those are the technologies that allow all types of consumers to adjust their energy usage to save energy.

"Because demand response can be put in incrementally and quickly, it can solve the reserve margin crunch that NERC discusses," says Bud Vos, vice president of marketing for Comverge in New Jersey.

By all measures, it is crunch time again. Both the public and private sectors have stepped to the plate, although the efforts to date fall short and more energy infrastructure is needed to avert troubles down the road. NERC's report is a warning shot. But it is still not certain whether that caveat has been widely heard.


 

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