Planning For Power Plants

Planning For Power Plants

Location: New York
Author: Ken Silverstein, EnergyBiz Insider, Editor-in-Chief
Date: Tuesday, September 2, 2008

Many utilities are once again in a position to invest in new power plants. But will regulatory impediments and community concerns stifle those efforts?

The skepticism is healthy. Rosy projections more than a decade ago prompted regulators to ease restraints and lenders to loosen their standards. As a result, many power companies overreached and hurt their backers in the process, but the industry is again warning of an impending generation shortage.

"We made the mistake in the 1990s of overstating our needs," says Tony Earley, chief executive of DTE Energy. "The public may think we want to make investments and then put them in the rate base."

Consumers and regulators are wary but willing to listen. The U.S. Energy Information Administration says that the nation needs 50,000 megawatts by 2014 and 258,000 megawatts by 2030. That will cost about $412 billion. And that need comes atop a projected decline nationally in electricity reserve margins through 2015.

Utility executives appreciate the attention but caution against shortsighted solutions. Instead of building the needed base load generation that would be operational much of the time, they say that regulators will likely compromise with consumer groups and just allow them to build a series of smaller plants.

Most of the opposition to construction is aimed at coal facilities. TXU's new owners, Energy Future Holdings, agreed to scale back a decision to build 11 new coal plants in Texas and rollout instead renewable energy projects. Meantime, the Kansas Department of Health and Environment denied permits to build two coal-fired plants there citing health concerns. The decision has been upheld by a district judge but awaits one from the Kansas Supreme Court.

Green projects may not fare any better. No one really wants a wind farm -- a power plant -- near where they live. In West Virginia, for example, residents forced a subsidiary of U.S. Wind Force to withdraw its permit application. Opponents argue any site would spoil views while hurting tourism and property values.

For the last five years, utilities have focused on their core services while cutting their debt levels and trying to improve their rating scores. The economic retrenchment in the early part of the decade caused those companies to postpone their capital investments. Today, neither lenders nor utilities will take risks unless the unregulated generation capacity is either fully contracted from the get-go or, in the case of regulated companies, the cost of construction and production can be passed through to customers.

Winning Hearts

So, now, the stars seem to be aligned. Many utilities are able to invest at a time when the demand for power is escalating. Altogether, Fitch Ratings says that the power sector has collectively increased its capital spending by 15 percent in 2005 and 30 percent in 2006. But according to Southern Company's Chief Executive David Ratcliffe, it's not enough. He says that $1.5 trillion is necessary over the next 20 years.

In Southern's case, it has built 35,700 megawatts of generation since 1988. Most of that has been combined cycle natural gas plants that are used during peak time periods when demand is highest. It is now trying to build a nuclear power plant as well as a demonstration integrated coal gasification facility by 2010. The utility advances its mission by forecasting the demand for power in its service territory and what its future generation needs might be. It then gets preauthorized permission to build new plants.

Winning the hearts and minds of the people is the next step. It would be easiest to wait until brownouts occur and consumers start clamoring. That is essentially what happened during the California energy crisis of 2000-2001 when rolling blackouts were the norm. Now the state is scrambling to build more wires, pipelines and generators and the permitting process has been cut from years to a matter of months.

The proactive answer, conversely, is to estimate what future demand will be and to extend an open line of communication to let others know of the need. The issues tied to permitting and capacity must be addressed before potential shortages occur by establishing neighborhood meetings and creating a common communication strategy.

Consider Wisconsin, where both the Sierra Club and Clean Wisconsin, Inc. said they would halt their opposition to what will become the largest coal-fired plant in the state. WE Energies and two smaller ones consented to back legislation to push up renewable portfolio standards from 2015 to 2013 and to increase that benchmark from 10 percent to 25 percent by 2025. In exchange, they will be able to expand an existing facility so that it will generate 2,300 megawatts by 2010.

Meanwhile, hope abounds in the merchant generation world. Once beleaguered, Calpine Corp. is now warmly embraced. The San Jose, Calif.-based company, which emerged from bankruptcy this year and which reported a second quarter profit, operates 80 state-of-the-art natural gas and geothermal power plants that it says are in high demand.

Despite the reason for optimism, corporate chiefs such as Exelon's John Rowe say that ideal solutions will always be elusive. The nation may need the bigger base load plants, he says. But the political reality is that there will be a lot of ad hoc solutions that will increase expenses. "I am looking at the future and it doesn't work. It does not get us the kind of infrastructure we need."

Utility planners have long warned that the nation's power infrastructure is stretched thin and that the national economy is at risk as a result. Their arguments never truly resonated with average consumers. But the message may slowly be getting through. Attention is now focused on improving reliability and communities appear open to new ideas.