Combined Cycle

Capacity Shortages Call for Action

Issue 1 and Volume 103.

Capacity Shortages Call for Action

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Opinion

By Robert W. Smock,Manager, Energyand Utility Group

According to the Federal Energy RegulatoryCommission, Last Summer`s Disturbingly High Spot

market electricity prices were caused by an unusual combination of factors unlikely to recur: near-record peak demand in the Midwest, more than the average number of power plant outages, transmission constraints, and insufficient market information.

I don`t agree. I think all these factors are likely to recur, price spikes will happen again, brownouts will happen, and worse. Electricity demand is growing and generating capacity is not. Almost every year sets a record peak. Power plants have forced outages. There`s nothing unusual about forced outages occurring at the time of the peak. That`s why we need a contingency reserve margin in generating capacity.

The real reason for the price spikes is low reserve margins caused by the lack of construction of new capacity. Nationally the reserve margin is down to about 15 percent, the traditional minimum. It`s been argued that we no longer need 15 percent, that 10 percent or less will do. Last summer showed us the price we`re going to pay for this. The ECAR/MAIN reserve margin was 11.9 percent.

The new competitive wholesale electricity market is providing us valuable price signals, an indicator of the U.S. capacity shortage that`s developing. Some market participants have asked the federal government, mainly FERC, to increase regulation of the competitive wholesale market with, for example, price caps. I think that would be wrong. That would muffle the price signals which are telling us what to do. So far, FERC has wisely taken no action, but the staff report tends to dismiss the seriousness of the situation by saying it`s unlikely to happen again.

I don`t agree that the way to nurture the competitive market is to ignore or explain away what happened last summer. What happened was not the fault of competition. The market just gave us an early warning through price spikes. The capacity shortage exists whether the market is competitive or not. Muffled price signals would only delay the awareness of capacity shortages until something worse happened.

Something worse–brownouts, blackouts, whatever–can happen. Growth in demand is strong. During the past three years peak load in ECAR, MAIN, and MAPP has grown by 3.6 percent, 3.5 percent, and 5.8 percent. Utility generating capacity in the US in the summer of 1998 was below that of 1997. That`s a formula for much worse than price spikes.

Merchant developers have responded, attracted by the high prices for electricity. As much as 30 GW of new gas-fired combined cycle merchant capacity has been ordered. Sound like a lot? It`s not. It`s less than five percent of national generating capacity. It doesn`t even cover last summer`s growth in demand. Further, construction is under way on only a small part of that new capacity. It`s too late to do much good for next summer.

The answer is new capacity. A lot of new capacity–a balanced program including gas-fired combined cycles, repowered steam plants, new coal-fired plants, relicensed nuclear units, and anything else that makes sense. I don`t know that we should be relying solely on independents to fill the gap. Some new conventional utility capacity is needed to provide a balanced supply. The independents have responded. The utilities, for the most part, have not.

Why are so few utilities building new capacity? Think carefully before you fire off an indignant letter to the editor about all the difficulties utilities face in the modern U.S. electrical market. Regulated utilities are still the major players consumers count on to provide much-needed electric service. They still have a big role in generation. It`s time they stepped up to the plate and proved it. p