Editor’s Note: It is my pleasure to announce that noted industry commentator Fred Lyon will be sharing his views on the power industry in a periodic column in Power Engineering titled Power Points. His first installment, appearing here, addresses the possibility of a surge in new baseload capacity construction. Fred’s next piece will appear in the September 2005 issue. – Brian
The buzz is back. Five years after the collapse of Enron and failed California deregulation put the entire electric utility under an all consuming cloud, there is finally talk about building new baseload capacity. While natural gas is now disfavored because of high prices and a too close association with the last boom and bust cycle, more than 100 new coal plants are supposedly in the works. Eight utilities, TVA, GE and Westinghouse have formed NuStart Energy to promote resurgent nuclear power, with some observers boldly predicting five new nukes by 2015, 12 by 2020, and 50 by 2050. Clean coal has captured the imagination of major industry players like AEP, Cinergy and Southern, which are planning IGCC plants even absent new environmental legislation. After years of layoffs, bad jobs, and vanishing backlogs, the energy construction industry is preparing for a comeback.
But is this flurry of optimism justified, entitled to any more credence than the conventional wisdom of the late 1990s, which touted Enron as a blueprint for success? Is the industry really on the verge of major capital investment in baseload capacity or is it just wishful thinking that bad times simply can’t last forever?
Certainly most forecasts suggest increasing domestic demand, and logic dictates that the existing fleet will eventually have to be replaced and not just be retrofitted and relicensed. But the power industry experienced its Enron tipping point in 2001 – that one dramatic moment, as defined by author and New Yorker columnist Malcolm Gladwell, when everything changed all at once. And not enough has happened in the interim to tip things back in favor of significant new baseload construction.
In the summer of 2001, major American utilities still sought to emulate the Enron model. Vice President Cheney’s Energy Task Force predicted the need for one new power plant a week for 20 years. Within months Enron suddenly collapsed and by the end of the year, it was back to basics. Construction plans, which only months before had been deemed essential, were shelved indefinitely. The lending and financial communities, politicians, and the public became intensely suspicious of all things electric.
While slow progress is being made, especially on Wall Street, utilities have still not been readmitted to the political and public circles of trust (hence the fate of the yet-to-be-passed Energy Bill). Recent books and movies demonizing Enron with criminal trials yet to come won’t help the industry gain re-entry any time soon.
Continued hostility breeds uncertainty, which in turn casts doubt on all the forecasts of diverse, new construction. Each type of baseload technology has risks, of tipping points both good and bad. Coal remains vulnerable to increasingly pervasive evidence of global warming, to a change in political administration, and to a carbon tax. Clean coal has the advantage of enlightened industry leadership and political popularity, but questions remain unanswered regarding technology, rate recovery, and costs of construction (e.g., IGCC plants are estimated to be 15 to 20 percent more expensive than traditional coal plants).
Of the various technologies, it is perhaps long-disfavored nuclear that is the most likely to see a tipping point in its direction. Nuclear power will benefit from resolution of the waste issue, new technology, and Washington’s bully pulpit. And tipping points are sometimes heralded from the most unlikely sources. Consider that leading environmentalist James Lovelock, author of the Gaia theory of Mother Earth, is now an outspoken proponent of nuclear power, claiming that to convince the public of the merits of nukes “what we badly need is a good pro-nuclear novel and Hollywood film.” (Now that Jane Fonda has apologized for her unpatriotic remarks in Hanoi during the Vietnam War, it may also be time for her to make long overdue amends for The China Syndrome.)
Perhaps more significantly, even the Op-Ed page of the New York Times (April 9, 2005) has joined the chorus, with Nicholas Kristof proclaiming nuclear energy as “green” and memorably observing, “(B)urdening future generations with nuclear wastes in deep shafts is probably more reasonable than burdening them with a warmer world in which Manhattan is submerged under 20 feet of water.” Of such changes in heart are tipping points made and trends reversed. But one accident or terrorist incident, and nuclear too is done.
Until trends coalesce and a tipping point in favor of new construction occurs, there will be plenty of talk about construction, but little definitive activity. Action will occur around the edges, a coal plant here, maybe a nuclear order there, an IGCC plant somewhere in the Midwest. But the core decisions on how America should invest in its baseload capacity for the next century will continue to be deferred, awaiting that one big moment when everything changes and the country gets serious about addressing its long-term capacity needs. That’s not very satisfying for those who value certainty, but such is the unfortunate reality in a post-Enron world of suspicion and distrust. Not enough has changed to erase this legacy, and until it does, capital construction decisions will remain an erratic hodgepodge of unwarranted optimism. p
Fred Lyon is senior partner in the Florida and Washington DC law firm, The Lyon Firm PA. He specializes in energy construction law and in the mediation of power plant disputes. He frequently speaks and writes about issues important to the industry. Lyon is also a principal in TriCon Power Group, which provides construction contract consulting services to utilities and contractors.