So Much to Build – So Little Time

Issue 3 and Volume 117.

Joe Nipper   By Joe Nipper, Senior Vice President, Government Relations, American Public Power Association

Whether you call it interdependence, harmonization, coordination, “chaos”, or something else, much of the electricity industry is appropriately focused on the increased use of natural gas to generate electricity and the related issues that need to be addressed for that change to happen in a cost-effective and reliable manner for both sectors. The increased use of natural gas to generate electricity is occurring for several reasons: 1) the cost of complying with Environmental Protection Agency (EPA) regulations for many existing coal-fired power plants; 2) the inability to build new coal-fired power plants in the near term due to EPA requirements on emissions of greenhouse gases; 3) the low cost and apparent abundance of natural gas; and 4) the need for additional generation capability to back up highly variable sources such as wind and solar.

Demand for natural gas is also projected to quickly increase in the manufacturing sector. A recent report prepared by Dow Chemical based on public announcements by numerous corporations shows new, near term investment in manufacturing of $80 billion, accompanied by an increase in natural gas consumption of 6 Bcf per day. These investments also mean increased demand for electricity, most of which will be generated using gas. The real “kicker” in this rapidly unfolding scenario is that most of the affected electric generation facilities, as well as a substantial amount of the increase in manufacturing, is happening in one region of the country – the Midwest – and in the next three to four years. Other regions, notably New England, are seriously challenged too, but the heartland is where it is all converging.

Industry groups, regulators, legislators, think tanks, vendors and others have been discussing this convergence for months. The discussion has centered on issues such as inter-industry communication, business practices, scheduling of gas deliveries and curtailment policies in recognition of the “cultural” differences between the two industries.

While those are important matters to resolve, more emphasis needs to be placed quickly on building the necessary infrastructure in time. This includes the retrofits to existing coal-fired plants and the new gas-fired plants that are needed, but even more importantly it includes the natural gas pipelines and storage facilities required to make it all work.

Electric generators essentially have until 2016 – three years from now – to comply with the newest EPA requirements. Hundreds of power plants are involved. The regional electric grid operator, the Midwest Independent System Operator, has expressed concern about the potential impact on electric reliability and is busy working with the regional utilities to coordinate and sequence activities in order to maintain service. But there is real concern as to whether all of the necessary pipelines and storage facilities can be built in time. It often takes about four years to gain the approvals and construct a new pipeline, although the time will vary depending on the specifics and length of the route. New natural gas storage sites require certain geologic and other criteria that are not available in many locations, and they also can take several years to permit and construct even when a suitable location is identified.

Industry is doing its part to implement these changes, build the infrastructure and maintain reliable and affordable service to consumers. But there are actions the federal government can and should take to help:

1. The EPA should recognize the threat posed to electric reliability and use more of their authority to provide utilities that need it with additional time to comply with their newest requirements without subjecting them to civil or criminal penalties.
2. The Federal Energy Regulatory Commission (FERC) has conducted a series of helpful technical conferences to look at certain issues such as gas/electric day coordination, but the agency should do more to spur and expedite approval and construction of new natural gas pipelines.
3. In its ongoing deliberations over budgets and tax reform, Congress should preserve utilities access to capital on affordable terms. For public power utilities, that means retaining the full exemption from income tax for interest paid on state and municipal bonds.
4. Congress should pass legislation similar to that by U.S. Rep. Pete Olson, (R-Texas) that would protect utilities complying with emergency orders from FERC or the Department of Energy to operate certain generators for reliability purposes from also incurring penalties by EPA if operating the generators during that period results in violation of EPA rules.

Working together, and with federal assistance, we can avert major problems and move to a more modern and cleaner electric generation fleet. But we must act quickly.

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