TCS Daily

Energetic Eggs in One Basket

By Herbert Inhaber - July 18, 2003 12:00 AM

Long ago, our mothers and fathers told us not to put all our eggs in one basket. But this is what U.S. electrical utilities have done in the past few years. Now they, and their customers, are paying the price.

A bit of background: When the electricity deregulation wave hit in the late 1990s, previously unknown companies like Calpine and Mirant saw their opportunity. In the past, a public utility, given a franchise by a public utility commission, could bar any competitors from its area. Now competitors were not only allowed, they were encouraged by PUC rules. Utilities were often required to buy a fixed percentage of their electricity from competitors.

So what are these eggs in one basket? It's natural gas. The merchant energy companies, like Calpine, Mirant and a host of others, wanted to get into the market quickly and generate revenue. If they had chosen nuclear, they would have had to wait perhaps a decade before the first dollar came in. The onerous regulations about nuclear energy, although supposedly neutral with respect to that source, have had the effect of almost excluding new plants from the market.

Coal is by far the cheapest form of electricity generation in most parts of the country. However, the EPA has also imposed draconian regulations that prevent almost all new coal plants from going up.

Renewables? A laugh. Without government subsidies, solar and wind electrical plants simply wouldn't be built. And because of their variable output, they will always need conventional plants spinning and wasting energy, for the times when the sun doesn't shine and the wind doesn't blow.

You hardly need an MBA to figure out what is left -- natural gas. Not surprisingly, over 90% of the new plants built with the deregulation boom were gas-powered.

When there is a new or renewed demand for a commodity, the market reacts. Gas prices soared to about twice what they were a year or two ago. This threw the calculations of the merchant energy companies all askew. I haven't read any of their business plans, but I would be willing to wager that they assumed a flat, or almost flat, price for gas. If they had assumed a skyrocketing price, the utilities to which they wanted to sell electricity would have kicked them out the door.

So gas it was. But a new report from UBS Warburg, the merchant banker, says that peak electricity prices are expected to rise about 48 percent in 2003 from last year. Gas is often used for peaking times, when the sun heats up houses and office buildings in the sweltering summer. Peaking means that the plants are turned off during the night, when electrical loads are much smaller. Many of the merchant energy firms also built gas baseload plants, which would run continuously.

All this means that consumers will be paying more for electricity, although not a 48 percent increase. Peaking costs form only a portion of total electricity price. The proportion varies according to which part of the country you live in.

Clearly what we need is more gas, as Federal Reserve Chairman Greenspan pointed out a few weeks ago. The market will work -- if more gas is available, the price will gradually fall.

We can get more gas in two ways. First we can drill for it. Huge swaths lie in the Gulf of Mexico and off the coast of California, but are off limits due to environmental pressure. However, gas has been piped from offshore locations in many countries for decades with few if any environmental problems.

The other way, as Greenspan said, is to import liquefied natural gas from countries that now flare it off because there is no nearby market. A recent article by an environmentalist said that LNG ships would be terrorist targets, and therefore shouldn't be allowed to dock in the U.S. But if we are to govern all our actions on the basis of a lone terrorist with a rifle or mortar, there is not much future for this country. Should we all freeze in the dark or swelter in the sun because Osama may have an agent among us?

In the long run, the way out of the gas crisis is to spread our eggs in a number of baskets. The energy bill before Congress encourages nuclear energy as well as the fossil fuels. If it were ever to pass -- it has been before Congress for over two years now -- dropping one basket would not cause catastrophe.

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