From 2000 to 2001,
about 140 Gw of new gas-fired capacity was added to the US fleet. Then,
by 2002, the combination of this new capacity and the country's economic
turndown restored peak margins to the high teens and wholesale price volatility
quickly dampened.
The dampened volatility
has masked a pullback of deregulation efforts that had been underway in
many states. Today only 24 states, plus the District of Columbia, have
open choice and access to competition; there is no activity occurring
in 24 states-- and in California and Nevada, restructuring legislation
has been rescinded. Public enthusiasm for deregulation has been undermined
and confused by the political bickering and finger pointing between the
public and private sectors over the California debacle. The moderation
in electric price volatility may have seduced the public into a false
sense of comfort and a belief that deregulation actually has taken place.
Danger lurks in complacency. While wholesale price spikes stimulated massive
investment in generation, there has been no corresponding investment in
transmission. Over the last 20 years, generation has expanded by about
60%, while high voltage transmission miles have expanded by less than
20%. And projections for new transmission capacity through 2010 do not
show any changes in this trend.
The July 31, 2002
FERC NOPR offers a format for transmission Standard Market Design. Network
service tariff structure, locational marginal pricing dispatch models
and congestion revenue rights are aspects of the design that are encouraging.
However, the presumed need for an environmental impact statement and a
lack of consensus around the plan create the possibility it will be derailed
or lead to artificial shortages.
Consider the situation
with respect to labor: The one or two times per year outages typical at
today's electric power plants provide only seasonal work for experienced
boiler makers, and not the benefits of steady employment enjoyed on projects
that took 36-40 months to complete. Older, experienced labor has retired
from this business and replacements are not easy to find or retain. The
absence of a need-- for almost two decades-- for construction labor to
erect large central generating stations resulted in a lack of experienced
riggers, welders and fitters required for the construction of combined
cycle facilities as well as retrofit equipment related to the NOx SIP
call. In the 1990's, well-known AE firms, with long histories of managing
complex fixed-price turnkey projects, saw their partnerships torn apart
as cost over runs consumed cash and a flurry of lawsuits consumed time
and resources and poisoned long-term former business relationships.
For more than a decade,
the number of high school students matriculating to engineering curricula
has dropped. The pattern of bachelor's degrees awarded during this period
has shifted significantly. Engineering and engineering technologies declined
4% between 1990 and 1995, and a further 7% decline between 1995 and 2000.
Some engineering schools, in an attempt to remain viable, have "engineered"
their curricula to deal with a less prepared student body and student
bodies marginally interested in technology-and, then, only in relation
to a perceived need to evaluate technology on economic grounds, not to
participate in creating it.
Poor economics at
the user level, poor economics at the vendor level, and disinterest at
the college level all have lead to a lack of spending at the R&D level.
The amount of money spent annually by US OEM boiler manufacturers on real
R&D is probably less than $10 million (perhaps less than 1/2-% of sales).
The issues of prosperity
and national security, at least as they are related to electricity, cannot
be taken for granted any longer. Indeed, there is some risk that electricity
supplies might actually become an impediment to prosperity and national
security. Under that scenario, emergency government interventions that
could result, given the California experience and the determination of
certain factions in the environmental community to slow, if not prohibit
development, likely would not restore or generate much interest from the
capital markets.
What are some
options?
In the case of gas,
it might be well to remember that withdrawal rates from the Gulf of Mexico
have exceeded replenishment rates for several years. Natural gas price
volatility, the need to site and maintain long pipelines, and the dwindling
supplies of extractable gas in the lower 48 states do not leave one with
a good feeling about this fuel. Traditionally, drilling activity increases
when gas prices at the Henry Hub reach $3.00 or above. But forward prices
have been well above $3.00 for some time and drilling activity is less
than 80% of historic values. Moreover, the United States imports about
15% of its natural gas today. Neither factor adds to the energy security
or price certainty of electricity.
LNG development is
increasing. In October 2002, Merrill Lynch published an analysis suggesting
development of new natural gas supplies will continue to face hurdles
and, as a result, LNG growth will exceed 6 percent for the next two decades.
LNG imports will be required to meet the longer-term growth demands of
the United States. But this-- yet once again, increases America's dependency
on imported energy.
Air quality in the
United States today, is dramatically cleaner than at any time in the last
30 or 50 years depending on the pollutant under consideration. But Americans,
in poll after poll, believe otherwise.
Average SOx emission
rates from coal-fired power plants in the 1970s were 4.4 lb/Mbtu. Today,
the average is about 1 lb/Mbtu. Phase 2 of the 1990 Clean Air Act Amendments
is just now being implemented. This means US air quality will continue
to improve even if Congress and the Bush Administration cannot come to
terms on new regulations.
Selective catalytic
reduction, in combination with low NOx burner technology has the potential
to reduce NOx emissions by 90-95%. NOx emissions reported recently by
Ameren on eight of its units burning PRB coal showed emissions as low
as 0.11 lb/Mbtu.
A project recently
announced by a major coal company included a draft environmental permit
with SOx emissions at 0.167 lbs/Mbtu and NOx at 0.08 lbs/Mbtu, both below
the limits set by the Bush Administration in its February 2002 "Clear
Skies" Proposal.
Ample Coal
Coal is in abundance
in the United States. Ample known supplies of lignite, bituminous and
sub-bituminous coal exist for more than 200 years at current consumption
rates. And coal prices, in real terms, have remained stable to declining
over the past two decades. DOE believes this trend will continue for the
next decade. Domestic vendors have not spent much money on development
of the supercritical cycle. But the Europeans have. Turbine and boiler
technology at ultra-critical temperatures and pressures has a continuing
history of satisfactory operation in Europe and Japan. Over the last 20
years, the net plant heat rate has risen consistently and now approaches
45 percent on hard coal and 40 percent on higher moisture lignites; 85%
of all OECD coal-fired capacity installed between 1997 and 2000 has been
supercritical technology.
This heat rate improvement
has been accompanied by significant improvements in reliability: the forced
outage rates for once-through designs typical in Europe are 2.5 percent
better than NERC data.
The 550 MW Staudinger
plant, near Frankfurt, has been in commercial operation since the summer
of 1992. It is a 4130 psig/ 1013 F/1044 F coal-fired unit operated on
both hard and soft coals sourced worldwide. Boiler availability over this
period of time has been 99.3 percent and the plant capacity factor 91
percent. What's even more impressive is the plant has been in cycling
operation for the last 5 years. It shuts down every evening and is back
on line again at full load in 90 minutes the following morning. Staudinger
NOx and SOx emissions each are less than 0.2 lb/Mbtu. Another significant
point is that CO2 emissions are reduced more than 10 percent compared
to the emissions of a sub-critical unit of like capacity and availability.
That has resulted in a CO2 reductions of more than a half million tons
per year.
Considering the critical
nature of electricity in our country's economy and security, however,
the Federal Government must deal with environmental legislation and policy
now. It almost matters more to have a clear and stable regulatory regime
than what that regime actually is. The regime must provide guidance on
emissions requirements to remove the uncertainty faced by generators over
the usefulness and useful lives of their fleet. Investment will not flow
until this uncertainty is lifted. There is some hope that the mid-cycle
elections will result in a Congress interested in reasonable solutions
to this issue.
Clearly, the very
low margins offered by this market suggest that US companies need additional
incentives to invest in research related to near-term solutions: gasification
technologies and exotic materials development are two areas of immediate
need. This is entirely consistent with similar relationships between government
and the private sector in Europe and Asia. These incentives could take
the form of added tax incentives, however at some point, there will be
additional need for public-private partnerships, such as the DOE LEBs
program, in order to help project participants over the operating and
performance risk hurdles of first-of-a-kind technology.
Lobbyist Need
Apply
This industry needs
to become more vocal on its contribution to security, stability and low
cost supplies of electric power. Advisory Councils like the National Coal
Council are prohibited from lobbying or advocacy. Yet, it is members of
those councils, and industry coalitions who have, not only self-interest
in this industry, but the know-how to articulate reasoned arguments to
a more and more technically illiterate society.
While trade barriers
are counter productive in an open market economy, it is not in the best
interests of US national security to allow domestic equipment suppliers
that own or have developed significant taxpayer supported technology to
be acquired by foreign interests unless any taxpayer subsidies-- including
tax incentives-- have been repaid or the technology is divested to American
interests prior to a sale.
US-based equipment
manufacturers are staring at a pretty bleak market. The ability to export
is partially dependent on the ability to obtain export credit support.
Terms and conditions
for this support need to be at market levels compared to the rest of the
exporting world. In particular, the ability of competitors to obtain export-financing
packages that include significant non-country content, often preclude
domestic companies from utilizing low cost suppliers of non-critical components.
And in the matter of transmission, FERC must move ahead quickly to establish
the organizational regime and build the consensus upon which the forward
economics of new transmission can be created and existing congestion can
be accurately priced.
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