The U.S. power system managed the second hottest July in 100 years quite well this year, but the slow-down in power plant construction and the length of time required to permit the large number of proposed coal-fired power plants could put the system at risk in a few years, according to a new report by energy consulting firm Wood Mackenzie.

Reserve margins, particularly under a high economic growth and warmer weather scenario, begin to look extremely vulnerable by 2012 in a number of control regions, Wood Mackenzie said, echoing the conclusions of the North American Electric Reliability Council (NERC) last week (see related story). Power plant construction simply has not been adequate for a number of reasons.

“Without an increase in power plant development, many regions will have difficulty if the 2006 weather is repeated in the 2010-2012 time frame,” said Wood Mackenzie in a report titled “Crisis in the Making?”

NERC said in a report on Monday that the 67,000 MW of power generation planned in the United States compares to about 141,000 MW of additional demand expected by 2015, leaving a shortfall of about 81,000 MW. The shortfall is equal to about 160 large power plants.

Wood Mackenzie believes that under normal weather conditions most regions could have sufficient supply to maintain adequate reserve margins though 2012. However, if there is faster than expected economic growth and demand increases more than expected, it could result in “dangerously low reserve margins for many regions.

“In fact, without an increase in power plant development, 10 of the 17 major subregions will have reserve margins below 12% in 2012.” That assumes all the plants currently under construction are built, but does not include the output of proposed plants.

Under a high demand growth rate scenario, the situation is much more dire. Even assuming 100% completion of all projects under development and proposed, seven regions will have inadequate reserve margins by 2010 (Mid-Atlantic Area Council, Midwest Reliability Organization, New York, Southern Co., Tennessee Valley Authority, Virginia/Carolina and California). Assuming a 50% completion rate for new projects, four more regions would come up short on reserves: New England, East-Central Area Reliability Council, Florida Reliability Coordinating Council and Southwest Power Pool.

What makes the situation even more precarious are the risks involved in power plant approval and development, Wood Mackenzie said. “When analyzing the makeup of the project pipeline, the risks involved in successfully developing these power plants on schedule are alarming. The first alarming fact is that of the 113 GW in the pipeline over 50% of it is coal-fired. This is disturbing because it takes several years to receive all the necessary permits and approvals for a coal plant and then it takes approximately four years to construct. This means that several of these newly announced coal projects would be lucky to come online by 2010 even if they could get all the difficult approvals.”

The consulting firm also noted that there is a large amount of “other” power projects in the mix that could lead to greater risks. Nearly 18 GW of the 24 GW in this category is wind power, which isn’t always available during peak periods and usually is severely discounted when included in reserve margin calculations. “This means that approximately 16% of the total proposals would not be available when needed most in the summer peak hours, exacerbating the probability of a shortfall.”

The good news is that gas-fired generation can be permitted and built quickly.

“Higher than expected demands are the very reason reserve margins exit. With little construction of power plants currently under way, the vulnerability of the system will increase over the next several years. This could result in extreme price volatility an increase use of natural gas and finally blackouts.”

Wood Mackenzie said there are several reasons more power plants have not been proposed: volatility of long-term fuel prices; regulatory risks; lack of market mechanisms for capturing capacity revenue; pending environmental legislation; rising material and labor costs; fewer merchant developers; and concerns about overbuilding. There is still time to build new plants. “However, without an increase in plant development more regions will be at risk for reliability problems and wholesale price spikes over the next five to six years; and under a high demand scenario, even earlier.”

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