The electric industry is traveling down the highway ofrestructuring like a car whose every cylinder is misfiring. Thatmay sound pessimistic to some, but at least one industry watchersees much unevenness in how generation, transmission andlegislation are evolving and predicts a lot of uncertainty down theroad.
Looking at generation, Paul Parshley, director of North AmericanElectric Power for Cambridge Energy Research Associates, sees U.S.generating capacity growing differently by region. “A big wave hasbuilt up in the level of new projects that are announced. In thelast two years, about 200,000 gigawatts of electricity have beenannounced, and it’s important to keep in mind that this is anaccelerating curve… a hundred gigawatts in the last nine monthsor so. This is more than is needed, and so the current signs pointto misalignments in the degree and the timing and the location ofsome of these additions.”
For instance, he told attendees at Energy Expo 2000 in HoustonTuesday that the Midwest is the only region where all of the powerprojects announced are not equal to the anticipated need for newcapacity. “Conversely, in the Northeast, what you’ll see is thatthere already is under construction more power than we think isneeded. What happens here is that you then can anticipate boom-bustcycles, with the bust cycle being a longer stretch than the boomcycle. That’s important in thinking about how markets are going toopen up and how prices are going to be affected.
In the regulated world, transmission was developed almost inlock step with generation, but a large spate of merchant powerplants has thrown that out of whack.
“It’s important to keep in mind that there’s been a bigde-coupling between the investment in generation and the investmentin transmission. And this is potentially a source of a big problem.With [transmission] gridlock there is no one that really has theincentive to make the investments in the grid system that may benecessary to hook up new plants to protect reliability of thesystem and accomplish a number of other things, not the least ofwhich is facilitating the opening up of competitive markets.”
While transmission represents only about 10% of the assets inthe power sector, it’s been the focus of attention for the industryand regulators for the last six months, Parshley said, as isevidenced by the debate over regional transmission organizations(RTOs).
“Like with retail choice, there is an uneven rolling out. Thereare different models. There are different rules. There aredifferent regulations. It’s not easy to say how they will all matchup well together when they start coming into closer contact, andthat’s an issue to keep in mind. The sector is in change. There area lot of oxen that may need to be gored in the process. It’s notclear how we’re going to get there.”
With its order on RTOs, the Federal Energy Regulatory Commissionis leaving much up to industry to decide. “By not forcing the toughissues to a head at this time, FERC is hoping that flexibility,cooperation and reasonableness will prevail. In fact it may turnout they’re taking a five-year process and turning it into a10-year process.”
Wrapping up his talk, Parshley suggested three possible outcomesfor the restructuring industry. One scenario predicts a few largeRTOs coming into play.
“Some or all of them will have for-profit components to them.Underlying this is the notion that there really are economies ofscale out there in the transmission business and that they can becaptured. Capturing them assumes that there’s going to be properalignment between regulatory incentives and those who own and thosewho control the transmission assets.”
Another possibility is what Parshley calls “off-road solutions.”It embraces evolving technologies such as distributed generation.”It’s the solution that for want of a better term could be viewedas kind of a bypass of the traditional grid system. It’s wherecustomers exercise some pull, where there is a need for veryhigh-quality, reliable service at a local level, and perhaps theconsumers have such value-added products that the price of that isnot as important right now as you might think.
This is a very different world from the one in which you havebigger, smarter, more efficient grids, and the grid in this casemay become somewhat less significant.”
Parshley’s third and final scenario envisions an industrybecoming disillusioned with the idea of transmission as a business,opting for more government involvement.
“We wouldn’t be surprised to see a number of fairly boldexperiments, companies trying to make a go of it as for-profittransmission entities, but we also would expect to see that therollout of this will be uneven. It will be a patchwork, andultimately we may find out that it either works very well or is afrustrating experience that needs to have some alternativesolution.”
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