Western energy infrastructure is inadequate to handle the significant gas and power demand growth expected to occur over the next five years, according to a study released last week by the staff of the Federal Energy Regulatory Commission.

The assessment found that future power failures and supply shortages are likely unless California and the surrounding western states reduce their reliance on gas and hydro power, make significant changes to the energy market structure and make additions to the power and gas transmission grids. Some of the same conclusions also were presented in a separate study released last week by Rand Corp. (see related story).

Gas demand from new power plants in the West is expected increase 59% or about 2.9 Bcf/d over current levels over the next five years, putting a strain on an already stressed gas delivery system, according to the comprehensive assessment by FERC staff. About 95% of the proposed generation capacity in the West will be gas-fired, and significant new infrastructure is needed to support the new plants. Pipeline capacity in the region already is utilized near its peak.

California will experience a gas demand increase of 922 MMcf/d (30%) from new power plants (9,434 MW), staff determined, and the state already imports 85% of its gas needs, mainly to serve 32,542 MW of existing gas-fired generation. Interstate pipeline flows into the state are expected to average 97% of total available capacity this year, or about 6.8 Bcf/d.

Meanwhile, an even greater demand increase is expected in New Mexico, Arizona and Nevada where the addition of 13,154 MW of new gas-fired power generation will raise demand by 1.3 Bcf/d (140%) over the next five years. However, gas flows into the region already are running at 86% of peak capacity. In the Pacific Northwest, gas demand from new power generation is expected to grow by 102% or 586 MMcf/d. And in the Rocky Mountain region, gas demand from new generation is projected to grow by 76 MMcf/d, or about 30%.

A daunting number of changes must be made both inside California and across the western states to ensure that adequate energy infrastructure is built and energy consumers don’t experience recurring blackouts or shortages. The region still has some of the lowest power generation reserve margins in the country (10% in California compared to about 28% in the Electric Reliability Council of Texas). In addition, a large amount of the generation in the West is older, less efficient and less reliable.

Although California has made much of its success in achieving demand reductions, the consumer response has been declining, and the surrounding states have had less success with conservation programs.

The West also has an overdependence on hydroelectric and gas-fired generation, staff concluded. Hydropower makes up 20-60% of the available generation capacity in California and the Northwest, making the region subject to periodic drought-related generation deficits. While hydro availability in the Pacific Northwest and California has improved this year, the drought has shifted to the Southwest and the Rockies. Columbia River headwater reservoir levels remain below normal, providing little reserve if drought returns, staff found.

When drought does occur, it puts a strain the natural gas grid because of the abundance of gas-fired generation in the region, particularly California. That problem will only get worse as new generation is added.

California also has an over reliance on imported power. Imports were used to meet 20% of its demand during the last five years. Nevertheless, no significant bulk transmission has been added in recent years. The entire region must make a coordinated effort to alleviate transmission congestion, staff noted. But even if transmission adjustments are made and proposed generation is built, rapidly rising demand in southwestern states surrounding California will draw significant amounts of supply away from the nation’s most populous state further exacerbating its existing supply shortage.

What certainly will make matters even more difficult is an eventual economic recovery, which will drive up power demand and test a power grid with inadequate capacity and significant transmission constraints.

Meanwhile, the very companies the states are relying on to build new generation and transmission are in the midst of a debilitating financial crisis that will hinder their ability to invest in new projects. “Investor confidence, financial stability, low credit risk and favorable financing serve as the foundation for additional infrastructure investment,” staff noted. Currently these conditions are missing from the market.

Further exacerbating the problem are the current low spark spread outlooks, expected thinner profit margins and industry uncertainty has forced the cancellation of many power projects. FERC staff found that 40,089 MW of previously proposed generation has now been either tabled or canceled in the West, including 20,461 MW in California alone.

FERC staff made 13 recommendations that will move the West toward an improved regional energy market:

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