Despite current moderate to extreme drought conditions in the Pacific Northwest region, the Northwest Power Planning Council (NPPC) reiterated in a report this week that it does not expect any power supply problems this winter or next year because of about 3,000 MW of new non-hydro generation that has been built.

However, the low hydro conditions will increase demand for natural gas in the West, and a sharp decline in the amount of proposed generation over the next few years could lead to a much higher possibility of power supply shortages over the longer term.

“We’ve had a very dry fall, and we anticipate we will not have average runoff this year in the Columbia River,” said Tom Karier, chairman of the council’s four-member Power Committee. “This is an important reminder that the Northwest is still very dependent on hydropower and vulnerable to the variability of weather.”

Low precipitation and stream flows continue to be a concern this winter. While recent rains have helped the situation, the National Weather Service shows many parts of the Pacific Northwest need 12-15 inches of rain — some areas more than 15 inches — to reach normal conditions. The moderate El Nino is expected to allow the drought to persist across large areas of the Northwest heading into next year. While that undoubtedly will be a concern as it relates to power supply, market observers also will be keeping an eye on its impact on natural gas demand throughout the West.

“Hydro is a little low for this time of year. I think stream flows are about 55% of capacity right now. If it stays low like that, it could have an impact on power prices and gas demand in the West next summer,” said Chris Ellsworth, project manager for Fairfax, VA-based Pace Global Energy Services. “They should be prepared to handle it with the new power plants that have gone in. It shouldn’t be the same kind of issue that it was a couple of years ago. But it is something that bears watching.”

Ellsworth said if the lower hydro situation persists it could lead to 20-30% additional gas demand next summer. However, California is much more prepared to handle such a scenario. In-state gas transmission expansions and a 700 MMcf/d increase in capacity on the Kern River Gas Transmission system next year should provide sufficient capacity for the additional demand.

“We think Henry Hub prices next year will remain in the high-$3 range,” said Ellsworth. “We’re looking at $3.60-80 in 2003. Gas prices have remained high because of the supply situation.” There could be less upward pressure on Southern California gas prices next summer because of Kern River Gas Transmission’s expansion, he said.

Nevertheless, Karier is worried that the continued dependence on hydro power generation in the Northwest will lead the region right back into the problems it faced in 2000. “[W]e need to think about how we will respond as a region if the new power market fails to encourage adequate investment in new power plants,” he said.

Low power prices in the Pacific Northwest and depressed financial conditions among most power generators in the country has led to a greater chance for power outages in the Northwest region over the next few years, according to the previously announced report from the Northwest Power Planning Council (see Power Market Today, Dec. 4).

According to an analysis prepared by the Council’s Power Division staff, the probability of electricity shortages during the winter of 2002/2003 is no greater than 4%, which is below the 5% standard accepted by the utility industry. However, the probability increases to 7% during the winter of 2003/2004 and to 15% in the following two winters. The Council’s four-member Power Committee reviewed the analysis at a meeting Tuesday in Portland.

“We will be okay this winter, but for the 2004-2006 period we are exposed to a level of risk that is higher than we think it should be,” said Karier.

The problem identified in the analysis is the same, although smaller, than the one identified by the Council in March 2000, several months before the energy crisis of 2000/2001 began. Through the 1990s, development of new power plants and energy conservation lagged steadily farther behind the growing demand for power – on the West Coast generally and in the Northwest specifically. The problem was that the wholesale price of power generally was lower than the cost of power from new power plants or most types of energy conservation, and this discouraged new investments. Then, when the California power crisis developed and the Northwest suffered drought, power supplies diminished and the prices jumped to more than 10 times normal levels and stayed there from the fall of 2000 through the late spring of 2001.

According to the NPPC analysis, if the region relies entirely on price signals from the wholesale power market to provide the incentive for developing new resources, by 2005 the region will experience significant high prices — three and four times normal — in the summer months. “Nobody wants to see this as our future. This is alarming,” Karier said. “We can make different choices and change the future.”

The Northwest Power Planning Council is an agency of the states of Idaho, Montana, Oregon and Washington and is directed by the Northwest Power Act of 1980 to prepare a program to protect, mitigate and enhance fish and wildlife of the Columbia River Basin affected by hydropower dams, while also assuring the region an adequate, efficient, economical and reliable power supply.

©Copyright 2002 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.