Generation reserve margins have shrunk across the country, and the United States has built too much gas-fired power gen and too little of everything else, making for a capacity portfolio that is underpowered and out of whack — not to mention too dependent upon natural gas, which increasingly will come from abroad.

At least that’s what it looks like if your name is C. John Wilder, CEO of TXU Corp., the Dallas-based titan with 40% of the Texas generation market. Wilder sits atop an enterprise whose units boast:

That’s not enough for Wilder, who told attendees at the Edison Electric Institutes’s (EEI) financial conference in Las Vegas last week that he wants TXU’s power development arm to become the leading originator and constructor of baseload generation throughout the United States. Besides ambitious buildout plans in ERCOT, the company also has a development program slated for PJM. TXU believes it can build baseload generation 35% cheaper and faster than others and improve on that achievement by 5% annually. Part of the strategy includes long-term off-take agreements and equity sell-downs to ensure that 30% of construction is sold forward.

Wilder announced a reduced earnings out look at EEI for both 2007 and 2010-2011. The company now forecasts for 2007 earnings of $5.25-5.55/share, down from a previous $5.75. Longer-term earnings (2011) are forecast at $7.55-7.85, down from the May outlook of $9.75-10.00 in 2010.

In a research note last week, Merrill Lynch analyst Jonathan Arnold said key factors behind the lower 2007 outlook are commodity price movements and retail pricing; new technology and development investments; reduced share buyback assumptions, tempered by productivity gains.

“What is not receiving attention, however, is that much of the change relates to strategic decisions to re-direct capital towards longer-term growth projects,” wrote Arnold. “While selling down the Texas new-build program is a negative for earnings in the 2010-2011 time-frame, reinvesting outside of Texas promises better long-term balance for the business, less gas exposure over time and stronger returns on capital.”

TXU has ambitious goals for plant construction metrics. While the average plant in the United States costs about $1,600/kW and can go as high as $2,000/kW, according to TXU estimates, the company believes it can build baseload generation for about $1,100/kW and cut construction time from an average of 50 to 32 months.

That kind of efficiency is highly desirable in a world where power demand is projected to grow 8% from about 3,875 TWh in 2005 to nearly 4,200 TWh by 2010. This is leading to a projected supply-demand imbalance where incremental demand is expected to exceed supply by 2.5 times by 2015 and reserve margins could sink to well below minimum levels.

“According to NERC (the North American Electric Reliability Council), demand will outstrip supply by about two and a half times,” Wilder told EEI attendees. “We will have demand growing at two and a half times what supply will grow, and that’s going to result in reserve margins across the country being at dangerously low levels. In Texas we’re at the forefront of that.”

He said Texas is a good example of how the rest of the country is going with regard to generation capacity, although the state is more reliant on gas-fired generation than the average.

“Texas has a more vibrant economy; it’s growing faster. We’ve peeled off reserve margins quicker than the other regions. But if you get into each one of these NERC regions you see a very substantial amount of reserve margin declines that will lead to levels not unlike those we had in the late ’90s when we had severe shortage issues with electricity.”

The antidote to this situation advocated by Wilder is a multi-technology generation approach that includes coal, gas, wind, nuclear, solar, etc.

“None of these generation technologies have the right answer,” Wilder said. “There’s not one generation technology that’s the most reliable, least-cost and has the best environmental profile… You’ve got to approach it in a balanced way. As we’ve rebuilt the generation profile in America over the years we’ve constantly gotten the balance out of whack.”

Specifically today, that means an over reliance on natural gas for power generation in Wilder’s view. He noted that demand for gas for power generation has offset declines in gas demand in the industrial sector. Over the next five years, he said, demand for gas is expected to grow at a rate of 5% while supply is projected to grow at 2%.

“That means we have to import more gas,” he said. “While we’re importing oil and becoming even more dependent on imported oil for our energy we’re going to become even more dependent on imported gas for our energy sources over the next decade.”

Hence TXU’s plan to bring on 9 GW of new coal-fired capacity in Texas by 2010 (see NGI, April 24) and rebalance the state’s supply stack to maintain adequate reserve margins through 2014. The strategy includes leveraging the scale of its power generation program to bring down prices and push higher cost generation out of the market.

In the United States, about 42% of 1,070 GW of generating capacity is gas-fired. In Texas, 65% of 77 GW of capacity is gas-fired. By 2010, Wilder said Texas will be down to about 58% gas-fired. Wilder said TXU’s long-term expectation for gas prices is that they stay in the $5-7 range. So far, he said he’s surprised that more companies haven’t stepped up to build generation in Texas.

“We thought more people would follow us than actually have in terms of filing permits in Texas,” he said. “It’s generally a very attractive place to do business.”

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