- The Washington Times - Monday, August 21, 2006

The Washington area so far has weathered the worst of the heat this summer without any lapse in power service, but industry analysts are warning about regional shortages in the next few years as rising demand butts up against limited power resources.

Another energy crisis of the magnitude seen in California in 2001, with rolling blackouts and soaring power rates, could occur before the end of the decade because the use of power is growing rapidly, but planning is inadequate for building the new plants and facilities needed to provide future power, said Ed Muller, chairman of Mirant Corp. at a recent Edison Electric Institute symposium.

Worries about the adequacy of power were heightened this summer when the Maryland General Assembly forced Baltimore Gas & Electric Co. (BGE) to defer for several years recovery of its increased fuel costs, raising questions about where utilities will get the money they need to upgrade the power grid and add supply-generating capacity.

“Electric power is the lifeblood of our economy, and serious service interruptions that could cripple economic growth will occur” if the power industry, regulators, political leaders and consumers do not start working together to ensure enough funding is available, said Timothy F. Sutherland, chairman of Pace Global Energy Services, a Fairfax consulting firm.

Cambridge Energy Research Associates also concluded recently that although supply is adequate this summer, the Mid-Atlantic and some other areas with rising demand will experience supply deficiencies within two to five years unless investments in generation and transmission are made, or conservation measures are taken, “immediately.”

“Neither the industry nor the consuming public can afford another boom-bust cycle,” such as the one that led to the shortages in California and a power glut afterward, Mr. Sutherland said.

A boom in construction of power plants fired by natural gas between 1995 and 2001 led to power surpluses from 2002 to 2005, but that spare cushion is rapidly dwindling in the Washington-Baltimore area, California, New York, New England and Florida, the most congested urban regions.

One irony is that as utilities such as Potomac Electric Power Co. and BGE have depended increasingly on gas-fired power plants built in the 1990s, that dependency has driven up power prices and rates, because gas prices, having tripled since 2000, are the costliest fuel for supplying power.

Yet growing demand in coming years will keep pressure on gas prices and force even more reliance on these costly, though environmentally clean power plants, analysts say.

Because of the spike in gas prices, the industry is looking to nuclear and coal-fired power plants to satisfy the next generation of power needs. But the upfront costs for these massive power plants are considerable, estimated at $400 billion over the next 25 years, and the many hurdles to getting regulatory approval and financing for nuclear and coal projects means they can take six years to a decade to build.

Gas-fired plants are small and can be built relatively cheaply and quickly because they need less regulatory scrutiny, but new coal and nuclear plants have not been built for decades, and environmental and community opposition makes their revival uncertain.

So-called “clean” coal technology aimed at eliminating the noxious pollutants and greenhouse gases prevalent at older coal plants is largely unproven, so clearance of new coal plants by state and federal environmental authorities remains far from certain, according to a Pace report.

And while nuclear power is enjoying a renaissance worldwide, with a dozen plants on the drawing boards in the United States, no nuclear plants have been built here since the 1970s, and it remains to be seen whether the latest efforts will be successful, the report said.

Congress and federal regulators have sought to clear the way for a new generation of clean coal and nuclear power, as well as power plants fed by renewable fuels such as wind and the sun, facilitating financing in recent legislation and smoothing the approval process. But obstacles remain, and in some cases, have increased at the state and local levels, where many of the critical decisions on siting and rates are made.

That raises questions about whether the coal and nuclear plants will be built in time to prevent power shortages, the Pace report said. If any of the planned coal or nuclear projects are delayed — which seems likely, given opposition from environmentalists and many community activists to both types of power — “the likely result is a near-term bind,” it said. “Higher than expected load growth or abnormal weather can speed” the arrival of shortages, “as recent events in California have shown.”

The public backlash against deregulation in Maryland and other areas has added to the uncertainties clouding the power outlook. While Washington-area utilities need to add capacity, “price volatility has led regulators to impose price caps, which diminish the incentive for capacity additions and exacerbate the possibility of capacity shortage,” the Pace report said.

A report by ScottMadden Management Consultants also concludes that it will be “challenging” for utilities to meet future power needs, given the many uncertainties over fuel costs, rate levels and environmental regulation.

While federal regulators have taken constructive steps to speed power development, “state regulators are taking a more active role in dictating policy,” it said. “The sunsetting of rate freezes has sparked battles over rates. It has also soured the political and regulatory climate.”

Importantly, the political fracas in Maryland and elsewhere has caught the attention of potential investors on Wall Street, whose support will be critical for financing new power projects.

Wachovia Securities analysts see a recipe for disaster: “Combine election-year politics, bitterness between Democrats and Republicans, tightly contested races, politically motivated attorneys general (AG can also denote ‘aspiring governor’), then toss in the issue of rising utility rates, and suddenly you’ve got a horse that everyone can flog,” they said in an analysis. “That’s great, unless you’re the horse.”

The potential power squeeze has prompted some utilities, including BGE, to push for greater conservation measures to avert the need to build new power plants. But while greater energy efficiency or more powerful transmission lines could stave off a reckoning, neither of those is certain to happen.

“The fact the grid is holding up during this heat wave shows the progress we’ve made the last few years modernizing grid-management systems and upgrading older … lines,” said Roberto Torres, energy program manager at Frost & Sullivan consulting firm.

“But we still have a long ways to go” to upgrade the transmission grid, he said. “For about 20 years up to the late 1990s, there was declining investment in grid infrastructure, and it will take more time and money to reverse the deficiencies built up during that period.”

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