United States

United States

Calls for diversity follow price spikes

This summer's disruption of America's electricity system--when soaring demand for air conditioning caused dramatic electricity price spikes and warnings of substantial blackouts across the US--threw the market into near panic. But the frightening price spikes could hold benefits for wind as decision makers start demanding a return to regulated diversity of supply. Wind is high on the diversification list of at least one state governor.

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Regulators in America have opened an unprecedented investigation into this summer's wild electricity price swings, which threw the US market into near panic for the first time since widespread deregulation was started. Confidence in the changing American market among power and financial businesses and consumers remains dicey, while renewables are increasingly being edged out of the mainstream and into a niche green market visited by a few environmentally minded consumers with cash to spare.

At least some policy experts are now calling for a return to the drawing board. They point out that the concept of integrated resource planning (IRP) -- which requires utilities to embrace a wide diversity of energy sources to safeguard supply -- is being ignored by power planners in the rush to deregulate. As a result utilities are vulnerable to violent market swings, such as those caused in part by the summer's heat wave and soaring demand for air conditioning. Because of the broad base of the IRP concept, renewables advocates have argued that it could open a far stronger market for wind than specific renewables legislation, such as the Renewable Portfolio Standard backed by the American Wind Energy Association.

Meantime, staff at the US Federal Electricity Regulatory Commission (FERC) are now probing the cause of the Midwest price surges, confirms FERC's Hedley Burrell. Once the investigation is complete, possibly this month or next, the FERC will decide whether it should implement changes, though the findings of the staff team may not be made public. The highly unusual probe marks the first time the commission has opened an investigation of how well the US electricity market is operating. Previous FERC "fact finding" exercises have almost always focused on the specific problems of a tightly regulated market -- whether national or regional -- and have involved a particular utility or issue, says Burrell. FERC has shown itself keen to open up America's electricity market to free competition.

Market under strain

The merciless heat wave that started in May sent electricity prices spiking to 100-plus times normal by late June and early July in various areas including the Midwest and California. But in the heat struck region extending from Colorado and Wyoming to New Mexico, where the market has yet to deregulate, prices were only one-tenth as high as in the Midwest. Nonetheless, the supply was so tight that the main utility in Colorado, Public Service Co (PSCo) of Denver, asked consumers to reduce their consumption of power voluntarily and instituted a program of rolling blackouts. PSCo is building a wind farm in Ponnequin County for its green pricing program.

In late July the utility publicly warned customers that it was predicting a peak load of about 5100 MW -- but it would only able to generate 4800 to 4900 MW. One or two power plants in PSCo's territory had to be completely shut down because of mechanical problems, a hydro plant and a coal plant, while another three were operating only because of patchwork repairs. Even an ancient often unused diesel plant was pulled back into service for a bit to keep the region's juice flowing, says energy expert Randy Udall of the Community Office of Resource Efficiency in Aspen, Colorado.

The entire region in the Rockies and High Plains was almost plunged into a complete black-out that would have wreaked widespread havoc by slashing economic productivity and potentially contributing to health problems and food spoilage because of the heat. "It was a very, very close call," says Udall, who talked with top executives from other utilities in the region. "We were apparently one mechanical failure away from a black-out from Colorado and Wyoming to New Mexico."

Wind in the equation

Because the system came so close to failing, Colorado state regulators are re-considering deregulation, which has yet to start in their state, and of reviving Integrated Resource Planning, says Udall, who sits on the governor's renewables task force. Some resistance might well come from the Colorado utilities though. Udall says they have already been acting as if restructuring has been launched and as if IRP obligations are archaic.

But governor Roy Romer, a long time renewable energy advocate, is calling for the coal-dependent state to diversify its energy resources. Romer, whose house is powered by wind energy, told the Denver Post that the state needs a new plan for producing and delivering power. He said he envisioned a new era in electricity would come from diverse sources, including wind and solar energy. The new era would feature open competition and smaller power plants rather than large central plants.

As much as 96% of Colorado's electricity comes from coal fired plants, but PSCo has no plans to add any renewable energy generation, says the utility's Natalie Goldstein. The governor made no mandate, she stresses. Any mandate, however, would have to come from regulators and not the governor.

Marc Roper, manager of the Colorado Office of Energy Conservation's renewable energy programs, says, however, that pressure for renewable energy is mounting. "Recent problems are turning the heat up in terms of getting the utility to make decisions about how it will meet future resource needs." Although he does not expect any immediate policy changes on renewables, Roper notes that Romer formed a task force in 1996 aimed at developing strategies for increasing the use of renewable energy. In November, Romer set a goal of developing 250 MW of renewable energy by the next decade. And PSCo in August submitted to state regulators a plan for net metering that would allow solar users to receive credits from the utility for feeding energy into the utility grid.

First real test

The onset of the heat wave was the first time the market had come under serious strain since FERC ordered utilities in 1996 to open their transmission lines to competitors, with the result that some power providers said they would not be able to deliver as promised. Minor brown-outs followed, notably in New England, and prices soared. Consumers in some areas were even told just to keep using electricity regardless of its price, for their health, and to forget about their bills for the meantime. Panicky utilities and some other unseasoned market players, unfamiliar with such fast changing prices and availability, also petitioned FERC to scrutinise the market in case some "reregulation" was warranted.

At about the same time, at least two electricity companies filed civil lawsuits against other firms that had allegedly failed to deliver a product -- electricity -- as promised. And consumers and small independent power producers were often left worried that the situation might worsen -- and risk might increase as the US and individual states charge ahead and dismantle the way that electricity has been generated, bought and sold since the US market first developed.

Even officials at California's newly founded electricity "traffic cop," the Independent System Operator (ISO), which oversees the grid (while the PX or Power Exchange oversees pricing), expressed concern about the market disruption with the FERC in Washington DC. The approach to the FERC by trend setting California, the first state to launch electricity restructuring across the board , is significant. Its closely watched four year transition to full deregulation only started on April 1.

The electricity crisis was undoubtedly exacerbated by an unusual confluence of events -- many weeks of high temperatures which meant that power usage surged, along with fierce summer storms that knocked out both a key transmission line and a nuclear plant. Yet it was also soon evident that the underlying cause of the disruption was far from clear. Even within the wind industry, opinions of what caused the price spikes have varied about as much as the peaks and troughs in the electricity market.

Differing analyses

Some have insisted the disruption was a sign of immaturity that would soon calm down. Some even argued that deregulation should be accelerated to prevent such high prices recurring and to shake out weak or slow moving players. Following this line of argument, the American Wind Energy Association (AWEA) characterised the period of spiking prices as a gentle sounding "power market price shift," typical of a young trading market.

Others in the wind industry are not so sure. They feel AWEA is being slightly too quick to minimise problems in the deregulation process. Even a deregulated market needs checks, they say. The price spikes were proof that some players will always seek to maximise profit regardless -- and that small companies and consumers will almost always get a raw deal unless there is some judicious reregulation. Moody's Investment Service said in mid July that the problem did not seem to be an aberration and that those thinking of investing in electricity should keep such risks in mind.

Wake up America

Wind optimists are pointing out that the price spikes could serve as a wake up call to alert America. No other major industrialised nation has such unrealistically cheap energy or uses so much energy per capita. Udall, a major critic of the nation's low electricity prices, feels a louder alarm is needed, however. There was a short run-up of prices because of the heat wave, he notes. But a far more serious crisis would be needed to shock America into action. The real price of electricity has dropped 25% since 1985 in America, because the country is still living on the cushion of the over building of power plants after the 1970s. And even now, he says, utilities are just hoping that others will build power plants and that they can avoid any risk.

Nonetheless, there are signs that some minor but notable changes might be afoot, that the utilities are less frozen by their fear of deregulation. In Colorado this summer PSCo changed the rules slightly for bidders for an IRP auction. Until recently the utility only guaranteed the winning gas bid a two year contract. (If any proposals involving wind or other renewables win, they get a 15-year contract.) Because of the price spikes, PSCo has now extended potential contracts for gas to five years.

Udall is even more sceptical that the mood will change in the US Congress without a far more major crisis. America's politicians tend to think short term, he says. This was recently illustrated in a comment made by Chuck Linderman, in charge of the renewables and fossil fuel programs at the Edison Electric Institute in Washington DC, which represents America's private utilities. Udall reports that at a meeting in Cheyenne, Wyoming, Linderman jokingly speculated that the meteorological wake up call needed for the country to understand its vulnerability to global warming is nothing less than a series of class five hurricanes that strike major East Coast cities from Miami northwards. Other than that, says Udall, it would take a famine in the Midwest, the nation's breadbasket, to jolt the country's leaders into any real action.

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