Chicago Tribune Finally Wakes Up On Our Dismal Energy Future

Over the last few years I have written many articles about power and electricity, and in particular how transparently wrong the “dreams” and plans are for alternative technologies or the re-birth of nuclear power (although that makes me sad, for I am a big supporter of nuclear power).

A large part of the problem is that there are many variables that need to be understood in order to see what is likely to occur in the future in the energy industry. These include:

1 The motivation of key players, whether they are utility companies, government entities like the TVA or the Los Angeles Department of Water and Power

2 The financial capabilities of the key players, because often the ones with the largest amount of available funding are unlikely to “risk it all” for uncertain financial gains

3 The role of state regulators, since the utility industry still has a very strong state orientation, particularly in Texas, which has its own grid (except for El Paso)

4 The role of Federal regulators, who have can order components of deregulation which have shaken up the industry for better and for worse

5 The role of Federal agencies, such as the Nuclear Regulatory Commission, which for the most part has rubber-stamped nuclear re-licensing so far (prior to Japan), and the Department of Energy which has spectacularly failed with the Yucca Mountain storage project for nuclear waste. Also the EPA with particulate emissions

6 The role of special interest groups, particularly those against new construction of nuclear or coal plants, or transmission lines to connect the grid. These interests have won huge and damaging victories such as the demented Shoreham situation and the transmission line under Long Island that can’t be powered on

7 How electricity works (and gas, for they are intertwined), with the key note being that it is a “peak” business and not having the right amount of power in the right place makes for bad outcomes (blackouts)

8 That “classes” of rate payers such as industrial titans (aluminum plants), companies, government entities and residents have different motivations and goals. One of the most insightful things I heard in a rate case proceeding was “I don’t care if you raise utility rates, just don’t raise them on my class of service”

9 The different segments of utility operations, from generation to transmission to distribution, and how each has different economics and “closeness” to customers (you may hate your local distribution utility, but it is the generation and the lack of transmission that is driving the rates that they must charge)

10 The role of individual politicians, such as prominent ones from either party that come into power and proclaim that they can “change” the system or achieve a particular type of transformation

11 The fact that utilities are regressive in that an increase in utility rates disproportionally impacts the poor because it can represent such a big portion of their expenses and the utility actually takes action if you don’t pay (one of my first encounters in the industry happened when a small child on a plane asked if I was the guy who “turns off the power” when I said I worked in the electricity industry)

12 The availability and impact of alternatives of which the most important by far is decline in the price of natural gas for generation or to a lesser extent the fact that gasoline powered generators for home backup were once rare but are getting more common, and that many major businesses simply have to purchase parallel backup power units(quite expensive) because they can’t rely on the “dirty” power from their local utility

13 The advancement of technology captures the popular imagination, but I hardly pay attention to it at all. Our energy infrastructure is ancient; our hydro faculties may as well have been built by the ancient Egyptians, and the vast, vast majority of our nuclear plants are running on technology designed 30-40 years ago. Items like smart metering and “alternative” technologies are a drop in the bucket and don’t solve our fundamental issues of lack of base-load power and properly placed and sized transmission lines

14 The cost & availability of money whether measured in interest rates or in availability of credit or buying power is very important to capital-intensive businesses; in the 70’s during high inflation up to 25% or more of the cost of a major investment such as a nuclear power plant was just capitalized interest which was driven by the high cost of money

15 The motivation of oligopoly players is important since major utilities are adjacent to one another and tend not to compete in the other guys’ backyard; the most famous example of this was AT&T which was broken up in the classic Judge Greene decision in 1982 and then regrouped slowly over the next 25 years as shown in this hilarious but true Colbert bit

Of all the variables… the popular imagination tends to favor #13 “new technology” with magazines like Popular Mechanics talking up new reactor designs and other cool advances as well as #10 when the incoming administration talked of a (never-gonna-happen) “nuclear renaissance” in 2008.

The “real” answer, in my opinion, is that “it depends”. What pre-killed the nuclear renaissance in the USA was the fact that the major players either didn’t have the money to buy them (#2) or if they did have money, didn’t have a motivation to do so (#1) which is tied to the fact that they profit anyways off the status quo.

When the (sad) situation in Japan occurred, instantly the most important item was #6, the role of special interest groups, which would fight tooth and nail until the end of time, draining money and adding risk, in order to see the utility fail in its mission of adding new generating capacity.

The most important general trend now is the low price of natural gas (#12) which means that now not only is it insane from a regulatory point of view to consider nuclear or coal, natural gas at its current price presents a rational economic alternative.

Back to the Chicago Tribune…

Due to the fact that you have to understand so much, the typical “reporter” method of asking some questions, fact checking what you were told, and then adding a “human” element of the average “Joe” on the street, and kicking it out in the paper, fails utterly. You could ask 100 people and get different answers, with few to none understanding the financial and regulatory hurdles that OBVIOUSLY prevent anything from happening at all (except the status quo). Thus in order to understand and write insightful articles you need to see “the big picture” which means at least a decent understanding of all the components above, or at least the elements that are the most important at the time the article is being written.

Due to the importance of this issue and the fact that it keeps popping up year after year, more and more journalists and papers are starting to be more insightful in their conclusions. Today’s article is called “Consumers’ Electric Bills Likely To Spike As Coal Plants Close“.

The first line is:

Consumers could see their electricity bills jump an estimated 40 to 60 percent in the next few years.

Well that is a good start. We have been shielded from rate increases for years as the utilities “wind down” the lives of their existing assets and don’t re-invest in new base-load generation (along with price caps in Illinois), but that good fortune is coming to an end. Implied is (#11) the impact of these increases on everyone in Illinois, especially the poor.

The reason: Pending environmental regulations will make coal-fired generating plants, which produce about half the nation’s electricity, more expensive to operate. Many are expected to be shuttered. The increases are expected to begin to appear in 2014, and policymakers already are scrambling to find cheap and reliable alternative power sources. If they are unsuccessful, consumers can expect further increases as more expensive forms of generation take on a greater share of the electricity load.

Also true – pointing out that environmental regulations from the EPA (#5) with a sop to the fact that our (state) regulators (#3) don’t have any solutions, although they claim to be working on it.

“Each generator will have to decide for itself whether the investment required to meet environmental requirements can be justified based on its projection of market prices and the cost of its capital. In any case, those costs will be passed through to consumers,” said Mark Pruitt, director of the Illinois Power Agency, which procures electricity for Illinois.

All true. There is no free lunch, and (#1) the MOTIVATION and (#2) FINANCIAL CAPABILITIES of the key players will drive what happens. That is a good insight that whatever happens, customers pay.

American Electric Power, one of the country’s largest coal-burning electricity generators, said Thursday it will retire nearly a quarter of its coal-fueled generating capacity and that it will spend up to $8 billion to retrofit remaining units to meet regulations that start taking effect in 2014. Those moves will have an impact.

This is an interesting quote. Note that they are retiring 25% of their coal base-load capacity (they have some nuclear, too) and then spending billions just to keep the rest in operation (which doesn’t add ANY net new capacity, we just tread in place) to keep up with new regulations (#5).

What analysts know is that a portion of ComEd bills that pays electricity generators to reserve a portion of their power three years into the future will increase more than fourfold. That would translate into increases of $107 to $178 a year for an average residential customer in ComEd’s territory, starting in 2014, according to calculations by Chris Thomas, policy director for consumer advocacy group Citizens Utility Board.

While the numbers may be fine, the reporter misses a KEY DISTINCTION; there is no “ComEd”. ComEd gets most of its energy now from Exelon, and will get MORE in the future as the coal plants shut down. “ComEd” is OWNED by Exelon, and Exelon will make money hand over fist as they run their nuclear plants forever, and their poor subsidiary ComEd will come crying to politicians hat in hand saying it needs money to pay for power generated by some distant utility, which is basically themselves.

Ultimately the CRAZY SCENARIO I see is that Exelon “dumps” ComEd, which is just a conduit for power purchased by others that makes a bit of money on a regulated return, so that they no longer have this tie to their subsidiary that will allow them to pass on massive increases in power costs (for the same power that state ratepayers funded decades ago, mind you). That is why I have this item – motivation – as #1 on my list (although they aren’t in order, it just jumped out at me as I started the list).

And then the CRAZIER SCENARIO, which is right out of the movie “Too Big To Fail” which I just saw on HBO, is that the state or local governments just get tired of this and seize the Exelon nuclear plants. They could do this directly or by stealth (through pecking them to death with local violations); but at some point these rate increases will go so high that politicians will have to “do something”.

In any case, this is a well written article, and the reporter obviously could see the situation from several angles, and pretty much discounted any hopes of avoiding these rate increases. There isn’t much of a tone of hope in the article, which is appropriate, because our situation is bad and getting worse, saved only by the low cost of natural gas as a fuel source. The article was also mostly free of “alternative energy” mumbo jumbo; it doesn’t provide base load power anyways and we’d all be paying far more than 60% higher on our electrical bills if it provided a substantial portion of our electricity.

Cross posted at LITGM

24 thoughts on “Chicago Tribune Finally Wakes Up On Our Dismal Energy Future”

  1. And what is the State of Illinois going to seize the power plants with? They are the brokest players of all.

    As I so often say, when the last lawyer is strangled with the innards of the last environmentalist.

  2. California had a taste of this when the utilities were stripped of their generation sources. They then begged the state to be allowed to sign long term contracts and this was denied. Then came the manipulation (I still don’t know if this was on the up and up) of peak power prices by Enron and people and businesses saw massive spikes in rates. Gray Davis, the governor, panicked and legislators tried to put price controls in place. That led to the recall election that saw Schwartzenegger become governor. The situation is now that “smart meters” are being installed and I expect brownouts this summer.

    I had a laser in my office that required very stable voltage to avoid damage. I put a meter on my office power source and saw radical variation in voltage, from 90 to 130 volts, that required a line backup system to smooth out the variation. I finally gave up on the laser which would have cost $250,000. This will not end well, especially in California. It may require local generation capability for any business that requires steady power.

  3. California also suffered from being heavily dependent on hydro. The last power crisis was triggered (made possible?) by a drought which limited hydro supplies. This year there is a surplus of hydro and most of the gas plants will barely run this summer. Paying for adeqequate reserves is possible only by allowing generators to keep large (daily) profits in peak times or by paying regular capacity payments. Utility gadflys oppose both.

    The same is happening in other areas where large wind generation is being installed. Only in this case the “droughts” can occur in a matter of hours.

    This is real first order input-output type load balancing. No smart grids or other pie in the sky solutions will help much.

  4. Carl,

    What is your take on the role of current electricity markets and their role in the future? I have some clients who are active in OTC electricity contracts via Intercontinental Exchange, but have wondered how a more standardized and exchange-traded alternative would change the landscape.

  5. So you think that the NRC has “rubber-stamped nuclear re-licensing so far”?

    Sure doesn’t seem like it from the trenches trying to get one’s plant licensed. Both the industry and the regulator strives for a stable set of rules. The NRC writes lots of specifications and review plans and the industry generally tries to meet them to avoid surprises. It makes things easier but stiffles innovation on both sides – that’s why I’m bearish on small modular reactors – no rules yet. Still, our energies have been focused on improving operating plants for 30 years now and they really are much better designed and operated than when I started back in the 1970s.

    We have but a small handful of real events to learn since the operating plants are very reliable and run safely. We will make a handful of changes from Fukushima (I’m pushing one now) but Nature can ALWAYS overwhelm the best of man’s intentions and plans.

    Good point about looking at the motivations of all the players in the electric business. The environmentalists have been at work tweaking those reward systems over the years. Want utilities to push energy efficiency? Give them 10 cents profit on every dollar they spend and get the money from the rate base. Want consumers to use CFLs? Subsidize the retail price from the rate base.

  6. Michael Kennedy Says:
    June 13th, 2011 at 1:08 am

    This will not end well, especially in California. It may require local generation capability for any business that requires steady power.

    I think we are seeing that in Britain now. From what I understand, businesses, in the London area especially; that require steady, uninterrupted power for computer or manufacturing processes [and heat in the winter, people have been freezing to death in Britain for the last couple of winters due to lack of power or inability to afford power] are installing their own local power sources. They are facing the reality that all of the windmills that they have paid so much to install don’t work all that well in good weather, and don’t work at all in bad weather.

    Germany is going to have a similar moment this winter. By permanently shutting down their nuclear plants, they are destroying a good part of their base load instantly. German power generators are saying that there will be blackouts in southern Germany this winter, and perhaps elsewhere. The Government and the Greens say that there will be new, environmentally pure power sources on line by then. I’m betting on the German equivalent of Gray Tribe engineers. The only thing that will save their collective tuchus’ will be if they can buy surplus power from France …. generated by nuclear power plants.

    The interesting thing, is like all power sources but hydro and nuclear; local power generators have emissions that are regulated. A problem in Britain is getting the regulatory permission to install and operate. California, with its built-in regulatory over-reach trying to destroy any productive efforts while subsidizing destructive trends, is probably going to make it all but impossible to install local generation. At least for those not appropriately “connected”.

    The last profitable business to leave California will not have to turn out the lights as they exit. It will already be dark.

    Subotai Bahadur

  7. One of my favorite writers on energy topics is Robert Rapier, an engineer who works in the energy business. The following is from his post on “Democrats and Energy Policy” on May 23, 2011:

    “I understand the thinking of the Democrats. Many of them believe that the only thing really standing between the status quo and a clean energy economy are the traditional power providers, their lobbyists, and their allies in Congress. Therefore, if they pass legislation to marginalize our major providers of energy in this country (oil companies, coal companies, nuclear power companies), their share of energy production will decline and green power will save the day. I see that viewpoint again and again. It is so far out of touch with reality, and yet at the heart of the divide between the left and right on energy issues.

    “I believe part of the issue is also that many Democrats think the use of fossil energy is morally wrong, and therefore the industries that profit from that are to be ostracized and punished. That’s why you see liberal think tanks like the Center for American Progress expressing outrage over oil company tax deductions, but silent over Apple’s or GE’s tax deductions. The issue isn’t really taxes. They want an end to the consumption of dirty fossil energy, and they therefore try to stir up anger toward the oil companies. The casualty of their tactics is that they decrease America’s average energy IQ with misinformation campaigns, and they make it much more difficult to have rational energy policy discussions.”

  8. I read that column and came away convinced that he is another example of Michael Crichton’s “Gell-Mann amnesia theory.”

    “Briefly stated, the Gell-Mann Amnesia effect is as follows. You open the newspaper to an article on some subject you know well. In Murray’s case, physics. In mine, show business. You read the article and see the journalist has absolutely no understanding of either the facts or the issues. Often, the article is so wrong it actually presents the story backward—reversing cause and effect. I call these the “wet streets cause rain” stories. Paper’s full of them.

    In any case, you read with exasperation or amusement the multiple errors in a story, and then turn the page to national or international affairs, and read as if the rest of the newspaper was somehow more accurate about Palestine than the baloney you just read. You turn the page, and forget what you know.”

    He agrees with the Democrats and Obama on everything but energy.

  9. SmartGrid will enable each utility who adopts it to control the amount of power your home or business consumes at any time of day. That’s how they plan on mitigating rolling brownouts. Short-term.

  10. “SmartGrid will enable each utility who adopts it to control the amount of power your home or business consumes at any time of day. That’s how they plan on mitigating rolling brownouts.”

    Yeah. They will blackout the houses of Republicans.

  11. Mr. Schwartz,

    Here in California, the energy consumption that will be reduced will be the air conditioners in the Central Valley. The state’s elites live along the coast where the temperature is moderated by the cold Pacific Ocean. Remember Mark Twain’s line: “The coldest winter I ever experienced was summer in San Francisco”?

    The Central Valley gets hot, hot, hot during the summer. The air conditioners will be controlled through their thermostats. While we beat back the mandatory remote controlled thermostat, the latest push is to make differential electric rates so that it will be prohibitly expensive to NOT allow remote control.

    And yes, the coastal areas are largely Democratic while the Central Valley votes more Republican, so you’re correct for this state.

  12. Speaking of the insanity of California, here is the plan for the future. No doubt the Central Valley will get these, too. I just can’t see wind turbines under the Golden Gate Bridge. Even though it blows hard enough there I have seen the bridge perceptibly move in high wind.

    I took some friends to see California about three years ago. They are from England on their way home from Hong Kong. We drove up the Central Valley to Yosemite and avoided Los Angeles. From there, we went to San Francisco and St Francis Yacht Club, then to Sonoma and the home of Jack London.

    I think I might have to take another route now.

  13. “While there’s plenty of land in the Mojave, projects as big as Ivanpah raise environmental concerns. In April, the federal Bureau of Land Management ordered a halt to construction on part of the facility out of concern for the desert tortoise, which is protected under the Endangered Species Act.” I lmfao’d at that one – if you are a greenie, you are damned if you do and damned if you don’t.

  14. The California Energy Gamble is still being used to support special interests, increase the cost of energy, and reduce individual freedom.

    There has been no sign that our political leaders acknowledge the futility of their quest or the lack of scientific basis.

    In other words, full speed ahead into a ditch.

  15. The main saving grace of cheaper natural gas is that a company can put up a 250-300 MWe combined cycle plant in as little as 18 months, if they are near a pipeline that is not running at choked flow already. Look for Texas to become an even bigger electricity exporter as they seem to have no problem building gas pipelines. That ought to make the libtards running Illinois, California, New York and the other blue states choke and sputter even more.

    New nuclear and coal fired baseload plants will and are being built almost entirely in the south. Luminant is building at least one more lignite/coal plant and plans to add 2 more units to Comanche Peak, Southern Nuclear is still planning on 2 more units at Vogtle plant in Georgia, and SCANA is doing the same at the VC Summer plant in South Carolina. It ain’t the ‘nuclear renaissance’ the industry was hyping back in 2007/2008, but even back then those of us in the industry who make it work knew we could not build more than 2 to 3 plants in any one 5 year period due to the big shortage of skilled craft and very little domestic nuclear manufacturing capacity. With the Chinese buying up most of the cement, copper, almuninum, and structural steel in the world to build their own infrastructure, the cost jumped by a factor of 3 too.

  16. Here in California, a company called Avernal Energy has waited over 2 years for a permit from the EPA to build their combined cycle natural gas electric plant burning natural gas. Since the statuatory time limit on approving or rejecting such a permit is 1 year, and the head of the EPA unilaterally added a second round of internal review, Avernal is suing.

    So, yes, one COULD build a CCGT in 18 months IF the federal goverment made a prompt and timely decision.

    Likewise, the nuclear plant in Texas I was working on was to be built in 4 years, 6 months BUT we had been working on the license for over 5 years before the owner just gave up with no license and no dirt turned.

  17. A lot of organizations have been making plans based on the assumption that natural gas will now be cheap & abundant for a long time….not just electric power plants, but feedstock for chemical & plastics production, transportation fuel for local delivery & buses & even over-the-road trucking, etc. But if enough independent decisions are made in this direction, there may well be a supply pinch at some point, and the economics of all these projects may not look so wonderful.

  18. Whitehall,

    Was the plant you were working on STP 3/4? If the rumors I keep hearing are correct, then financing was what killed it. NRG did not have enough money, Austin refused to participate, and San Antonio started backing away. TEPCO pulling out after Fukushima was the final nail in the coffin. I think Comanche Peak 3/4 is still in the works from what I hear from my sources.

  19. We’re still working on getting the license but NRG has stopped spending money on it. Toshiba is footing the bills. NRG said that they just couldn’t keep spending shareholder money on STP 3 and 4 when the government was clearly fighting nukes. The fact that the southern part of Texas also has a big boom in natural gas from fracking probably had something to do with it.

    Their big hurdle was signing a power marketing agreement. The deadline was fast appproaching and they couldn’t make a deal.

    TEPCO finances were also part of the problem as was the Japanese banks. Neither is very liquid right now.

    Once Toshiba gets a license in the US for an ABWR, they will be better positioned in global markets since NRC is the gold standard.

  20. Don’t forget that at one point in the 70’s they thought that we were running so low on natural gas in the US that they banned new hookups. Amazing what some competition and new technology can do if we unshackle people and give them incentives.

    As far as Carolina and the nukes I have been writing about this for years if you check on the energy column I have been covering them.

    Agreed that more than a few was a pipe dream but I was approaching it from a financial angle since I am not an expert at all on the engineering and construction aspects.

  21. Further proof, as if any were needed, of the truth of my slogan:

    “when the last lawyer is strangled with the innards of the last environmentalist.”

    Reptile Roils Oil Patch
    Companies Oppose Endangered-Species Tag for Lizard, but Brace for Its Listing
    By ANA CAMPOY in The Wall Street Journal on June 14, 2011 at page A3

    The dunes sagebrush lizard, while just five inches long, is causing a big ruckus in the oil patch.

    The U.S. government is considering whether to put it on the endangered species list, with the U.S. Fish and Wildlife Service arguing oil and gas development in the Permian Basin, a rich oil-producing area in West Texas and Southeast New Mexico, is destroying parts of the lizard’s home, a unique sand dune ecosystem.

    The oil industry says the listing of the Sceloporus arenicolus would bring economic ruin.

    “This is the most prolific oil-producing region in onshore America,” said Ben Shepperd, president of the Permian Basin Petroleum Association, an industry group in Midland, Texas. “If you are to knock out a big portion of that, it clearly would drive prices up at the gasoline pump.”

  22. Carl,

    I will plead guilty of being too hopeful about new nukes.

    In the words of Oswald Spengler: “Optimism is cowardice.”

  23. I understand Carl, but the engineering, construction and financial are all intertwined, and unfortunately the nuke and gas/oil industries all are in competition for the same resources. We let our nuclear industrial support structure decay away in the 1990’s, and there are not that many manufacturers with an ASME N stamp anymore and the youngest of the craft workers who built the last plant are at least in their late 40’s now. It will take a lot of money and time to get new nuclear qualified manufacturers and craft trained.

    I am at the Watts Bar unit 2 right now trying to get ready for startup next year and it is not pretty, but it is getting there. It will be a steep learning curve. I am trying to be optimistic when I say it will get done, but it is hard sometimes. I just wish it was not a government agency as the owner. Their bureaucratic overhead and government work rules that bow deeply to union work practices are making it messy. If it were a private utility trying to do the job, some of the nonsense would not happen, but then again, all the plants put on hold by the private utilities were eventually scrapped. Only a government entity mothballed three plants for future re-starts, and even one of them (BPA) finally gave it up at the turn of the century.

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