Energy & Power Generation

Britain and Electricity – Asking the Wrong Questions

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Recently I wrote about Britain and electricity and the fact that Britain isn’t bringing new capacity on line in time to stave off a looming crisis as older plants go out of service and electricity demand rises.

This article, titled “Questioning the invisible hand“, has the sub title “Can liberalized energy markets cut carbon emissions? Britain is starting to doubt it”.

The first myth is that Britain, like America, really “deregulated” or “liberalized” their markets. A better description would be that the markets are “regulated differently”.

In the old markets, utilities had a duty to plan for customer demand growth and re-invest in future capacity. Many of the deregulation schemes split off generation, transmission, and local energy distribution into separate companies, which is fine in theory because then each of these three components could be optimized. In many cases local citizens were given a “choice” of electricity providers at the distribution level, but these distribution companies still essentially utilized “legacy” transmission and generation assets.

The reason that these schemes were only partially deregulated is that 1) barriers in the market place ensured that it was difficult to build base load capacity of coal or nuclear power, meaning that the older units ruled the market 2) the spot price of generation was determined by gas fired units, which essentially meant that it fluctuated with the price of natural gas 3) building transmission is so onerous (getting permits, siting it) and funding is so uncertain that the grid was not significantly improved. What did happen is that price controls on generation were lifted and rates were capped, so for a decade or so there weren’t increases in the price of electricity from the generation side.

From the article:

The committee’s diagnosis was stark: the market, left to its own devices, is failing to deliver (carbon reductions). Consumers are not buying energy-efficient appliances or insulating their houses… and power makers still prefer fossil fuels to greener alternatives.

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Gulliver, Meet the Lilliputians

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California state officials have been busy writing regulations:

The California Air Resources Board (CARB) just passed a new regulation that requires glazed glass in automobiles that is supposed to reduce the need to use air conditioning. The catch is that the same properties that block electromagnetic sunlight radiation also blocks lower frequency electromagnetic radio waves. That means radios, satellite radios, GPS, garage door openers, and cell phones will be severely degraded. Even more surprising is that it requires this glass even for jeeps that have soft covers, plastic windows, and no air conditioning. Furthermore, the rules are so stringent that they effectively make sunroofs black, even though many consumers use the covers.

Also, the California State Energy Commission is promulgating stringent energy-consumption requirements for flat-screen TVs. At a minimum, these will surely increase prices to consumers (if manufacturers could increase energy efficiency without raising prices, they would have already done it, since efficiency is a selling point) and may effectively ban some size-technology combinations. This is being done on the theory that it will reduce overall electricity consumption and help avoid the need to build new power plants.

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Natural Gas and Power Generation

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Power Generation:

The US power generation portfolio is primarily made up of nuclear power, coal, and natural gas. Hydroelectric can be significant in parts of the country (and in power coming from Canada) but no one is even thinking of adding new hydro assets (in fact they talk about tearing down the dams we have today). Despite all you read in the press, “alternative” energy including solar and wind energy makes up a minuscule portion of total US generation (and almost none of the critical “base load” generation which is reliable).

In many posts over the years I have written about the media myths about power – one of the most prevalent is that nuclear power is enjoying a “renaissance” – nothing could be further from the truth. You can click on the sidebar (here) to view my previous posts on this topic. Nothing of substance (i.e. shovels turning dirt, committed orders occurring) is happening in the US; even in Europe where the revolution is also occurring one of the few new Western nuclear plants under construction (in Finland) is plagued by cost overruns and difficulties – from this NY Times article:

Areva, a French nuclear construction company, said this week that its project to build the world’s most powerful reactor remained mired in delays and was over-budget by 2.3 billion euros, or about $3.3 billion. The price tag of the plant in Olkiluoto, Finland — the first of a fleet of so-called evolutionary power reactors that Areva foresees building in coming years — was about $4.3 billion in 2003 and costs have steadily increased. The reactor was meant to have gone online early this summer but Areva no longer is committing to any dates for its completion.

With all of these difficulties in building coal or nuclear plants, the industry has turned almost exclusively to natural gas in order to provide extra capacity for the US. Natural gas plants are relatively cheap to build and easy to site; they emit less greenhouse gases than coal plants – but their down side is that with the price of natural gas up near $10 – $14 / unit (as anyone who uses natural gas to heat their home can attest), these plants are much more expensive to run. In addition, US supplies of natural gas have been limited (by exploration constraints and lack of LNG facilities and pipelines to get the gas where it is needed).

Natural Gas Today:

Often in this blog I criticize journalists for their poor understanding of business concepts; but I need to instead praise the Wall Street Journal for an excellent and succinct article on natural gas on Monday, October 5th.

The article is titled “Natural-Gas Glut Posts Risks for Independents” and is about the impact of lower natural gas prices on independent power producers (traditionally known as IPP’s). This article is on the back page of the investing section, called “Heard on the Street”. The articles here assume that the reader has a pretty in depth knowledge level of what is being discussed and as such get right to the point.

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The Economist on Britain’s Electricity Situation

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The Economist recently wrote an editorial called “How Long Till the Lights Go Out?” describing the electricity situation in Britain. The byline was

Thanks to its posturing politicians, Britain will soon start to run out of electricity. What should it do?

As a long time writer on electricity and energy, I was pleased that The Economist at least hit on the core of the issue:

In 2009 Britain’s electricity demand peaked at 59 GW. Just over 45% of that came from power plants fuelled by gas from the North Sea. A further 35% or so came from coal, less than 15% from nuclear power and the rest from a hotch-potch of other sources. By 2015, assuming that modest economic growth resumes, a reasonable guess is that Britain will need around 64 GW… where will that come from?

This is the HEART of the issue. Electricity has to be generated from somewhere, and traditional sources of generation are 1) Coal 2) Gas 3) Nuclear 4) Hydroelectric 5) everything else (generally insignificant).

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