Published In June 2001
A civil war is shaping up over energy that may get nasty this summer, if supplies fall short of demand in several parts of the country, as is expected. The war is developing along two fronts. One is a conflict between consumer groups who want to keep prices low and supplies high while maintaining a pristine living ambience (no power plants in my backyard) and investor groups who want to raise profits by holding down supply to increase prices. The other front is between states that are net exporters of energy and states that are net importers of energy. In between, residing in the no-man’s land, is a complex mixture of public and private suppliers that are caught between these emotional opponents and forced to work with an outdated and overtaxed interstate delivery infrastructure that no one has much incentive to fix. Federal policy makers are split on what to do about these complex issues, if they understand them at all, so we are caught in a crisis that has been building up for decades that no one seems to be able to solve. It will take some cool heads and superior wisdom to find a peaceful solution, resources seemingly lacking at present. Here is a recap of the situation, including some forecasts that you might want to ponder. The Energy Information Association (www.eia.doe.gov) released figures recently that include both good news and bad news, as usual, about our energy situation. The good news is that the United States has abundant reserves of fossil fuels. The bad news is that production is not keeping up with demand. Here is a fuel-by-fuel summary, compiled by Scientech, Inc. (www.scientech.com). Oil We have 21.8 billion barrels of proven oil reserves, mostly in Texas (25 percent), Alaska (24 percent), California (21 percent), and Louisiana (14 percent). There are another 10.3 billion barrels under the famous Arctic National Wildlife Refuge in Alaska. Unfortunately, our profligate use of oil for heating and gasoline requires twice as much to be imported now as during the infamous Organization of Petroleum Exporting Countries (OPEC) crisis of the 1970s. We use about 19.5 million barrels per day, but produced only 8.1 million barrels per day in 2000. Further, U.S. oil drilling peaked in 1981 with a total of 43,958 wells, 20,166 of which were gas wells. For all of 2000, only 4,731 oil wells and 15,206 gas wells were drilled. OPEC has gotten much better at controlling its output to push oil prices up just to the brink of world-wide recession. The top foreign suppliers to the United States are Canada, Saudi Arabia, Venezuela, and Mexico, with 22 percent of our supplies coming from the Persian Gulf reserves, and 46 percent from OPEC nations. Suppliers charge that oil and gas prices are not high enough to stimulate the operations needed to bring in new supplies and increase oil production. But, that could change this summer. Natural gas The United States has 167 trillion cubic feet (Tcf) of natural gas, which is only 3.2 percent of world reserves, and consumes it at a rate of 22.8 Tcf per year. We import only 3.6 Tcf, mostly from Canada. Wellhead prices averaged $6 per 1,000 cubic feet (mcf) during the first quarter of 2001, up sharply from $3.62 in 2000 and nearly triple the 1999 average price of $2.08. The increase is attributed largely to growing demand for gas driven by new electric power generation, and dropping gas storage levels, combined with distribution constraints. Gas consumption in the United States increased 22 percent from 1990 to 2000, and that rate is expected to increase because gas is forecast to be the dominant fuel for new power plants. Gas consumption is forecast to reach 31.5 Tcf by 2020. Distribution of demand by sector is industrial (41 percent), residential (22 percent), commercial (15 percent), and electric power (13 percent). The forecasted rise in gas consumption will require investment of $1.5 trillion over the next 15 years for pipeline construction and storage capacity expansion. Coal Coal is the nation’s most abundant fossil fuel, the largest in the world, but the least preferred by environmentalists. The estimated recoverable coal reserve is 275 billion short tons, of which about 19.3 billion short tons were ready for recovery at the end of 1998. We produced 1.074 billion short tons in 2000, mostly from mines in Wyoming, West Virginia, and Kentucky. Employment in mines has dropped from 700,000 in 1923 to around 80,000 workers presently, partly due to vastly increased productivity. Still, miners face health and safety issues that cause concern. Electric power plants consume the vast majority (90 percent) of coal production. EIA is forecasting only a modest increase in coal production, up to 1.3 billion short tons annually by 2020, because of opposition to coal combustion-related pollution. However, coal producers offer increased electricity output fueled by coal as the cheapest, quickest, and safest way of expanding power generation, if not the cleanest. Electricity U.S. electric generation capacity was pegged at 687 gigawatts (GW) going into 1999. On a capacity basis, coal-fired generation dominated (40 percent), followed by gas (21 percent), nuclear (13 percent), hydropower (13 percent), petroleum (93 percent), and renewables including solar, wind, and geothermal (2.8 percent). The demand for electricity is forecast to increase at 1.8 percent annually through 2020. At that rate, the United States will need to build 1,300 new power plants, roughly one every week, for the next 20 years. The United States is the world’s largest single source of human-caused greenhouse gas emissions. EIA projections indicate that U.S. carbon emissions will reach 1,690 million metric tons in 2005, about one-fourth of the total world energy-related carbon emissions, an increase of 353 million tons since 1990. The 1997 Kyoto protocol, never ratified by the United States, calls for reducing U.S. emissions 7 percent from 1990 levels by 2008, a goal that clearly will not be met, based on current forecasts. President George W. Bush has rejected calls for restricting power plant emissions further, because it would be too costly and impractical to cap carbon emissions and meet our growing economic output. Attempts by the Energy Policy Act of 1992 to deregulate the electric power generation have yielded mixed results. EPAct authorized independent wholesale power markets and exempted generating companies from the Public Utility Holding Company Act of 1935. It authorized states to set up retail competition to their own liking. In response, investor-owned utilities set up holding companies and split their integrated operations into generation, transmission, and distribution, plus various forms of unregulated retail consumer services. But only half the states have scheduled full retail competition, and the ones that implemented plans for consumer choice have met with problems because incumbent utilities were successful at protecting stockholder interests and preventing outside suppliers from gaining a foothold. Promised reductions in consumer prices have only been obtained through temporary restraints on full competition to ensure incumbent utilities recovery of their “stranded costs,” i.e., capital investments that might be threatened by lower prices. Consumers were left confused and investors were left disappointed. Moreover, interstate power transmission was left federally controlled by the Federal Energy Regulatory Commission (FERC). FERC has yet to come up with a plan to effectively transition the regional high-voltage power grid into a true national highway for interstate power transfers. Policy makers seem to be unable to reconcile basic laws of economics with Kirchhoff’s laws of power distribution in closed circuits, if that is even possible. Transmission and distribution engineers have been claiming for years that the regional transmission system interties were designed to help ensure reliable delivery under emergency conditions and never were intended to act as an interstate common carrier of power, such as the federal highway system. FERC is attempting to get utilities to create a new system of Regional Transmission Organizations for operations by end of 2001, but progress has not been good. With future control and development of a true national grid uncertain, present transmission line owners are understandably reluctant to invest in badly needed expansion and maintenance. Also, siting of new lines often requires passing regulatory hurdles that take years. California Most newsworthy has been the electricity shortage in California that has reached crisis proportions and threatens the state’s financial credit standing with Wall Street. The Golden State is a net importer of about one-quarter of its needs due to the success of environmentalists who prevented construction of adequate power plants and transmission lines to meet rapidly growing demand. Its plan for restructuring encouraged the three main investor-owned utilities to sell their power plants and set up a nonprofit power exchange that turned laws of supply and demand upside down. Instead of ensuring the lowest wholesale prices, it ensured the highest spot market prices. Further, it squeezed the utilities by setting retail price caps, forcing them to buy high and sell low and so caused the bankruptcy of its largest utility, PG&E. Fortunately, the power exchange was mercifully terminated April 1, 2000. Suppliers that have not been paid are suing for payment and are threatened by court actions forcing them to continue delivering power nonetheless. SoCal Edison faces lawsuits from 17 power suppliers seeking recovery of receivables. Although legal opinions vary, the California Energy Commission has opined that the state cannot prevent builders of new peaking power plants sited within the state from selling power to other states. Through emergency legislation last winter, the state took over purchase of wholesale power for resale to the utilities and also is attempting to buy the transmission system to help solve the cash squeeze it brought onto the delivery companies. But, it has not been able to negotiate long-term power contracts to meet all its anticipated peak summer demands, and so faces continuing threats of rolling blackouts this summer that threaten the economic stability and voter confidence in the administration. Gov. Gray Davis (D-Calif.) is under extreme pressure to reduce demand and increase supply while reducing prices. Emotional consumer groups threaten his administration and any future political ambitions he might have had. The state is expected to spend 10 times as much for electricity in 2001 ($70 billion) as it did in 1999 ($7 billion). The California power crisis is sending ripples throughout the hospitality industry with some hotels announcing complete closure during the summer months rather than guarantee reliability to meeting planners for power delivery over which they have no control. National implications Conditions in California affect the whole western region. But, although state energy advisors agree that summer heat could pose great threats to energy supplies, they sharply disagree over what Federal regulators could, or should, do to bring down power prices. The deepest rift is over whether FERC should impose caps on wholesale rates. Governors of Oregon, Washington, and California support Federal caps, while those of Arizona, Colorado, Idaho, Nevada, Wyoming, Montana, New Mexico, and Utah do not. In a bizarre twist, several aluminum smelters with long-term, low-priced power contracts with the Federal Bonneville Power Administration have closed down because they can make more money reselling the power at market prices than they can selling aluminum. Bonneville has proposed closing others so it can send the precious power to California. States that have not introduced retail competition have slowed their plans, and some have put further deregulation on hold pending further developments in California. New York planners are calling state deregulation a mistake, since promised limits on upside risk to consumers has not been sustained. Last summer’s higher prices and shortages threatening that state’s densely populated New York City area have sparked several initiatives to address pending brownouts this summer, including one to create a new power agency with authority “to acquire, by purchase, condemnation or otherwise, the facilities formerly owned by the Consolidation Edison Co.” The N.Y. Power Authority is rushing to install 11 small natural gas turbines throughout the boroughs of NYC to head off potential blackouts this summer. Prices are expected to rise throughout the nation this summer, although major curtailments will hopefully be avoided in most areas. White House action President Bush has appointed Vice President Cheney to chair a federal task force to devise a new comprehensive energy policy, one that favors increasing domestic oil and gas production. In his introduction to the energy challenge, he commented, “Conservation may be a sign of personal virtue, but it is not a sufficient basis for sound, comprehensive energy policy.” His critics emphasize that focusing on increasing production of fossil fuels is not a sustainable proposition. In their view, and the one promoted by former Vice President Al Gore and most democrats, a sustainable energy future requires increasing renewable energy production dramatically, improving energy efficiency, and investing in ultra-clean forms of power generation such as fuel cells. There is little wonder that he calls the current situation an energy crisis, potentially worse than the crisis of 1973 that terminated the Carter administration. Energy Secretary Spencer Abraham noted the last three recessions were tied to rising energy prices, and predicted the U.S. energy crisis may worsen and cause serious economic damage. The new energy policy was released in mid-May. Your opportunity On that happy note, one can predict that demand for smaller, more efficient power plants will increase opportunities for electrical contractors, who can help build and maintain them. This trend, called distributed generation, hopes to allow many users to construct and own their own power sources independent of the grid. Merchant power suppliers also will be building smaller, more efficient power plants in a rush to meet demand. It might pay to become acquainted with Electric Power Supply Association members to learn more about their plans and so benefit from the pending opportunities in the changing energy market. You can begin by visiting their Web site at www.epsa.org. TAGLIAFERRE is proprietor of C-E-C Group in Springfield, Va. He may be contacted at (703) 321-9268 or e-mail email@example.com\pard.