Perth, Western Australia Jan. 12, 2001 SolarQuest® iNet News Service
by Brian J Fleay
revised 22 January 2001
The USA is in a major electric power crisis, partly a consequence of the deregulation agenda. Peak power demand is exceeding reliable generation and transmission capacity, especially in California. The industry is trying to overcome the crisis by installing gas turbines just when the supply of natural gas in North America is reaching a peak. Gas supply for winter heating is being compromised.
The only short term solution is to reduce consumption of both electricity and natural gas, to pursue energy efficiency as new gas supply would take 5 -10 years to bring on-stream. Pursuing efficiency requires a more co-operative environment between energy providers and consumers, away from the almost religious worship of competition characteristic of the world-wide movement to deregulate the electric power industry.
There are significant implications for the Australian agenda to deregulate the electric power generation and transmission industries. South Australia and Victoria are on the brink of peak summer power shortages, like in California.
This US crisis coincides with an emerging world oil supply crisis as production of cheap oil outside the Persian Gulf countries reaches its peak. The focus of oil supply is shifting to the latter countries who are not ready to invest in stabilising and expanding their production capacity to meet demand growth through to 2005 and beyond. Rising oil prices reflect this scenario. The US consumes 26% of the world's oil and imports nearly 60% of that at a cost of some US$100 billion in 2000.
US ELECTRIC POWER CRISIS
US base load electric power is provided by coal fired and nuclear plants plus some hydroelectric, while peak power is increasingly being met by gas turbines. Consumption has grown by 3% annually since the mid-1980's driven by population increase, air conditioning and by the internet since the mid-1990's. New style computer server centres typically require 2-40 MW and need high power supply reliability.
Deregulation of the electric power industry began in 1996 led by California with 23 states now participating, each with its own rules. Interstate power transfers come under Federal jurisdiction. There is a transition regime while the major utilities sell off their power stations and become distributors and retailers, ending the vertically integrated monopolies and introducing competition among the generators. During the transition retail prices in most jurisdictions are capped until fully "competitive" markets emerge between generators and consumers. Independent electricity traders are emerging in this market. The public was told deregulation would lead to cheaper electricity.
Utilities need a 20% generator capacity margin over peak summer demand to ensure supply security - electricity cannot be stored. However, investment in power stations and transmission lines was cut back due to the uncertainty introduced by deregulation. By 1998 generator capacity margin in the US was below 10% - and worse in California where utilities import 25% of their peak power load from other states. There were over 40 emergencies in California last year with repeated incidents of blackouts and brownouts - and these continue.
The spot market for electricity in California at the peak has reached US$1.50/kwh for some utilities whereas their sale price was capped at 6.5c/kwh. Their average purchase price last year was around 30c/kwh. The price of natural gas has increased as well from US$2.20/1000 cu. ft. in late 1999 to spot prices over US$9 in December - see below for a discussion on natural gas supply. Merchant generators in this market have made huge profits by exploiting the futures market in both electricity and natural gas. Similar situations exist in the US northeast and elsewhere, but not on the scale of California.
Pacific Gas & Electric (PG&E) and Southern California Edison (SCE) with over 9 million customers have accumulated losses of US$9 billion since June and face bankruptcy. The Californian Public Utilities Commission refused their early January request to increase rates by 26% to 30% for six months to overcome the crisis, only agreeing to a 90 day 9% increase for residential rates and 7% to 15% for businesses. The companies' credit rating is now near junk bond status and their share prices have fallen 40% - which affects their capacity to borrow and buy peak electricity. Stocks of major banks with significant loans to PG&E and SCE also fell. Further action is inevitable within days to resolve the hiatus.
In San Diego the electric utility has completed the deregulation transition phase and the retail price cap has been removed. Some retail electricity prices trebled during the 2000 summer. The Los Angeles publicly owned power utilities have yet to be deregulated and have not experienced problems on anywhere near the scale of PG&E and SCE.
PUC Commissioner Carl Wood said: "We are voting the epitaph for deregulation in California today. Deregulation is dead." Consumer advocates can see no reason why consumers should pay for this fiasco.
US NATURAL GAS SHORTFALL
Underlying this electric power crisis is a shortage of natural gas. US installed generating capacity was some 743,000 MW in 1998. 90% of new capacity to 2010 is planned to be natural gas fired, with 22,000 MW added in 2000. (Western Power's installed capacity on the SW grid is just over 3,000 MW). Power generation is the major contributor to the 2.6% pa growth in US natural gas consumption, forecast to grow by 40% over 10 years.
Natural gas is the principal fuel for winter heating in North America, winter consumption is 50% higher than in summer. Consumption has exceeded US production since 1985 and Canadian imports now supply 15% of US consumption. However, US production has declined since 1997 with new gas wells unable to offset a doubling of production well decline rates in the 1990's. A similar pattern has emerged in Canada. Running faster and faster just to stand still! There is no way US production and imports from Canada can grow at 2.6% per annum.
Summer gas production is stored in depleted onshore oil and gas fields to meet 20% of winter heating demand. However, gas turbines used to meet summer power loads are rapidly eroding the capacity to recharge these storages. The current winter is a cold one and consumption is being met by drawing them down. Leading analysts believe they could be depleted during the 2002/2003 winter.
The weather and a likely decline in industrial use will influence the outcome. Some nitrogen fertiliser manufacturers have shut down as rising gas prices make them non-competitive with imports. Kaiser aluminium has shut down an aluminium smelter. It is more profitable to on-seIl electricity purchased under long-term contracts than to convert it in to aluminium. Some producers have stopped stripping ethane, butane and propane from natural gas - it is more profitable to sell it as gas. Ripple effects in industry will follow and perhaps influence the price of liquid petroleum gas (LPG) world-wide.
US heating bills this winter will be 30-50 % higher than 12 months ago, hitting the poor hardest.
US GAS SUPPLY OPTIONS
There are three options. Import liquid natural gas (LNG), develop gas resources on the Alaskan and adjacent Canadian Arctic Ocean coastline, develop gas resources at depth in the lower 48 states and in presently embargoed areas offshore. Billions of dollars are needed and significant supply would only become available from 2005 at the earliest.
New LNG production capacity would be needed, most likely in Venezuela and Nigeria, plus a fleet of LNG tankers and expanded US port facilities. Alaskan sources require a minimum investment of US$10 billion and several thousand kilometres of pipelines on a minimum 6-7 year time frame. Gas prices of over US$3/1000 cu.ft. are required to justify these investments.
Two-thirds of lower 48 states gas potential is thought to be east of the Rocky Mountains in deep formations, the remainder offshore. Drilling costs will be double or more because of the greater depth and the time to drill a well will more than double. A massive number of new and specialist drill rigs are required that is beyond the capacity of the rig manufacturers to build. 40-50% of experienced staff in the US upstream petroleum industry will soon retire and few new ones are in training. Years of low oil prices have taken their toll on the exploration and development industry world-wide, but especially in the USA.
The constraints to exploiting new hydrocarbon resources are in the physical resources and skilled personnel required to do the job. Such constraints cannot be overcome quickly and require a sustained increase in energy prices.
OIL SUPPLY SCENARIOS
Since the mid-1980's over half world oil supply growth has come from Persian Gulf countries turning on wells shut down in the early 1980's, when world consumption fell. The remainder has come from developing expensive sources in ever smaller fields outside the Persian Gulf. Low oil prices since 1985 have decimated industry profit margins and eroding the accumulated wealth of the OPEC oil producers, forcing a downsizing of the oil exploration and development industry. The upstream petroleum industry has been consuming its capital, both fixed and human. And in the USA not developing its electric power infrastructure as well. In 2000 the last of the spare oil production capacity from the 1980's was turned on - only Saudi Arabia has limited spare capacity left.
Suddenly the upstream petroleum industry has to run more than twice as fast to keep pace with demand for both oil and natural gas, especially in the US where circumstances have also conspired to produce a major electric power crisis. A triple whammy!
The only immediate solution for the US is to systematically reduce consumption of electric power, natural gas and oil. It takes time and dollars to overcome physical constraints such as rigs, tankers and skilled personnel. Attempts to massively expand energy production diverts energy from the general economy to achieve this task, just as existing hydrocarbon supplies are declining. There are limits to the rate at which the energy industry can be expand under these circumstances. In the jargon of economics, there is an "opportunity cost" of no small proportions.
So President George W. Bush has the USA's greatest energy crisis in its history on his agenda.
He will of necessity have to preside over a contraction of oil, gas and electricity consumption - shortly after the US refused to do so at last year's conference at The Hague to reduce Greenhouse gas emissions! The nuclear industry is hoping for a boost.
The USA has hit an energy supply ceiling, economic growth in the old way is no longer possible. In California energy efficiency measures to get more service by consuming less energy are on the agenda, Governor Gray has proposed reducing electricity consumption by 7% through energy efficiency.
Deregulation of the publicly owned Australian electric power industry has followed similar lines to that in California. Privatisation agendas have led to foreign ownership of significant parts of the industry and a dramatic decline of research. In South Australia and Victoria generation reserve margins are declining to California-like levels and interstate transmission capacity and market management is fragmented and inadequate. Industry sources say it is close to peak supply shortages later this summer and industrial customers are being targeted to shed load if this happens.
From January households in eastern Australia can shop around among generators to buy their electricity. The large electricity consumers have had a privileged first bite at this cherry. But the industry is not ready to manage this last step effectively, with call centres expected to play a key role. This step is on the agenda for Western Australia.
In Western Australia Western Power is still vertically integrated, but now buys bulk electricity from private companies with co-generation facilities, eg BP Refinery. In 1997 the government sold the Karratha-Bunbury gas pipeline to a US company Epic Energy who paid a $1 billion more than anyone expected, anticipating early construction of the Kingstream steel mill at Geraldton. The company has announced its intention to enter the emerging market for electricity, as has the newly privatised Alinta Gas. Finally, Western Power intends to compete in the gas distribution market! All will be seeking to expand sales.
Electricity prices in Western Australia are higher than on the eastern seaboard, firstly due to the high cost of Collie coal and natural gas piped 1600 Km from the North West, and secondly the lack of base load industrial consumption - commercial and residential use dominates. However, the opportunities for reducing consumption without loss of customer service through energy efficiency investment are correspondingly high, but require a more co-operative approach between suppliers and consumers of electricity, not a sole focus on competition as is happening now. Electric utilities need to invest in their customers energy efficiency, and that requires a more collaborative approach.
Will the uncertainty introduced by these competing interests slow down investment in new capacity, both to meet growth and replace ageing power plants? Are we heading for a California type energy crisis in Western Australia?
1. See Simmons & Coy International. www.simmonsco-intl.com Click Research. Items since October give the most up-to-date information. Key articles are "Outlook For Natural Gas: Is A Train Wreck Pending" and "The Earth In Balance: Has Energy Capacity Maxed Out?" Simmons & Coy is the leading US provider of financial and investment services to the upstream petroleum industry. Matthew Simmons, is a close associate of James Baker one of the leading Republicans in George Bush Jr's circle.
2. Articles under "energy" in the Houston Chronicle, Texas. www.HoustonChronicle.com
3. Campbell, CJ, Perrodon., A, & Laherrere, J 1996. The World's Gas Potential, Petroconsultants SA, Geneva.
4. Articles in leading oil industry journals since the early 1990's.
5. Campbell, CJ 1997. The Coming Oil Crisis, Multi-Science Publishing Coy UK and Petroconsultants SA, Geneva.
6. Miller, Don Dec. 2000. Avoiding hearbreak at the Internet hotel - problems and opportunity for electricity suppliers, Electricity Supply Magazine, Electricity Supply Association Australia, p. 14.
7. Booth, Rob Jan 2001. California's market "meltdown" is uncomfortably close to the Australian bone, Electricity Supply Magazine, Electricity Supply Association Australia, p.14.
8. Australian Financial Review 2001. Power supply squeeze looms, 22 January.
9. Fleay, BJ (1999) Climaxing Oil: How Will Transport Adapt? Paper presented to the Chartered Institute of Transport in Australia's National Symposium, Beyond Oil: Transport and Fuels for the Future, Launceston Tasmania, 6-7 November 1998. Published as Occasional Paper 1/99 by the Institute of Sustainability and Technology Policy, Murdoch University Western Australia. wwwistp.murdoch.edu.au
See Section 5 in particular for constraints to expansion of the upstream petroleum industry, and figure 11 for US gas prospects.