From 2000 to 2001, about 140 Gw of new gas-fired capacity was added to the US fleet. Then, by 2002, the combination of this new capacity and the country's economic turndown restored peak margins to the high teens and wholesale price volatility quickly dampened.
The dampened volatility has masked a pullback of deregulation efforts that had been underway in many states. Today only 24 states, plus the District of Columbia, have open choice and access to competition; there is no activity occurring in 24 states-- and in California and Nevada, restructuring legislation has been rescinded. Public enthusiasm for deregulation has been undermined and confused by the political bickering and finger pointing between the public and private sectors over the California debacle. The moderation in electric price volatility may have seduced the public into a false sense of comfort and a belief that deregulation actually has taken place. Danger lurks in complacency. While wholesale price spikes stimulated massive investment in generation, there has been no corresponding investment in transmission. Over the last 20 years, generation has expanded by about 60%, while high voltage transmission miles have expanded by less than 20%. And projections for new transmission capacity through 2010 do not show any changes in this trend.
The July 31, 2002 FERC NOPR offers a format for transmission Standard Market Design. Network service tariff structure, locational marginal pricing dispatch models and congestion revenue rights are aspects of the design that are encouraging. However, the presumed need for an environmental impact statement and a lack of consensus around the plan create the possibility it will be derailed or lead to artificial shortages.
Consider the situation with respect to labor: The one or two times per year outages typical at today's electric power plants provide only seasonal work for experienced boiler makers, and not the benefits of steady employment enjoyed on projects that took 36-40 months to complete. Older, experienced labor has retired from this business and replacements are not easy to find or retain. The absence of a need-- for almost two decades-- for construction labor to erect large central generating stations resulted in a lack of experienced riggers, welders and fitters required for the construction of combined cycle facilities as well as retrofit equipment related to the NOx SIP call. In the 1990's, well-known AE firms, with long histories of managing complex fixed-price turnkey projects, saw their partnerships torn apart as cost over runs consumed cash and a flurry of lawsuits consumed time and resources and poisoned long-term former business relationships.
For more than a decade, the number of high school students matriculating to engineering curricula has dropped. The pattern of bachelor's degrees awarded during this period has shifted significantly. Engineering and engineering technologies declined 4% between 1990 and 1995, and a further 7% decline between 1995 and 2000. Some engineering schools, in an attempt to remain viable, have "engineered" their curricula to deal with a less prepared student body and student bodies marginally interested in technology-and, then, only in relation to a perceived need to evaluate technology on economic grounds, not to participate in creating it.
Poor economics at the user level, poor economics at the vendor level, and disinterest at the college level all have lead to a lack of spending at the R&D level. The amount of money spent annually by US OEM boiler manufacturers on real R&D is probably less than $10 million (perhaps less than 1/2-% of sales).
The issues of prosperity and national security, at least as they are related to electricity, cannot be taken for granted any longer. Indeed, there is some risk that electricity supplies might actually become an impediment to prosperity and national security. Under that scenario, emergency government interventions that could result, given the California experience and the determination of certain factions in the environmental community to slow, if not prohibit development, likely would not restore or generate much interest from the capital markets.
What are some options?
In the case of gas, it might be well to remember that withdrawal rates from the Gulf of Mexico have exceeded replenishment rates for several years. Natural gas price volatility, the need to site and maintain long pipelines, and the dwindling supplies of extractable gas in the lower 48 states do not leave one with a good feeling about this fuel. Traditionally, drilling activity increases when gas prices at the Henry Hub reach $3.00 or above. But forward prices have been well above $3.00 for some time and drilling activity is less than 80% of historic values. Moreover, the United States imports about 15% of its natural gas today. Neither factor adds to the energy security or price certainty of electricity.
LNG development is increasing. In October 2002, Merrill Lynch published an analysis suggesting development of new natural gas supplies will continue to face hurdles and, as a result, LNG growth will exceed 6 percent for the next two decades. LNG imports will be required to meet the longer-term growth demands of the United States. But this-- yet once again, increases America's dependency on imported energy.
Air quality in the United States today, is dramatically cleaner than at any time in the last 30 or 50 years depending on the pollutant under consideration. But Americans, in poll after poll, believe otherwise.
Average SOx emission rates from coal-fired power plants in the 1970s were 4.4 lb/Mbtu. Today, the average is about 1 lb/Mbtu. Phase 2 of the 1990 Clean Air Act Amendments is just now being implemented. This means US air quality will continue to improve even if Congress and the Bush Administration cannot come to terms on new regulations.
Selective catalytic reduction, in combination with low NOx burner technology has the potential to reduce NOx emissions by 90-95%. NOx emissions reported recently by Ameren on eight of its units burning PRB coal showed emissions as low as 0.11 lb/Mbtu.
A project recently announced by a major coal company included a draft environmental permit with SOx emissions at 0.167 lbs/Mbtu and NOx at 0.08 lbs/Mbtu, both below the limits set by the Bush Administration in its February 2002 "Clear Skies" Proposal.
Ample Coal
Coal is in abundance in the United States. Ample known supplies of lignite, bituminous and sub-bituminous coal exist for more than 200 years at current consumption rates. And coal prices, in real terms, have remained stable to declining over the past two decades. DOE believes this trend will continue for the next decade. Domestic vendors have not spent much money on development of the supercritical cycle. But the Europeans have. Turbine and boiler technology at ultra-critical temperatures and pressures has a continuing history of satisfactory operation in Europe and Japan. Over the last 20 years, the net plant heat rate has risen consistently and now approaches 45 percent on hard coal and 40 percent on higher moisture lignites; 85% of all OECD coal-fired capacity installed between 1997 and 2000 has been supercritical technology.
This heat rate improvement has been accompanied by significant improvements in reliability: the forced outage rates for once-through designs typical in Europe are 2.5 percent better than NERC data.
The 550 MW Staudinger plant, near Frankfurt, has been in commercial operation since the summer of 1992. It is a 4130 psig/ 1013 F/1044 F coal-fired unit operated on both hard and soft coals sourced worldwide. Boiler availability over this period of time has been 99.3 percent and the plant capacity factor 91 percent. What's even more impressive is the plant has been in cycling operation for the last 5 years. It shuts down every evening and is back on line again at full load in 90 minutes the following morning. Staudinger NOx and SOx emissions each are less than 0.2 lb/Mbtu. Another significant point is that CO2 emissions are reduced more than 10 percent compared to the emissions of a sub-critical unit of like capacity and availability. That has resulted in a CO2 reductions of more than a half million tons per year.
Considering the critical nature of electricity in our country's economy and security, however, the Federal Government must deal with environmental legislation and policy now. It almost matters more to have a clear and stable regulatory regime than what that regime actually is. The regime must provide guidance on emissions requirements to remove the uncertainty faced by generators over the usefulness and useful lives of their fleet. Investment will not flow until this uncertainty is lifted. There is some hope that the mid-cycle elections will result in a Congress interested in reasonable solutions to this issue.
Clearly, the very low margins offered by this market suggest that US companies need additional incentives to invest in research related to near-term solutions: gasification technologies and exotic materials development are two areas of immediate need. This is entirely consistent with similar relationships between government and the private sector in Europe and Asia. These incentives could take the form of added tax incentives, however at some point, there will be additional need for public-private partnerships, such as the DOE LEBs program, in order to help project participants over the operating and performance risk hurdles of first-of-a-kind technology.
Lobbyist Need Apply
This industry needs to become more vocal on its contribution to security, stability and low cost supplies of electric power. Advisory Councils like the National Coal Council are prohibited from lobbying or advocacy. Yet, it is members of those councils, and industry coalitions who have, not only self-interest in this industry, but the know-how to articulate reasoned arguments to a more and more technically illiterate society.
While trade barriers are counter productive in an open market economy, it is not in the best interests of US national security to allow domestic equipment suppliers that own or have developed significant taxpayer supported technology to be acquired by foreign interests unless any taxpayer subsidies-- including tax incentives-- have been repaid or the technology is divested to American interests prior to a sale.
US-based equipment manufacturers are staring at a pretty bleak market. The ability to export is partially dependent on the ability to obtain export credit support.
Terms and conditions for this support need to be at market levels compared to the rest of the exporting world. In particular, the ability of competitors to obtain export-financing packages that include significant non-country content, often preclude domestic companies from utilizing low cost suppliers of non-critical components. And in the matter of transmission, FERC must move ahead quickly to establish the organizational regime and build the consensus upon which the forward economics of new transmission can be created and existing congestion can be accurately priced.
