Should the power industry adapt its approach to capital markets in this environment? The answer, of course, is yes. Multiple frameworks are necessary to establish a power company’s or project’s...
Regional Power Markets: Roadblock to Choice?
distinction, and hence the confusion, derives from the unique nature of electricity as a commodity that in large part cannot be stored.
Electricity demand dips and peaks seasonally. This fluctuation explains why even base-load plants only operate about 65 percent of the time. This excess capacity could be used to steal sales or satisfy increased demand, except during peak-demand seasons. If low-cost plants should pick up this use, then the high-cost plants that lose business are supposedly stranded.
But consider annual peak demand. Capacity margins have fallen to less than 10 percent in some NERC regions, especially MAAC, MAIN, ECAR and SERC; this means 90 percent use of existing plants. Margins continue to slide, new construction has slowed and peak demand grows robustly. Summer peak demand grew 30,000 megawatts nationwide in 1995, while only about 6,000 MW of capacity was added. Demand-side management programs report an annual reduction in peak demand of 10,000 megawatts or so each year, but that does not mean peak demand is going down. These are reductions from what would otherwise have occurred, or so it is claimed.
This growth has caused almost every generating unit to run for at least several unpredictable weeks a year. Otherwise, the nation would run short of power and black out because electricity, unlike other commodities, can't be sold on a first-come basis. But in a competitive scenario, the price for power from those plants that only run a few weeks has to cover their full annual cost. So they are not stranded. Just about every plant we have is a 'must run plant' in this sense.
The price to cover annual peak using these high-cost plants could grow astronomical. In some cases, it is already 10-times the off-peak price, but could go much higher as supplies tighten. This growth could lead to cost-saving measures such as turning off air conditioning or shutting factories. It could also lead to building of efficient peaking plants, as our present mix is too heavy with base-load equipment. But adding enough peakers to displace all high-cost plants could take a long time, especially given the growing clean air constraints.
It is not clear when or how fast high-cost plants are likely to be stranded or which ones will lose a significant portion of their revenue stream. One can't say that every high-cost plant is a loser, because right now all are needed, despite cost.
Note, too, that we are talking about heavily regulated competition and the regulators, for political reasons, have always cross-subsidized maximum peak. Consumers will not tolerate too much volatility in their bills; certainly not unpredictable price jumps of 100 percent, probably not even 10 percent. Price increases allowed for peak power may not be enough to stimulate the cost-avoidance measures that would strand expensive plants.
So again the question is how can there be stranded capacity when there is no excess peak capacity? The confusion is evident. Given a storable commodity, 65 percent use of production means excess capacity. Not for electricity. Off peak must always be a buyer's market, on peak a