State and federal regulators and the industries we regulate have donned life jackets. It's as if we are boating down the unexplored Grand Canyon with John Wesley Powell1 in 1869. We share a vague...
IOUs take action, but other overriding forces will affect prices in the near term.
It's going to be a wild summer for the Western Electricity Coordinating Council (WECC), courtesy of higher than forecasted load growth, high gas prices, delays and cancellations of renewable resources, and lower than normal hydro generation. These conditions will drive faster than expected market recovery in the West (especially for merchant generators) and will increase the price volatility exposure of the municipal and investor-owned utilities that rely upon the markets to meet load.
Any comeback requires a strong start, and the West got its start from above-average load growth. Aluminum smelter loads in the WECC likely are gone for good, but utility peak load grew 5 percent and energy sales grew 4 percent from 2002 to 2003. Many Western utilities have published new load forecasts representing higher than formerly predicted growth. The California ISO load through the end of May 2004 is up nearly 6 percent over the first 5 months of 2003. While some utilities are bullish on load growth, we see loads increasing by nearly 2.5 percent over the forecast of 6 months ago.
Natural gas prices also have continued to do their part in driving higher market prices in the West, remaining significantly above long-term sustainable levels during the last six months. The fundamentals don't fully support these high prices because natural gas storage in the West has caught up with storage levels from a year ago. However, as shown in Figure 1, fear of a return to historically low gas storage levels and efforts to avoid market exposure appear to be driving buyers to pay high prices.
In the long run, new production and liquefied natural gas facilities are expected to drive natural gas prices back down to the $3.50 to $4.00/MMBtu range. But over the next 3 years, we expect to see a $0.50/MMBtu premium on gas. While high natural gas prices are not normally seen as a positive thing for market participants' profits, many participants are operating high-efficiency, combined-cycle units with heat rates between 7,000 Btu/kWh and 8,000 Btu/kWh. The average implied daily heat rate in the West is nearly 8,800 Btu/kWh (see Figure 2), allowing a new combined-cycle turbine running at full load to take home 20 to 25 percent more profit from every fuel dollar spent.
Since January 2000, developers have committed to building nearly 6,000 MW of wind capacity in the West. To date only 1,200 MW of this capacity has been built, and an additional 1,400 MW has been abandoned. The rest is in various states of completion (see Figure 3). Some development faces significant permitting and economic hurdles, while other development is on hold because of the failure of Congress to renew the tax credits for these resources. It now looks unlikely that the renewable targets set by some states and utilities will be met.
Strangely enough, despite oversupply in Western markets, an additional 13,800 MW of new capacity was built between January 2003 and the end of May 2004. The