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What's Happening In the WECC?

High reserve margins and blackout risk are part of the extended forecast.

Fortnightly Magazine - December 2005

the WECC region. Annual energy production equal to median hydro generation in the WECC region is 245,900 GWh. Although we assume normal hydro conditions for the Northwest and throughout the WECC for the full forecast period, hydro volatility should be considered in strategic planning for resource additions and the strategic planning of regional transmission.

Two-thirds of the 52,000 MW of the primarily gas-fired generation built since 2000 or under construction in the WECC is located in the California, Arizona, and the southern Nevada areas. This dependence on natural gas-fired generation, along with a strong push to include a higher percentage of renewable resources (such as wind) into the resource mix has policymakers turning their focus toward new transmission.

Renewable energy standards have been adopted by five states in the Western Interconnect. These standards set targets ranging from slightly more than 1 percent to 20 percent. New electric transmission lines will be critical to bringing vast wind resources to market to meet these targets. New transmission has been planned to provide market outlets for recently constructed Arizona and southern Nevada natural gas-fired generation. Coal may be making a comeback, but new transmission also will be required to expand the role of coal-fired resources in the WECC generation mix.

Many factors have converged, driving up fuel prices over the past two to three years. Continued Middle East tensions and rising world demand have pushed oil prices to new highs. Flat or declining natural gas production across many North American basins, buoyed by high oil prices (crude sympathy), has greatly affected continental gas markets.

What is almost certainly true is that fuel—especially natural gas—remains locked in a volatile period. Higher prices are now required to clear the market than what was witnessed only five years ago.

With uncertainties remaining about lost production and a colder-than-normal winter, natural-gas prices entered the 2002-2003 heating season at roughly $4/MMBtu. Bitterly cold weather in the Northeast caused daily spot prices at the Henry Hub to peak at roughly $19/MMBtu by late February 2003.

The cold weather was severe and sustained, resulting in extraordinary heating demand that lasted well through March 2003. Higher world oil prices in 2004 and several hurricanes that year had contributed to the sustained high prices felt throughout the 2004-2005 winter-heating season. Similar developments can be expected regarding coming winter month prices as a result of the destruction caused by the recent hurricanes.

Hurricane Impact

Katrina, the most powerful hurricane to hit the Gulf of Mexico in the last 80 years, left a great deal of oil and gas production shut-in. Leading up to, and after, the landfall on Aug. 29, 2005, prices had climbed to a second record high of $12.70/MMBtu on Aug. 30, 2005. However, the price at the Henry Hub and a number of other markets in the Gulf Coast area declined for the two weeks following the hurricane. Nonetheless, they are still higher than the pre-Katrina period.

Aside from the significant amount of new generation completed since the end of the power crisis in June 2001, other major issues affect the WECC.