The Western Electricity Coordinating Council (WECC) continues to experience a glut of generation and historically high levels of generating reserve margins. Global Energy Decisions recently completed its fall 2005 analysis of changing WECC regional power and gas market fundamentals,1 and we expect high reserve margins driven by the addition of new power plants to preclude widespread power shortfalls for the next several years.
Generation additions between 2001 and 2007—including plants currently under construction—add up to almost 52,000 MW. When added to a base quantified in 2000 of 160,000 MW, significantly more generation than needed will cover a WECC load forecast expected to peak at almost 150,00 MW in 2007.
Despite some retirements of older, inefficient power plants, planning reserve margins are running around 41 percent on a WECC-wide basis. Global Energy’s current forecast shows that 2,300 MW more of gas-fired generation will be built in the next couple of years than forecast six months ago. These additional plants generally are being built near load centers by (or under contract to) utilities (see Figure 1).
Despite these reserve margins, state and federal regulators are asserting that all is not well, and that rolling blackouts may return. This past summer, the California ISO did in fact order rolling blackouts in Southern California in response to the loss of a 3,000-MW transmission line from the Northwest during a period of high temperatures and peak demand.
Whether California is at risk for rolling blackouts may depend on how conservative the import capability rating is.2 Global Energy’s analysis also suggests that the risk of blackouts is a very local issue for load pockets in the San Diego and Los Angeles areas. The issues of import capabilities and reliability are gaining more traction, and entities such as the Northwest Power and Conservation Council are addressing the issue of economic versus physical reliability, by establishing a Northwest Resource Adequacy Forum.3 In addition, the ISO’s comprehensive market redesign will incorporate locational marginal pricing (LMP). This should help deal with the issue of load pockets and the concerns of intra-zonal congestion.
Although the WECC as a whole is a summer peaking region, the Pacific Northwest is a winter peaking region. All or major portions of Oregon, Washington, Idaho, Montana, Wyoming, Nevada, and Utah, along with the Canadian provinces of British Columbia and Alberta, comprise this area. More than 60 percent of the area’s resource capability is from hydro generation. Oregon, Washington, and western Montana coordinate the operation of their hydro resources to serve load. WECC hydro resources equate to an approximate average of 11,000 MW of firm energy when reservoirs start full.
Global Energy’s representation of energy production from hydro facilities located in the WECC region largely is tied to the hydro energy production in the Pacific Northwest, Canada, and California. In total, these areas account for more than 90 percent of the hydro generation in 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.
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.
• Load Forecast. In our fall 2005 market analysis, Global Energy raised its peak load forecast for 2005 to almost 150,000 MW. We forecasted peak load to grow on average at a rate of 1.96 percent per year throughout the forecast horizon, slightly higher than the 1.9 percent growth rate reflected in our spring 2005 forecast. Load forecasts reflect new data provided by load-serving entities and reported to FERC.
• Retirements. Cumulative retirements of existing resources over the 25-year study period are forecast to be 25,532 MW, little changed from the 25,261 MW retirements in our spring 2005 forecast. This reflects retirements announced during the past six months. This forecast does not assume that the Mohave coal plant or any nuclear plant retires in the next 25 years.4
• Generation Under Construction. We include 11,121 MW of new generation currently under construction. In addition, we assume that additional renewable generation will be constructed in an effort to meet targets established for energy produced from renewable resources. This new generation construction, coupled with plants brought on line in the last six months, results in about 4,600 MW of new capacity not included in the spring 2005 forecast.
• Other New Resources. Over the study period, we assume that new, efficient, combined-cycle generation will be built in response to market signals, and combustion turbines will be built to provide adequate operating reserves. In this forecast, which evaluates the economics of new combined-cycle generation based on a deterministic analysis, new generic combined-cycle and peaking capacity start to enter the forecast in 2010—one year earlier than in our spring 2005 forecast. We also include about 14,000 MW of new coal-fired capacity added in the latter half of the forecast. In addition to the coal build-out, more than 16,000 MW of nameplate-wind capacity has been added throughout the forecast period in market areas where wind likely is to be built. After the market absorbs capacity already under development, long-term regional reserve margins in the WECC region will be about 18 percent.
• Natural Gas Prices. Natural-gas prices are forecast to remain high for the next few years. Over the 2006-2010 period, prices in real dollars are expected to decline, reaching a low of $4.54/MMBtu in 2009 at the Henry Hub and staying within a $4.35-$4.90/MMBtu range for the remainder of the forecast. During the period 2009 through 2029, Henry Hub prices gradually rise by about 0.4 percent annually in real dollars, on average.
Figure 2 shows announced power plants in WECC and their construction status since 2000. Since the spring 2005 report, the completed and under construction capacity has increased by about 13 percent.
Regulatory events play a big role in the WECC, which still has only two regional transmission operators—Alberta’s Electric System Operator and California’s Independent System Operator (ISO). Proposals for additional RTOs have met different fates—Grid West and Transmission Improvements Group (TIG), both representing different market redesigns in the Northwest, still are being actively pursued.
In December 2004, Grid West filed articles of incorporation officially to become a membership organization, and it set a target of 2007 to be up and running. There has been no formal decision to form Grid West. WestConnect, representing the Southwestern portion of WECC, appears to be withering for lack of support, following the route of its predecessor, Desert Star. Also, the California ISO is in the process of a major redesign of its scheduling and congestion management.
1. Global Energy Power Market Advisory Service, WECC Electricity & Gas Market Outlook, Fall 2005, www.globalenergy.com.
2. WECC path ratings may not always be the appropriate value to use in modeling or in operating the system under certain conditions.
3. Chapter 8, “Resource Adequacy,” from the pre-publication draft of the Fifth Power Plan by the NW Council, January 2005.
4. The 1,500 MW Mohave coal-fired plant (in Nevada, partly owned by SCE) is put on cold standby for the 2006-2009 period in this study, during which time it is assumed that investments will be implemented that allow its continued operation in compliance with current laws and regulations.