The US power market has consistently displayed cyclical characteristics of “boom and bust” over the last two decades. Today’s market environment has been directly and significantly impacted by the recent economic recession. Decreases in load growth, declining commodity prices, and lack of accessible financing have caused challenges for the industry.
Despite these challenges, policy makers have put an emphasis on three objectives for the energy industry: reduce carbon dioxide (CO2) emissions, expand and enhance the transmission and distribution (T&D) infrastructure, and develop significant levels of renewable generation. Although pursuit of these objectives represents a significant challenge to policymakers, regulators, and executives alike, success in these three areas has the potential to fundamentally change the course of the electric power industry.
However, in order to realise the benefits from the above priorities, it is critical to pursue each within a closely integrated program of work, focused on the interrelated objectives of facilitating environmental stewardship, building a significantly more modern electricity network, and implementing the technologies to help producers and consumers make optimal choices around the production and use of power. Furthermore, innovative methods of financing the considerable cost of these programs are necessary, given the continued tight credit markets and challenges related to financing large scale capital programs.
State of the Market
Understanding today’s power market environment requires an understanding of both general macroeconomic conditions, as well as the state of the power markets leading up to the deepest troughs of the economic downturn. Entering the summer of 2008, the power markets appeared to be positioned for growth. In general terms, markets across the US were beginning to stabilise from years of overbuild, commodity prices were at near record highs, and there was an increase in new generation development (in particular, renewable generation). However, the economic crisis that deepened by the 3rd quarter of 2008 fundamentally changed the outlook on the power markets. Decreases in load growth projections caused a significant and systematic delay in recovery expectations across the US power markets. Markets are currently not expected to reach equilibrium levels until the 2014-2015 timeframe. In addition, steep commodity price declines put downward pressure on margins for many types of generation assets. In the context of renewable generation, declines in natural gas prices - and subsequently power prices - can cause significant compression of margins.
The combination of depressed power market conditions and restricted financing due to tight credit markets has led to a significantly challenging environment – particularly when considering the significant goals and objectives of both federal and state policy makers. Specifically, there has been an increased focus on CO2 emission reductions and renewable generation supported by transmission and distribution infrastructure upgrades at both levels. At the Federal level, the Waxman-Markey Bill was passed in the House of Representatives in June 2009 and intends to create a CO2 “cap and trade” regime which would aim to reduce CO2 emissions to 17% below 2005 levels by 2020 and 83% below 2005 levels by 2050. It also contains a provision for 20% of the US energy to be supplied by renewable generation by 2020. The Senate is currently working on the Kerry-Boxer Bill which in its current form proposes to reduce CO2 emissions to 20% below 2005 levels by 2020 and 83% by 2050. Meanwhile at the state level, there have been a variety of regional CO2 initiatives such as the Regional Greenhouse Gas Initiative (RGGI) and the Western Climate Initiative (WCI). Additionally, state renewable portfolio or energy standard (RPS and RES) programs require that varying percentages of total electricity production come from forms of renewable generation. Currently 28 states plus the District of Columbia have RPS targets in place.
Policy makers have also recognised that transmission and distribution upgrades will be necessary to meet these challenges. President Obama has called for 3,000 miles of new transmission lines and in October 2009 unveiled $3.4 billion in stimulus funds for specific electricity infrastructure projects, including smart grid meters and supporting infrastructure and modernisation of transmission lines.
An Integrated Solution
Looking forward, it is clear that renewable generation will play an important role in the future of the power markets. However, ensuring both the installation of significant levels of renewable generation to meet CO2 abatement and other regulatory objectives as well as the ability to deliver the generation from the new renewable plants to load centres is a significant undertaking, which is exacerbated by the continued challenging financial market environment. In general, to increase the probability of successfully meeting the objective of creating a significantly modernised electricity production and delivery network that supports environmental sustainability, delivers energy in a reliable manner to changing load centres, and facilitates the evolution of customer demand characteristics, it is important an integrated solution be implemented that not only addresses the character of installed megawatts, but also the need for significant T&D infrastructure as well as balancing generation.
Transmission and Distribution
One of the most significant challenges associated with the development of significant sources of renewable generation is the need for a new and enhanced T&D infrastructure to accompany the new assets. Stated simply, while the US has vast amounts of renewable resources, a majority of these resources are located away from load centres, requiring significant investment in new T&D infrastructure.
Perhaps the best example of this is the Electric Reliability Council of Texas (ERCOT), which has added more over 8,500 megawatts of wind capacity to date. Over 90% of ERCOT’s wind capacity is located in the sparsely populated West, while the major demand, or load centres (Dallas, Houston, etc.), are located in the East. Due to limited transmission capability from the West to the South and East zones much of the wind capacity is ‘stranded’, and therefore ERCOT is unable to realise the full benefit on both an energy pricing and CO2 emissions reduction basis. These ‘stranded megawatts’ have resulted in large price variations across the ERCOT zones. In fact it is not uncommon for the West to experience negative energy prices as a result of excess wind generation.
In an effort to realise the full benefits of ERCOT’s wind capacity the Public Utility Commission of Texas (PUCT) approved the Competitive Renewable Energy Zone 2 (CREZ 2) in 2008. Projected to cost approximately $5 billion, CREZ 2 is designed to increase the transmission capability from West to East by more than ten fold. When completed in 2013, CREZ 2 will provide transmission for total of approximately 18,500 MW of wind capacity in ERCOT.
Smart grid technologies will also be an important element of the overall T&D modernisation effort. Smart grids should allow for two way communication and response between utilities and consumers through the use of a dynamic network utilising smart meters, device/appliance controls, data management tools and neural networks. This will enable consumers to respond to real-time prices as well as select the most cost-effective energy usage pattern. Fully implemented smart grids aim to create an integrated distribution system between the utilities and consumers that also incorporates such aspects as distributed generation sources such as house solar panels, and electric cars.
Another critical component to the integrated solution is balancing generation. Many types of renewable generation are not baseload and will have much smaller capacity factors in comparison to baseload generation, such as coal plants. In addition, renewable generation is subject to generating only when renewable resources are available. Therefore, some types of renewable generated energy, such as wind, is often produced in more significant volumes during low demand periods, and subject to significant volatility. Given this, it is important to have balancing generation to supplement renewables.
One specific example of the importance of balancing generation also involves ERCOT, when in July 2008 wind generation spiked 1,500 megawatts in 30 minutes. This forced the system to remove several non-wind generators from operation. The wind generation then proceeded to drop 2,500 megawatts, which forced the system to try to bring those same non-wind generators back on-line, in addition to others. Over a four hour period real-time energy prices fluctuated from nearly $100/MWh to over $170/MWh. In this case it is important that quick start resources, such as peaking plants, are available since they are able to ramp up and down. Without such resources, markets like ERCOT - made up of a large proportion of wind capacity - will be subject to grid instability and consequently subject to spikes in real-time energy prices.
Smart grid and storage technologies can also help balance supply and demand. On the supply side, storage facilities will be able to store excess generation in hours that it is not needed, such as wind generated in off-peak hours. Smart grid technologies have the capability to also have storage elements, through electric car batteries for example. On the demand side, smart grid technologies will send appropriate signals to the consumer so that demand can be shifted to hours when renewable generation is available.
Financing the Solution
Realising the potential benefits from the energy initiatives aimed at modernising the country’s generation fleet and T&D network will require development and execution of a closely integrated set of programs. Successfully implementing the collective set of solutions described herein will require significant capital, and the appropriate set of incentives. While the cash grants provided by the American Recovery and Reinvestment Act of 2009 (ARRA) have produced some of the right incentives, these represent only a near-term solution to a longer term requirement: In order to encourage sustainable renewable generation growth - and in general, the sustained reinvestment in the energy infrastructure - a long-term solution is needed.
The Department of Energy (DOE) loan guarantee program, also established under ARRA, is a step in the right direction, albeit also more focused on the near-term. For commercially proven technologies, the program guarantees 80% of a project’s debt, so long as the debt is less than 80% of the project’s total cost. In addition the program is designed to expedite the loan approval process by partnering renewable developers with lending institutions prior to filing the loan application. According to the DOE, the $750 million in funding available under the program could support $4 to $8 billion in renewable generation. Depending on the borrowing rate, others have suggested the level of support could be closer to $15 billion.
A complementary and longer-term solution is the Green Bank, or Clean Energy Deployment Administration (CEDA). CEDA is currently part of the Waxman-Markey Bill and has been passed out of the Senate Energy and Natural Resources Committee. As currently proposed, CEDA would operate as an independent, government-owned, non-profit investment bank, with an initial charter of 20 years and $7.5 to $10 billion in funding. CEDA would provide access to capital and offer lower financing rates through loans and loan guarantees. With $10 billion in funding, CEDA is estimated to be able to support more than $100 billion in debt to finance elements of the integrated solution, including the renewable generation and associated T&D and other technologies that can reduce CO2 emissions.
The recent significant economic recession has presented a challenging environment for all aspects of the US economy - the power industry is no exception. Despite the lingering effects of the downturn and continued economic uncertainty, a unique opportunity exists to fundamentally change the future of the US power industry through the successful execution of an integrated reinvestment plan that explicitly recognises the interrelated nature of renewable generation development, CO2 emissions abatement, modernised T&D, and more flexible energy production capability. Importantly, the levels of innovation in creating the right incentives for sustained financing and investment must match the levels of innovation around renewable energy production and delivery, development of smart grid technologies, and efforts to significantly reduce emissions.
 For utilities with sales greater than 4,000,000 MWh with adjustments allowed for existing hydro generation, new nuclear generation, and new carbon sequestration units. Additionally, 25-40%of the targets will be allowed to be met by energy efficiency measures.
 Chairman’s Mark of the Clean Energy Jobs and American Power Act (S. 1733) October 23, 2009
 President Obama Weekly Address January 24th, 2009
 Source: PA Consulting Group’s merchant capacity database
 Section 1705
Projects funded through this program will need to show that it is likely they will be able to start construction by September 2011.
 American Clean Energy and Leadership Act 2009
 In the Waxman Markey bill, CEDA is funded with $7.5B and in the Senate version it is funded with $10B.