Power industry building spree to bring US burst of electricity

Feb 19, 2002 01:00 AM

A year after the California energy shortage woke up the nation, the power industry has launched an unprecedented building spree. Approximately 100 new power plants will come on line this year, accounting for roughly 57,000 MW of electricity. That's enough juice to keep an estimated 57 mm average homes humming.
The previous record was 45,000 MW in 2001. Two Charlotte companies, Duke Energy and Cogentrix Energy, are among the leaders in building new plants. As they and others continue opening plants, some critics wonder if, in the short term, the market will face a glut of new power.
"Looking at what's out there, based on the amount of capacity under construction, there is enough to create a serious oversupply" said Will Dailey, senior consultant for Platts/RDI Consulting, an energy research and consulting firm in Boulder, Colorado. Over time, demand for electricity is expected to easily surpass the sudden bulge in supply. The federal Energy Information Administration projects demand will grow 1.4 % annually between 2000 and 2020.
Vice President Dick Cheney said the industry would have to build 1,300 to 1,900 new plants over the next 20 years simply to meet long-term demand. "That averages out to more than one new plant per week, every week, for 20 years running," he said.

To an extent, the building boom is evidence that energy companies anticipated increased demand. Power plants take about two years to complete, which means those coming on line this year were begun in 2000 -- before the California crisis raised public awareness.
In the year since parts of California experienced rolling blackouts, the price of electricity has fallen dramatically. In California, utilities now pay about $ 28.75 for July delivery of a MWh, down 54 % from a year ago. Prices are down 6 % in the Midwest and 22 % in the Southeast.
For companies that build power plants, the lower prices could mean increased financial pressure. For some consumers, however, a sudden glut could lead to lower utility bills.Most of the plants opening this year are "merchant" plants, which sell power wholesale, primarily to utilities.

A Duke Energy subsidiary, Duke Energy North America, will open 11 plants in seven states in May and June. (It does not build in the Carolinas.) Cogentrix opened a plant in Jenks, Oklahoma and will open two more this year in Louisiana. The most aggressive builder, San Jose, California-based Calpine, plans to open 27 plants in 2002 and 2003.
Consultant Dailey said a herd mentality led companies to build 100 plants this year. When prices and demand rise, he said, "Everyone gets the same idea, and they rush out to build supply." Still, short-term oversupply shouldn't be viewed as a problem, said Mark Stultz, spokesman for the Electric Power Supply Association, which represents about 40 merchant plant builders.
"You cannot store electricity, so it tends to be a volatile commodity," Stultz said. "You will see swings, but you need to let price signals work. Investment (in new plants) is driven by price cycles."

For plant operators, increased supply of power could mean lower earnings and, for some, the forced sale of unprofitable plants. Even if they have locked in revenues that exceed their costs, plant operators face the risk that financial problems could cause customers to default on agreements to buy power. Consumers in states where power is regulated -- such as the Carolinas -- will probably not benefit dramatically from the lower energy prices, just as they were shielded from shortages and sharp spikes in prices in 2000 and 2001. But Duke Power spokesman Tom Williams said regulators routinely make fuel cost adjustments, so consumers will benefit to the extent that Duke has to go into the open market to meet power demand at peak periods.
For Duke Energy North America, 2002 will bring its biggest plunge ever into the power market, with its 11 new plants accounting for 6,600 MW, coming on line just in time for the summer air-conditioning season. Jim Donnell, president and CEO of DENA, saida carefully crafted risk-management strategy means Duke will be immune from what would seem to be the likely consequence of bringing new supply to market at the wrong time.

Essentially, Duke sells its power in advance, by contract, long before a plant is completed. Likewise, it pre-buys the natural gas it needs to operate its plants. By locking in both, Duke can assure itself a profitable margin, Donnell said.
The process starts the day Duke's board approves a plant, typically two years before it opens. Donnell said the plants cost $ 275 mm to $ 325 mm to build. "What we really care about is neither the gas price nor the power price, but the spread between them," he said.
Unlike most merchant plant builders, Duke has a variety of roles in the energy business. It operates a regulated utility in the Carolinas. It controls its natural gas supply because it is one of the country's largest natural gas pipeline operators. It has a subsidiary that builds its plants, and it is a major energy trader.
Donnell said the combination of assets provides Duke with more pieces it can manage in an effort to assure a desired outcome. "What we do is three-dimensional in a matrix with gas transmission, power and trading," he said. "We're not just playing checkers. We're not even just playing chess."

Only Calpine is bringing more MW on line this year than is Duke. But Calpine, unlike Duke, is focused almost entirely on building and running merchant power plants. That means it has been more affected by the impending glut of supply.
Calpine said it would scale back its building program, putting on hold 34 plants planned by 2005. (Calpine officials still say a planned Fort Mill plant will be completed in 2005 as scheduled.) Calpine's growth has been slowed by lower prices for electricity, a downgrade of its bond rating to junk status, the recession and the collapse of Enron.
"Our position is: There is not a glut," said Calpine spokesman Bill Highlander. "We think that when the economy rebounds, the market will return and prices will be higher than today, when they are depressed due to (mild) weather and the recession." Calpine generally sells its power under long-term contract, ranging from five to 20 years, before its plants open, he said.

Privately held Cogentrix said that besides opening two plants this year it will open two in Mississippi in 2003 and plans about a half-dozen more in 2004. Spokesman Jef Freeman said Cogentrix takes little risk in its projects, because it builds and operates plants for other companies, such as utilities or power marketers. And, like Duke, those companies typically arrange to buy gas and sell power before contracting for a plant, he said. While power pricing may be weak, "when you look at the market longer term, there is an imbedded need for generation," Freeman said.
Utility analyst David Burks of Louisville, Kentucky, investment banker and securities firm J.J.B. Hilliard, W.L. Lyons, said most merchant plant operators have seen their stocks fall dramatically in the past year as power supplies have increased. "Last year, in the early part of the year, these companies could do no wrong and the outlook was as favourable as it could be," he said.
"A year later, it's just the opposite. The economy has decelerated, the weather last year was moderate and now there's additional capacity coming on line," he said. "So my question is: Does the additional capacity get absorbed over the next couple of years?" The short-term outlook is positive, Burks said, only if the economy expands and normal weather returns. He is cautiously optimistic about the economy.

Source: The Charlotte Observer
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