Power Curve: Gas Prices Push Electric Industry Back Toward Coal

Power Curve: Gas Prices Push Electric Industry Back Toward Coal

May 23 - Fort Worth Star-Telegram (Fort Worth, Texas)

Suez Energy formally dedicated a 734-megawatt electricity generating plant Monday amid signs that a binge in construction of plants fired by natural gas in Texas may be nearing an end.

The Suez plant, near Springtown, is one of 75 generators opened in Texas since the deregulation of wholesale electric markets in 1995. Sixty of those, with a combined capacity of more than 31,000 megawatts, are fired by natural gas.

But the price of natural gas has tripled since 2000, and planners are looking toward coal and even nuclear energy for the next generation of plants.

Just three gas-fired generators are under construction in Texas. The lone North Texas project is a 620-megawatt generator being built by the Brazos Electric Power Cooperative in Jack County. Three other gas-fired generators are in the planning stages.

TXU Chairman John Wilder told shareholders last week that the Dallas utility is considering plans to build new generators, something it hasn't done since completing the Comanche Peak nuclear plant two decades ago.

But Wilder said TXU will likely consider coal as the generating fuel, rather than natural gas.

The Suez facility will feed enough juice into the Dallas-Fort Worth grid to power about 800,000 homes. Suez is the new owner of Tractebel, a Belgian-based company that has built or operates 44 U.S. power plants, including one that opened in Ellis County in 2002.

Suez is a so-called merchant generator, plying a trade made possible by deregulation of the wholesale markets. A merchant generator is not a utility but a vendor that sells electricity wholesale to utilities and big customers.

Paris-based Suez is part of the French company that built the Egyptian canal in 1869. After Egyptian President Gamal Abdel Nasser nationalized the Suez Canal in 1956, the company turned to power generation.

The new Wise County generator is a combine cycle plant, which means that one of its turbines is fired by natural gas and the other by steam generated from the first. Combined cycle has been heralded as a magic bullet not only for energy efficiency but also for environmental cleanliness.

But some of the efficiency has been blunted by natural gas prices, which have soared since Suez began buying land for the plant in 1999. Suez officials think their plant will be all the more competitive now that older, less-efficient plants have become even more expensive to operate.

"This plant needs only about 7,000 Btu's of heat to generate a kilowatt of electricity," said Bob Greene, plant manager. "A lot of older plants need 10,000 or more Btu's of heat to make the same level of electricity. That gives us a cost advantage."

That means operators can fire up the Suez plant and offer electricity more cheaply, which is a prime reason TXU is seeking to sell or mothball eight older plants. State regulators are examining TXU's request.

At issue is the power grid's reserve margin, the surplus generating power over Texas' peak summer demand of 60,000 megawatts (a megawatt can power 1,000 homes). In recent years, that reserve has been pegged at 20 percent or more. But regulators and grid operators have begun to warn that rising demand and retirement of older plants is chipping away at the reserve.

For this summer, the reserve is forecast at 14 percent by the Electric Reliability Council of Texas (ERCOT), the cooperative that runs the statewide grid.

That's still a comfortable cushion, but industry officials are beginning to worry about a squeeze toward the end of the decade. Wilder alluded to a coming shortage by 2010 when discussing TXU's possible building plans. And Suez's North American manager, William P. Utt, said much the same thing Monday.

"We think the reserve margin likely will tighten as the decade goes along," he said. "That's why this plant is coming on at the right time."

A narrow margin is worrisome because electricity, alone among commodities, can't be stored. The lesson from California's crisis of 2000-01 is that when electricity is in short supply, companies can game the market and prices can spike. Blackouts and utility bankruptcies can result.

Suez's Wise County plant may also benefit if Texas regulators decide to adopt a "nodal" pricing scheme next year. Nodal pricing pinpoints cost-increasing congestion and assigns the higher costs to that part of the grid, rather than spreading it around statewide, as is done now.

Utt, of Suez, says he thinks the Public Utility Commission and ERCOT will adopt nodal pricing. Because the grid for Dallas-Fort Worth has been congested in recent years, nodal pricing could raise prices for the area. If so, newer and more efficient generating plants such as the Suez generator would hold a competitive advantage.

But opponents of nodal pricing plan to fight. The DFW Electric Consumer Coalition, which includes the cities of Fort Worth and Dallas as well as several major industrial users, plans to argue against nodal pricing before the PUC next month in Austin.

"Nodal pricing will raise electricity prices in North Texas, and people are just getting organized to fight it," said coalition director Eddie Kolodzieg.

-----

To see more of the Fort Worth Star-Telegram, or to subscribe to the newspaper, go to http://www.dfw.com .

Distributed by Knight Ridder/Tribune Business News.

For information on republishing this content, contact us at (800) 661-2511 (U.S.), (213) 237-4914 (worldwide), fax (213) 237-6515, or e-mail reprints@krtinfo.com.