Chicago Tribune Finally Wakes Up On Our Dismal Energy Future

Over the last few years I have written many articles about power and electricity, and in particular how transparently wrong the "dreams" and plans are for alternative technologies or the re-birth of nuclear power (although that makes me sad, for I am a big supporter of nuclear power).

A large part of the problem is that there are many variables that need to be understood in order to see what is likely to occur in the future in the energy industry. These include:

1 The motivation of key players, whether they are utility companies, government entities like the TVA or the Los Angeles Department of Water and Power
2 The financial capabilities of the key players, because often the ones with the largest amount of available funding are unlikely to "risk it all" for uncertain financial gains
3 The role of state regulators, since the utility industry still has a very strong state orientation, particularly in Texas, which has its own grid (except for El Paso)
4 The role of Federal regulators, who have can order components of deregulation which have shaken up the industry for better and for worse
5 The role of Federal agencies, such as the Nuclear Regulatory Commission, which for the most part has rubber-stamped nuclear re-licensing so far (prior to Japan), and the Department of Energy which has spectacularly failed with the Yucca Mountain storage project for nuclear waste. Also the EPA with particulate emissions
6 The role of special interest groups, particularly those against new construction of nuclear or coal plants, or transmission lines to connect the grid. These interests have won huge and damaging victories such as the demented Shoreham situation and the transmission line under Long Island that can't be powered on
7 How electricity works (and gas, for they are intertwined), with the key note being that it is a "peak" business and not having the right amount of power in the right place makes for bad outcomes (blackouts)
8 That "classes" of rate payers such as industrial titans (aluminum plants), companies, government entities and residents have different motivations and goals. One of the most insightful things I heard in a rate case proceeding was "I don't care if you raise utility rates, just don't raise them on my class of service"
9 The different segments of utility operations, from generation to transmission to distribution, and how each has different economics and "closeness" to customers (you may hate your local distribution utility, but it is the generation and the lack of transmission that is driving the rates that they must charge)
10 The role of individual politicians, such as prominent ones from either party that come into power and proclaim that they can "change" the system or achieve a particular type of transformation
11 The fact that utilities are regressive in that an increase in utility rates disproportionally impacts the poor because it can represent such a big portion of their expenses and the utility actually takes action if you don't pay (one of my first encounters in the industry happened when a small child on a plane asked if I was the guy who "turns off the power" when I said I worked in the electricity industry)
12 The availability and impact of alternatives of which the most important by far is decline in the price of natural gas for generation or to a lesser extent the fact that gasoline powered generators for home backup were once rare but are getting more common, and that many major businesses simply have to purchase parallel backup power units(quite expensive) because they can't rely on the "dirty" power from their local utility
13 The advancement of technology captures the popular imagination, but I hardly pay attention to it at all. Our energy infrastructure is ancient; our hydro faculties may as well have been built by the ancient Egyptians, and the vast, vast majority of our nuclear plants are running on technology designed 30-40 years ago. Items like smart metering and "alternative" technologies are a drop in the bucket and don't solve our fundamental issues of lack of base-load power and properly placed and sized transmission lines
14 The cost & availability of money whether measured in interest rates or in availability of credit or buying power is very important to capital-intensive businesses; in the 70's during high inflation up to 25% or more of the cost of a major investment such as a nuclear power plant was just capitalized interest which was driven by the high cost of money
15 The motivation of oligopoly players is important since major utilities are adjacent to one another and tend not to compete in the other guys' backyard; the most famous example of this was AT&T which was broken up in the classic Judge Greene decision in 1982 and then regrouped slowly over the next 25 years as shown in this hilarious but true Colbert bit

Of all the variables... the popular imagination tends to favor #13 "new technology" with magazines like Popular Mechanics talking up new reactor designs and other cool advances as well as #10 when the incoming administration talked of a (never-gonna-happen) "nuclear renaissance" in 2008.

The "real" answer, in my opinion, is that "it depends". What pre-killed the nuclear renaissance in the USA was the fact that the major players either didn't have the money to buy them (#2) or if they did have money, didn't have a motivation to do so (#1) which is tied to the fact that they profit anyways off the status quo.

When the (sad) situation in Japan occurred, instantly the most important item was #6, the role of special interest groups, which would fight tooth and nail until the end of time, draining money and adding risk, in order to see the utility fail in its mission of adding new generating capacity.

The most important general trend now is the low price of natural gas (#12) which means that now not only is it insane from a regulatory point of view to consider nuclear or coal, natural gas at its current price presents a rational economic alternative.

Back to the Chicago Tribune...

Due to the fact that you have to understand so much, the typical "reporter" method of asking some questions, fact checking what you were told, and then adding a "human" element of the average "Joe" on the street, and kicking it out in the paper, fails utterly. You could ask 100 people and get different answers, with few to none understanding the financial and regulatory hurdles that OBVIOUSLY prevent anything from happening at all (except the status quo). Thus in order to understand and write insightful articles you need to see "the big picture" which means at least a decent understanding of all the components above, or at least the elements that are the most important at the time the article is being written.

Due to the importance of this issue and the fact that it keeps popping up year after year, more and more journalists and papers are starting to be more insightful in their conclusions. Today's article is called "Consumers' Electric Bills Likely To Spike As Coal Plants Close".

The first line is:

Consumers could see their electricity bills jump an estimated 40 to 60 percent in the next few years.

Well that is a good start. We have been shielded from rate increases for years as the utilities "wind down" the lives of their existing assets and don't re-invest in new base-load generation (along with price caps in Illinois), but that good fortune is coming to an end. Implied is (#11) the impact of these increases on everyone in Illinois, especially the poor.

The reason: Pending environmental regulations will make coal-fired generating plants, which produce about half the nation's electricity, more expensive to operate. Many are expected to be shuttered. The increases are expected to begin to appear in 2014, and policymakers already are scrambling to find cheap and reliable alternative power sources. If they are unsuccessful, consumers can expect further increases as more expensive forms of generation take on a greater share of the electricity load.

Also true - pointing out that environmental regulations from the EPA (#5) with a sop to the fact that our (state) regulators (#3) don't have any solutions, although they claim to be working on it.

"Each generator will have to decide for itself whether the investment required to meet environmental requirements can be justified based on its projection of market prices and the cost of its capital. In any case, those costs will be passed through to consumers," said Mark Pruitt, director of the Illinois Power Agency, which procures electricity for Illinois.

All true. There is no free lunch, and (#1) the MOTIVATION and (#2) FINANCIAL CAPABILITIES of the key players will drive what happens. That is a good insight that whatever happens, customers pay.

American Electric Power, one of the country's largest coal-burning electricity generators, said Thursday it will retire nearly a quarter of its coal-fueled generating capacity and that it will spend up to $8 billion to retrofit remaining units to meet regulations that start taking effect in 2014. Those moves will have an impact.

This is an interesting quote. Note that they are retiring 25% of their coal base-load capacity (they have some nuclear, too) and then spending billions just to keep the rest in operation (which doesn't add ANY net new capacity, we just tread in place) to keep up with new regulations (#5).

What analysts know is that a portion of ComEd bills that pays electricity generators to reserve a portion of their power three years into the future will increase more than fourfold. That would translate into increases of $107 to $178 a year for an average residential customer in ComEd's territory, starting in 2014, according to calculations by Chris Thomas, policy director for consumer advocacy group Citizens Utility Board.

While the numbers may be fine, the reporter misses a KEY DISTINCTION; there is no "ComEd". ComEd gets most of its energy now from Exelon, and will get MORE in the future as the coal plants shut down. "ComEd" is OWNED by Exelon, and Exelon will make money hand over fist as they run their nuclear plants forever, and their poor subsidiary ComEd will come crying to politicians hat in hand saying it needs money to pay for power generated by some distant utility, which is basically themselves.

Ultimately the CRAZY SCENARIO I see is that Exelon "dumps" ComEd, which is just a conduit for power purchased by others that makes a bit of money on a regulated return, so that they no longer have this tie to their subsidiary that will allow them to pass on massive increases in power costs (for the same power that state ratepayers funded decades ago, mind you). That is why I have this item - motivation - as #1 on my list (although they aren't in order, it just jumped out at me as I started the list).

And then the CRAZIER SCENARIO, which is right out of the movie "Too Big To Fail" which I just saw on HBO, is that the state or local governments just get tired of this and seize the Exelon nuclear plants. They could do this directly or by stealth (through pecking them to death with local violations); but at some point these rate increases will go so high that politicians will have to "do something".

In any case, this is a well written article, and the reporter obviously could see the situation from several angles, and pretty much discounted any hopes of avoiding these rate increases. There isn't much of a tone of hope in the article, which is appropriate, because our situation is bad and getting worse, saved only by the low cost of natural gas as a fuel source. The article was also mostly free of "alternative energy" mumbo jumbo; it doesn't provide base load power anyways and we'd all be paying far more than 60% higher on our electrical bills if it provided a substantial portion of our electricity.

Cross posted at Chicago Boyz