August 23, 2013

New technology, politics and prices generate uncertainty for utilities

Kristi E. Swartz, The Atlanta Journal-Constitution

WAYNESBORO, GA. — Before the recession ground the state’s growth to a halt, Southern Co. made the decision to add two large nuclear reactors at Georgia Power’s Plant Vogtle.

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Central Maine Power Co. contractors erect a new 39-mile transmission line from Moscow to Benton in this November 26, 2011 file photo.

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The thinking was that the $14 billion reactors, scheduled to come online in 2017 and 2018, would generate enough electricity to support whatever population increases Georgia might see over the next several years.

But last week — about three years years too late — a financial analyst for the state questioned whether the energy giant’s nuclear expansion is the best use of money, with natural gas so much cheaper now. There’s no way to turn back, said Philip Hayet, a consultant, but Vogtle’s expansion would not be economical if Georgia Power were to start the project today.

Such second-guessing is typical nowadays.

Utilities like Atlanta-based Southern take long-term risks when deciding to build multi-billion dollar power plants, even in predictable economic and political times. Now, the stakes are higher when it comes to making decisions that must last at least 30 to 40 years as the nation continues its shift to natural gas and tighter environmental rules loom.

“A lot of what we knew five years ago was wrong, and a lot of what we think we may know now may be wrong too,” said Miles Keogh, grants and research director at the National Association of Regulatory Utility Commissioners, or NARUC.

“We used to, 20 years ago, basically ask our power companies to crush rocks and make kilowatts. Now, we expect more of them; we expect them to be risk managers,” Keough said at the four-day National Conference of State Legislatures held recently in downtown Atlanta.

Southern must manage those risks over 40 to 60 years while serving 4.4 million customers. That risk comes with a cushion: Its four utilities are regulated monopolies and earn a certain return on their capital investments in exchange for providing electricity to all customers in its territory.

“They’re responsible for keeping the system up for a long period of time,” said Paul Patterson, a utility analyst with Glenrock Associates. “Any advanced economy really needs an electricity system with a high degree of reliability. There’s a lot of investment that goes into it.”

Southern must be flexible because any prediction made 20 years or more out likely will be somewhat inaccurate, Patterson said.

“It’s not just, ‘We made a decision 20 years ago, and we’re 10 years in, and we’re not going to change just because the world has changed,’ ” he said.

The economy, the natural gas boom and pending environmental regulations add new, complex dimensions to a business model that is centered on building power plants and selling electricity.

Southern and South Carolina’s SCANA are the sole builders of new nuclear reactors in what was supposed to be a nuclear renaissance, as predicted by industry analysts as recently as five years ago. The combination of low natural gas prices and a diminished need for more electricity are chief reasons why other utilities scrapped their plans to build new reactors from scratch.

Tom Fanning — Southern’s chairman, president and chief executive — stands behind his company’s decision to build the nuclear reactors, the first in the nation to be built from scratch in 30 years.

“You have to take a long view with these things,” he said. “The industry is so capital-intensive, and the nature of the kind of capital you have to employ requires you to look at the long-term.”

As the housing market rebounds, manufacturers start to expand and consumers continue to plug in more devices, the need for electricity will grow, perhaps as much as 30 percent by 2030, according to the Energy Information Administration.

It’s likely that new plants will make electricity produced from natural gas as ample supplies of the fuel at cheap prices have made it popular across all industries.

In the past five years, Southern has cut the amount of electricity it produces from coal from 70 percent down to 35 percent. The amount it produces from natural gas has risen from 16 percent to 40-45 percent.

Natural gas is known for wild price swings, however, and predicting how much the fuel will cost in the decades to come is difficult. Keogh at NARUC, the regulator’s group, showed two charts with conflicting price projections.

“I can tell you with a pretty decent amount of confidence that somebody out there thinks the price of gas in 2030 is going to be between 2 bucks and 9 bucks,” he said, as the crowd laughed. “So let’s not say we have a really perfect vision. This is decision-making under conditions of uncertainty.”

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The push to add renewable energy, particularly wind and solar, adds another complex layer to long-term decisions about where utilities will get their electricity. Once known for high manufacturing and installation costs, solar and wind energy has become more competitive with traditional fuels. But Southern and its utilities have resisted adding renewable energy in large amounts.

Executives routinely tout the region’s lower electricity rates and the lack of natural abundance of renewable resources as two main reasons why.

Georgia Power recently signed a contract to buy wind power from Oklahoma. The utility also is expanding a solar program.

“We’ve been working hard, but a lot of it has been outside of the state,” said Dan Fossitt, president of Atlanta-based Inman Solar, which recently broke ground on a solar project in Polk County. Inman Solar is installing solar projects in Polk and Marion counties as part of Georgia Power’s so-called “advanced solar initiative.”

The projects are helping Inman Solar and other Georgia-based solar manufacturers and installers do more work closer to home, keeping the economic benefits local.

“The fact that most of our projects right now are in state and close to home is certainly good,” Fossitt said.

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Environmental rules requiring utilities to cut mercury and other air toxins from its coal-burning plants will lead Georgia Power to close 15 coal and oil units statewide.

Eventually after the closings and changes, Georgia Power will operate five coal plants in the state, said Ron Shipman, Georgia Power’s vice president of environmental affairs.

“The more certain we are about which regulations are coming down the pike, the more we can make, more concretely, decisions on what we’re going to do with these facilities,” he said.

Next up will be rules requiring utilities to cut carbon emissions from coal-burning plants, Shipman acknowledged.

President Barack Obama has directed the federal government to work with the states on developing these rules, said Bob Perciasepe, EPA deputy administrator.

“This is a key ingredient on how we as a country are going to deal with this,” he said.

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©2013 The Atlanta Journal-Constitution (Atlanta, Ga.)

 

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