Deregulation, California Style

New Generating Plants in California

There is a myth floating around that `California has not built a single new plant in over a decade'. This is false. What is -- or rather was -- true is that there were no major plants built whose sole purpose was electricity generation. In fact, a great deal of smaller-scale cogeneration -- the so-called `qualifying facilities' (QFs) for instance -- is quite recent. A typical cogeneration plant burns natural gas to make steam for industrial purposes, but burns that gas inside a turbine to generate electricity. Such a plant is highly efficient, because the heat that would be `waste' heat in a regular power plant is `good heat' instead. Not only that, the QF can sell both the electricity and the heat.

Still, new gas-fired plants would be more efficient. This makes a tremendous difference (see here for technical details). New plants would be much cheaper for their owners to run. For a while, this might make little difference in direct electricity prices. After all, just because you can make something cheaper than the next guy does not mean you have to sell it for less (in a free market -- in the regulated system before deregulation, utilities did have to sell it cheaper). But remember that electricity demand varies, and during periods when demand is lower, the new plant can undercut the old one. The new plant will generate the same number of megawatt-hours using only half as much gas.

This is extremely significant, because gas-fired electric generators are the largest gas users.

Natural Gas Supplies

Energy companies say that electricity prices are high because of supply and demand. We should have more electric plants. But where will the gas to run them come from? Natural gas prices are also very high, and those same energy companies say it is again because of supply and demand -- too much demand, not enough supply. How will adding more plants help? It seems obvious that if there are more generating plants, we will need more gas. But maybe not.

Consider a single 500 MW plant for example. To generate 500 MW for one hour -- 500 MWh -- at a new, efficient, 7000 BTU/kWh plant, the plant has to burn 3.5 billion BTU of gas. A million BTU is ten therms, so 3.5 billion BTU is 35,000 therms. This could heat a typical house for decades -- and this is just what it takes to run the new plant for an hour!

Decades of heat, every hour. If that plant runs 24 hours a day for 30 days, it uses 2.52 trillion BTU of gas. That is just over 25 million therms.

But this is the new, efficient plant! If the old plant is only half as efficient, it has to burn fifty million therms to produce that same power. If you build a new plant, and it keeps the old plant from having to run for one month a year while demand is lower, that saves those same 25 million therms. Suppose you build ten of these new plants, and those ten plants displace ten old plants for eight out of the twelve months a year. Compare the `before' and `after' situations, and say that you still need to run two of the old plants all summer.

before (total)	10 plants @ 50M therms/mo x 12 months = 6000M therms
after (winter, spring, and fall)	10 plants @ 25M therms/mo x 8 months = 2000M therms
after (summer)	10 plants @ 25M + 2 plants @ 50M, x 4 months = 1400M therms
after (total)	2000M + 1400M = 3400M therms

In other words, by replacing (or `repowering') ten old plants, the demand for natural gas drops by about 2.6 billion therms per year!

Costs: dollars and health

As noted above, the fuel savings might not translate instantly into cheaper electricity. Just like gasoline prices go up fast but come down slowly, electricity prices would probably do the same. But the new plant does not just burn half as much gas. It also produces less pollution.

You might think that, if you burn half the gas, you would produce half the pollution. It turns out that things are better than this. The new combined-cycle plants often produce something like one tenth the pollution of the old one, on a per-MWh basis. So the new plants are healthier for you than the old ones, by far. This is why the Sierra Club, the American Lung Association, and other such groups have all endorsed the idea of building new power plants.

So where are they?

Actually, they are under construction now, and being approved now. Several are ready to come on line this summer, including Calpine's 555 MW Los Medanos Energy Center in Pittsburg, near me. The real question is: why were they not under construction earlier, and why do they take so long to get approved?

One problem is `NIMBYism' -- the attitude exemplified by the comment: `that's great, let's build some -- but Not In My Back Yard!' NIMBYism is alive and well, as shown by opposition to Calpine's proposed Metcalf Energy Center next to the proposed Cisco office building. I read a file full of comments that had been made by people in the area, and one of them really did say `maybe we need this plant, but why don't they build it over at Moss Landing where the other plants are?' (There are lots of reasons not to build it there, among them the fact that Duke, who own the Moss Landing plant, are doing their own projects, and the fact that the transmission lines going into San Jose are already overloaded. Without more power plants, San Jose will need more power lines.)

Another common target for blame is `environmentalists'. As noted above, the Sierra Club, an environmental organization, actually supported the Metcalf Energy Center proposal. The plant was voted down by the local city council, on behalf of NIMBYism and because Cisco were against the idea. (Since then, the plant has been re-proposed, and many more are now for it, including an influential industry group, but San Jose's mayor is still in the `anti' camp.)

So who else opposes power plants? The answer is: other power plant companies! (See this ruling for one example, where Cabrillo Power LLC objected to the Otay Mesa plant project. Or simply consider the list of intervenors for the same plant, which includes Duke, Cabrillo Power, NRG Energy Inc., and even SDG&E itself.)

New plants cut into old plant profits

Remember the table above, which shows how new plants could displace old plants. When one new plant is built, it has little effect by itself. The demand for power is so high in the western United States that most plants can eventually sell enough output to make a profit. But if ten new plants are built, the old plants will find themselves undercut at 3 AM (when demand is low every day) and during spring and fall (when demand is low seasonally). They will be unable to sell their output at that time. Since they pay a lot for fuel and for pollution credits, they do not earn very much net profit, even at high prices, when they do run -- and they have to pay property taxes year round, running or not. Eventually, as new plants are built, the old ones will go out of business (or, more likely, have to `repower' themselves: replace the generators with modern, efficient equipment).

Government-induced Financial Risk

Power plants are expensive. Building one is a big risk, and business folks like to get big rewards for big risks. `There will probably be enough demand, hence money to be made' is a reason for building anyway, while `the California government might do something to delay or destroy my profits' is a reason to stop. When power companies build in foreign countries, they buy insurance policies that will pay them back if the government there decides seizes the completed plant, but such insurance is not available in California. Perhaps if insurance companies offered such policies, it would help.

Dirty Secrets

(I think this does not actually apply in California; I am still trying to find reliable information.) In some areas, a sufficiently old plant comes complete with a special permit that allows it to emit much more pollution than a new one. Since emitting pollution normally requires buying expensive pollution credits, even an old, inefficient plant can make a lot of money if it can skate by on `grandfathered' pollution allowances. But this exacerbates the natural gas problem mentioned above.

(One other reason an older, dirtier plant might run first is that it might have been bought cheaper, so that even though its output is more expensive, its owner does not have to collect as much revenue to make it profitable. This is perhaps a more likely reason the older, less-efficient generators seem to run `too much' and drive up the price of the fuel and emissions credits. This problem should eventually self-correct: eventually the fuel and emissions prices will go high enough to make the new plant cheaper anyway. In the meantime, though, things could get very expensive.)

Ballot Scares

AB1890, the deregulation law, went into effect in 1996. In the 1998 election, there was a proposition on the ballot to replace it with some other scheme. When the proposition got on the ballot, a number of companies that had planned to build new generating plants put those plants on hold. They only resumed their plans when the proposition was defeated. This put a delay into the building of new plants. Otherwise we might be a year or two ahead at this point.

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