In My View

IN MY VIEW

A Foundation To Build Upon

New plants and new regulation


	Richard F. McMahon

The past year has seen the integrated gasification combined cycle (IGCC) technology almost become a household name and a renewed interest in nuclear power. Both events are good news for a country whose demand for electricity is expected to grow at a steady rate for the next 20 years.

A new generation of power plants, including IGCC and nuclear, that run continuously to meet a utility's or a region's minimum demand will soon be needed to ensure that the United States continues to enjoy a reliable and affordable power supply. These technologies—as well as the transmission capacity to deliver the power—also represent the next generation of capital-intensive investments facing the power industry. To stimulate their construction, however, will take greater regulatory and legislative certainty for potential builders and their investors. The Edison Electric Institute (EEI) and its member electric utilities are advocating the solutions.

IGCC Activity

IGCC plants combine the high efficiency and low emissions of natural gas turbines with the ability to run on coal or other lower-cost solid or heavy liquid fuels. In an IGCC plant, coal is not burned directly but is processed with oxygen and water to form a synthesis gas, or "syngas." Most of the sulfur compounds contained in the coal are stripped off during the process and can be sold commercially. As a bonus, hot exhaust gases from the initial combustion process are then put to work heating steam, which drives another turbine generator. IGCC plants also hold the possibility for capturing and sequestrating carbon dioxide (CO₂).

Coal-based IGCC technology has been demonstrated at a commercial sc ale for the past ten years at two sites in the United States and two in Europe. The U.S. plants were built with support from the U.S. Department of Energy (DOE). One is operated in Tampa, Florida, by Tampa Electric, and the other is in West Terre Haute, Indiana, where Cinergy/PSI has recently entered into an agreement with the plant's owners to use the synthetic gas from the IGCC plant to power a 281-MW combined-cycle turbine generator.

Tampa Electric's 260-MW IGCC facility began commercial operation in the fall of 1996. To study the effects of gasifying a small percentage (1%) of biomass and adding it to the IGCC plant's primary feedstock of petroleum coke and coal, Tampa Electric conducted a test burn in late 2001. The result showed that it was technically feasible and that it did not increase the monitored air emissions of nitrogen oxides and sulfur dioxide.

The future of IGCC technology received a boost in 2004 with GE Energy acquiring ChevronTexaco's gasification technology business. GE Energy and Bechtel have since announced their intention to establish an alliance to develop a standard commercial offering for IGCC projects in North America.

This past year, Cinergy/PSI Energy, and American Electric Power have said they will each look at building IGCC plants. Cinergy/PSI is considering several sites, including the site of its coal-powered station in Edwardsport, Indiana. The plant would produce 500–600 MW of electricity to help meet increased electrical demand over the next decade. American Electric Power has announced its intent to build up to 1,200 MW of new generation using the IGCC technology.

In other IGCC news from the past year, ConocoPhillips and engineering-construction giant Fluor signed a worldwide alliance agreement to facilitate the development, design, and construction of new projects that would use ConocoPhillips' E-Gas technology. The E-Gas technology incorporates a unique, proprietary gasification system design. This can be applied with gas turbine and steam power generation in an advanced IGCC configuration to produce electric power. It can also coproduce synthesis gas, hydrogen, and steam in highly flexible combinations.

The DOE has selected ConocoPhillips/Fluor and the independent energy company Excelsior Energy to develop the 531-MW Mesaba Energy Project in Hoyt Lakes, Minnesota. This project is scheduled to begin construction in the second half of 2006 and to be in service in 2010.

Another IGCC-related announcement this year was that Tondu Corporation, a leading Houston-based power plant developer, has entered into an agreement with Shell Global Solutions to use the Shell coal gasification process technology in IGCC projects that Tondu is currently developing.

Nuclear Revival

The past year has also seen a comeback for nuclear power. Three industry consortia have applied to the DOE to test the Nuclear Regulatory Commission's (NRC's) new combined construction and operating license (COL). The expedited approval process for the first COL could take up to three years, but subsequent approval of COLs for identical plants is projected to take less than half that time. The consortia include NuStart Energy Development LLC (a partnership of 11 leading energy companies), a group led by Dominion, and another headed by the Tennessee Valley Authority (TVA).

So far, no company in NuStart has committed to build, but if they are granted a license, it could pave the way for a new plant by 2014. Other companies, such as Duke, Entergy, and Southern, have announced plans to seek NRC early site permits, which would give them the option to build on an existing nuclear site over the next 20 years. Later on, the companies could submit a COL application with much of the site preparations already completed.

Capital-Intensive Generation Needed

Of course, exactly when an IGCC plant gets built or whether a nuclear plant gets ordered is open to debate. There is no question, though, about the need for such capital-intensive power plants. The U.S. Energy Information Administration (EIA) is now predicting that electricity demand will grow around 2% annually between now and 2025. This means reserve margins, which peaked at almost 28% in 2003, could begin to decline by as early as 2007. To replace and expand this capacity, electric utilities and independent power producers will need to spend an estimated US$100 billion or more during the next 20 years.

The EIA is projecting that 87 GW of new coal-based capacity will need to be added by 2025, with about 16 GW of this capacity using advanced clean coal technology. Nuclear generating capacity is expected to increase from 99.2 GW in 2003 to 102.7 GW in 2025. Natural gas is predicted to have the largest increase in its share of total electricity generation, from 17% in 2003 to 20% in 2010 and 24% in 2025.

Strengthening the Federal-State Partnership

Before they commit to build either a large, capital-intensive power plant or transmission facility, builders and their investors want greater certainty about recovering their costs. They need to be reasonably certain that they will be able to get their money back and earn a fair return on their investment.

EEI is helping to create this certainty by encouraging a dialogue between the Federal Energy Regulatory Commission (FERC), which oversees the country's wholesale markets, and the states, which monitor the nation's retail electricity markets. Early this year, EEI's board of directors unanimously supported a framework to help guide the development of the country's wholesale power markets and, at the same time, reinforce the need for states to have adequate generation and transmission.

Another procurement area that would benefit from increased certainty is within regional transmission organizations (RTOs). The signals or market mechanisms that indicate when and where new power plants should be built within an RTO have an inadequate duration and fluctuate widely between regions. Many also believe that the current three-year, and even five-year, capacity auctions will not lead to companies making investments in the capital-intensive power plants.

Greater regulatory certainty, especially for cost recovery, is important for those building transmission wires and facilities as well. Between 1999 and 2003, for example, electric utilities invested more than US$17 billion on transmission. Looking ahead, preliminary data indicate that utilities have invested, or are planning to invest, an additional US$28 billion through 2008—a 60% increase over the previous five years.

To turn these spending plans into action though, utilities are looking for greater certainty over recuperating their investment. Broadly, the industry is working with FERC and with the states to create a regulatory framework that assures those who are willing to invest in the grid will be able to fully recover their investment, along with their cost of capital, through electricity rates.

Increasing Legislative Certainty

The Energy Policy Act of 2005 will also help to encourage investment in capital-intensive generation and transmission. The new law will encourage a stable, diverse supply of fuels needed for electricity production. The act also modifies two long-standing barriers to effective competition: the Public Utility Holding Company Act (PUHCA) and the Public Utility Regulatory Policies Act (PURPA). Repealing the 70-year-old PUHCA will help attract significant amounts of new investment capital to the industry. Reforming the mandatory purchase requirement of PURPA will help to reduce electricity costs for consumers.

Delays in siting are another discouragement to transmission investment. To resolve transmission bottlenecks that can arise if the states do not or cannot act, the act includes language that gives FERC limited authority to take the action needed. The act also designates the DOE as the lead agency to help streamline the federal permitting process for transmission facilities. Finally, the act reduces the depreciable lives of electricity transmission assets from 20 years to 15 years. This gives these assets tax treatment that is similar to other major capital assets.

Reducing Environmental Uncertainty

One issue that looms large in any discussion about building capital intensive generation is the impact the plants will have on the environment. The present approach to controlling emissions is laced with problems, notably persistent litigation. This is slowing down environmental progress and could lead to higher electricity prices. In particular, coal-based power plants face emissions control requirements that are duplicative, contradictory, costly, and complex, creating enormous uncertainty for future investment.

EEI has been advocating for a multipollutant blueprint that will reduce power plant air emissions faster, with greater certainty, and more cost effectively than current programs. The power industry believes that a market-based, cap-and-trade system will give individual electric utilities the ability to choose the compliance strategy that makes the most sense for their particular circumstances. At the same time, it will collectively ensure that the most cost-effective emissions control technologies are installed across the industry.

Another environmental issue that will affect power plant construction is concern over global climate change. A number of climate proposals have been introduced into Congress, and more are anticipated. With the debate continuing over what the United States should do, if anything, about the climate issue, the electric power industry will continue taking voluntary actions to reduce, avoid, and sequester greenhouse gas emissions. These programs are part of the reason why power sector carbon intensity (measured as the ratio of CO₂ emissions per kilowatthour generated) declined by 10% from 1980–2004.

The next generation of capital-intensive power plants promises extraordinary benefits, and importantly, the means the industry needs to satisfy the public's ever-growing demand for electricity. The hard part will be ensuring that they do not take an extraordinary effort to get built. We are confident, however, that with a spirit of cooperation among regulators and now much needed legislation on the books, the United States will be able to count on them for a reliable and affordable electricity supply well into the 21st century.