The day-to-day challenges of the electricity business often keep the focus of companies on short-term issues. This is understandable, given the just-in-time nature of delivering electricity to customers. Electricity is the original and ultimate example of just-in-time manufacturing. It cannot be stockpiled in large quantities like other commodities. The instant someone turns on a light or their PC, the additional electricity required must be immediately available from a generating station, which may be hundreds of kilometers away. It is not surprising then that much is made of meeting the immediate challenges, and often the longer-term issues are given less attention.
Electricity is the lifeblood of modern society. Without a reliable supply of electricity, all other sectors of the economy can grind to a halt. In our modern information age, few human endeavors can proceed, especially if the computers and electronic devices society depends on everyday do not have any electricity to run them. Modern society expects and fully depends on electricity service reliability that meets the highest standards. And this is a mandate the industry takes very seriously; it is indeed “Job One”.
The development of new market mechanisms has only increased the spotlight on the immediate challenges of delivering power to customers. Dayahead trading, hour-ahead contracts, congestion management and real-time markets tend to further focus the mind on meeting immediate needs. And while addressing the immediate requirements is core to the mandate of the industry, what may be lost in this equation are the long-term requirements. The question put simply is this: Will we be able to meet customer needs in a decade from now?
The long-term supply question is one that encompasses more than just generating capacity, though this is certainly the core issue. Yet related to that are equally important issues about whether we will have the right skill sets among personnel, market mechanisms to most efficiently meet demand, transmission systems able to provide flexibility and sufficient transfer capability, technologies and service which customers will require, and appropriate environmental regulatory regimes. In short, are industry, government, regulators and stakeholders taking the steps today needed to meet the long-term needs of electricity customers and the economy?
The question of generating capacity is one that has garnered attention in some regions of North America recently. Population and economic growth has not kept pace with capacity in specific states and provinces, resulting in shortages in California, and near misses in other areas such as Ontario. The long-term picture is something the Canadian Electricity Association (CEA) has studied in the Canadian context, and it is the core mission of the North American Electric Reliability Council (NERC).
The supply picture across North America has, over the past few decades, become increasingly tighter. The Energy Information Administration of the U.S. Department of Energy reports that between 1978 and 1992, America's utility capacity margins averaged between 25 and 30 percent. Since then, the capacity margins had declined to less than 15 percent nationwide by the end of the last decade, and increased to close to 16 percent by 2001. The capacity margin in Canada has also decreased of late, and now stands at slightly more than 22 percent.
CEA’s study of the long-term electricity supply for Canada in entitled “A Bird’s Eye View” and seeks to quantify what the supply requirements are for the country over the next two decades. Our study looked at the future needs of Canadians for electricity, took into account projections by the Canadian government and regulatory authorities, considered population and GDP growth patterns, and the current and projected growth in electricity demand. We took into account savings from energy efficiency programs, but also accounted for plant retirement over the next 20 years. Even accounting for a reduction in electricity exports, we were still left with the need to increase electricity supply by 205 terawatt-hours from some 40,000 MW of new capacity over the next two decades.
The challenge of meeting new supply needs is not unique to Canada. NERC annually produces a Reliability Assessment that looks at requirements over the next decade. The most recent assessment, published last fall, reported that “capacity adequacy in North America over the next ten years will continue to depend upon the timely construction of new generating facilities by merchant power plant developers. Merchant developers announced plans for more than 286,000 MW of new capacity during the ten-year period, a potential increase of 30.6% compared to the 934,370 MW currently installed in North America.”
The NERC report noted the changes to the electricity industry structure over the past decade. In the past, vertically integrated electric utilities, operating under a state or provincial obligation to serve, planned and constructed new generating units to meet requirements. “Today, most new generating facilities in North America are merchant projects. Where this is the case, generation planning is now primarily being conducted by developers who examine areas of the continent that offer the greatest business opportunities.”
Whether vertically integrated utility or merchant plant developer, the barriers to developing and deploying new generation are the same: Uncertainty surrounding the ability to obtain suitable transmission arrangements, the ability to obtain necessary siting and environmental permits, the ability to obtain financial backing, and political and regulatory actions.
With respect to transmission, the issue is clear. With increasing transmission congestions in a number of regions, meeting future needs must be addressed as not simply a generating capacity question, but one of ensuring adequate transmission capacity. Future generation and transmission both face hurdles when it comes to siting and environmental challenges. We need to move to a more streamlined and smarter regulatory environment in order to ensure societal needs for review and oversight are conducted in a fashion not unduly long and burdensome, all the while respecting the need and importance of review processes.
The financing of projects has become more difficult in the post-Enron age. Investors have been wary of an industry affected by the Enron debacle, the Telecom market deflation, and the continued fallout from September 11th. This lack of investor confidence is a serious challenge to the construction of needed generation and transmission projects and could affect meeting the future needs of customers, particularly troubling given what we know about the need for new generation.
Industry needs to continue its dialogue with decision-makers, regulators and other stakeholders in an attempt to find concrete solutions to these challenges. The solutions will likely include addressing everything from streamlining permitting processes to ensuring a fiscal environment that will attract the capital required to build for the future.
Ensuring future needs does not stop at supply and transmission. Much has been said and written about the state of distribution systems in many regions of North America. The infrastructure, described by some pundits as “crumbling” in some regions will clearly need attention to ensure continued reliable and safe operation.
Equally important will be to ensure the industry will have access to a pool of talent, able to meet the challenges in the years ahead. As the industry becomes more competitive and focused to a greater degree on immediate issues, not enough emphasis has been placed on ensuring future human resource requirements will be met. The strong connections that once existed between electric utilities and educational institutions have diminished. At the same time, much of the industry has undergone downsizing over the past decade, the result being an aging workforce in many instances. Greater emphasis therefore will be required to foster the expertise and skills the future will demand.
The long-term challenges may be great, but industry planners are working to see that we meet those challenges. We need to ensure the appropriate policy, regulatory, investment and human resource cultivation decisions are made so these plans can be carried out to the benefit of customers.
Electricity is the lifeblood of modern society. Without a reliable supply of electricity, all other sectors of the economy can grind to a halt. In our modern information age, few human endeavors can proceed, especially if the computers and electronic devices society depends on everyday do not have any electricity to run them. Modern society expects and fully depends on electricity service reliability that meets the highest standards. And this is a mandate the industry takes very seriously; it is indeed “Job One”.
The development of new market mechanisms has only increased the spotlight on the immediate challenges of delivering power to customers. Dayahead trading, hour-ahead contracts, congestion management and real-time markets tend to further focus the mind on meeting immediate needs. And while addressing the immediate requirements is core to the mandate of the industry, what may be lost in this equation are the long-term requirements. The question put simply is this: Will we be able to meet customer needs in a decade from now?
The long-term supply question is one that encompasses more than just generating capacity, though this is certainly the core issue. Yet related to that are equally important issues about whether we will have the right skill sets among personnel, market mechanisms to most efficiently meet demand, transmission systems able to provide flexibility and sufficient transfer capability, technologies and service which customers will require, and appropriate environmental regulatory regimes. In short, are industry, government, regulators and stakeholders taking the steps today needed to meet the long-term needs of electricity customers and the economy?
The question of generating capacity is one that has garnered attention in some regions of North America recently. Population and economic growth has not kept pace with capacity in specific states and provinces, resulting in shortages in California, and near misses in other areas such as Ontario. The long-term picture is something the Canadian Electricity Association (CEA) has studied in the Canadian context, and it is the core mission of the North American Electric Reliability Council (NERC).
The supply picture across North America has, over the past few decades, become increasingly tighter. The Energy Information Administration of the U.S. Department of Energy reports that between 1978 and 1992, America's utility capacity margins averaged between 25 and 30 percent. Since then, the capacity margins had declined to less than 15 percent nationwide by the end of the last decade, and increased to close to 16 percent by 2001. The capacity margin in Canada has also decreased of late, and now stands at slightly more than 22 percent.
CEA’s study of the long-term electricity supply for Canada in entitled “A Bird’s Eye View” and seeks to quantify what the supply requirements are for the country over the next two decades. Our study looked at the future needs of Canadians for electricity, took into account projections by the Canadian government and regulatory authorities, considered population and GDP growth patterns, and the current and projected growth in electricity demand. We took into account savings from energy efficiency programs, but also accounted for plant retirement over the next 20 years. Even accounting for a reduction in electricity exports, we were still left with the need to increase electricity supply by 205 terawatt-hours from some 40,000 MW of new capacity over the next two decades.
The challenge of meeting new supply needs is not unique to Canada. NERC annually produces a Reliability Assessment that looks at requirements over the next decade. The most recent assessment, published last fall, reported that “capacity adequacy in North America over the next ten years will continue to depend upon the timely construction of new generating facilities by merchant power plant developers. Merchant developers announced plans for more than 286,000 MW of new capacity during the ten-year period, a potential increase of 30.6% compared to the 934,370 MW currently installed in North America.”
The NERC report noted the changes to the electricity industry structure over the past decade. In the past, vertically integrated electric utilities, operating under a state or provincial obligation to serve, planned and constructed new generating units to meet requirements. “Today, most new generating facilities in North America are merchant projects. Where this is the case, generation planning is now primarily being conducted by developers who examine areas of the continent that offer the greatest business opportunities.”
Whether vertically integrated utility or merchant plant developer, the barriers to developing and deploying new generation are the same: Uncertainty surrounding the ability to obtain suitable transmission arrangements, the ability to obtain necessary siting and environmental permits, the ability to obtain financial backing, and political and regulatory actions.
With respect to transmission, the issue is clear. With increasing transmission congestions in a number of regions, meeting future needs must be addressed as not simply a generating capacity question, but one of ensuring adequate transmission capacity. Future generation and transmission both face hurdles when it comes to siting and environmental challenges. We need to move to a more streamlined and smarter regulatory environment in order to ensure societal needs for review and oversight are conducted in a fashion not unduly long and burdensome, all the while respecting the need and importance of review processes.
The financing of projects has become more difficult in the post-Enron age. Investors have been wary of an industry affected by the Enron debacle, the Telecom market deflation, and the continued fallout from September 11th. This lack of investor confidence is a serious challenge to the construction of needed generation and transmission projects and could affect meeting the future needs of customers, particularly troubling given what we know about the need for new generation.
Industry needs to continue its dialogue with decision-makers, regulators and other stakeholders in an attempt to find concrete solutions to these challenges. The solutions will likely include addressing everything from streamlining permitting processes to ensuring a fiscal environment that will attract the capital required to build for the future.
Ensuring future needs does not stop at supply and transmission. Much has been said and written about the state of distribution systems in many regions of North America. The infrastructure, described by some pundits as “crumbling” in some regions will clearly need attention to ensure continued reliable and safe operation.
Equally important will be to ensure the industry will have access to a pool of talent, able to meet the challenges in the years ahead. As the industry becomes more competitive and focused to a greater degree on immediate issues, not enough emphasis has been placed on ensuring future human resource requirements will be met. The strong connections that once existed between electric utilities and educational institutions have diminished. At the same time, much of the industry has undergone downsizing over the past decade, the result being an aging workforce in many instances. Greater emphasis therefore will be required to foster the expertise and skills the future will demand.
The long-term challenges may be great, but industry planners are working to see that we meet those challenges. We need to ensure the appropriate policy, regulatory, investment and human resource cultivation decisions are made so these plans can be carried out to the benefit of customers.
