21st Century Solution
for
An Uncertain and Dynamic
Future of Power Supply
by
Prepared by
George E. Owens,
P.E., President
Downes Associates,
Inc.
Read the Introduction
Read the Article
The History of Distributed
Generation
The Role of Large Regional Utilities
The Myth of the National Electrical Grid
Economic and Reliable Power for the
Consumers
Solution for the Local Municipal
Utility
Distributed
Generation Comes Full
Circle
Introduction
With the nationwide move towards the deregulation of wholesale
electric markets, the formation of ISOs and RTOs, and fears of
deteriorating grid reliability, some in the electric industry fear a
period of economic chaos and harm to municipally owned electric
utilities as the industry adopts competition as the new way of doing
business. If a shift away from vertically integrated utilities
providing centrally generated electricity and reliable transmission
service is going to impact the bottom-line of the public power
utility sector, what can these predominantly smaller utility systems
do to survive and flourish? For many in the public power sector,
locally owned and managed distributed generation will be an extremely
versatile tool in guaranteeing an economic and reliable supply of
energy to their customers. The question is: "Can a nationwide
system of small generating plants provide for a truly stable and
manageable utility network? And if so, how can such distributed
generating resources be best utilized for the benefit of the smaller
independent distribution utilities?"
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Foundation
of the Industry
Most electrical consumers have grown up believing the electrical
industry began with the construction of large electrical generating
plants connected to consumers by long miles of high-voltage
transmission lines. However, such was not the formation of the
electric industry. The first thirty years of the electrical age were
defined by the inventive genius of Thomas Edison and George
Westinghouse. Their development of practical generators coupled with
the manufacture of incandescent and arc streetlights brought the gas
streetlight era to a close and heralded the dawn of electrically
illuminated cities. In the process, electric light plants sprouted up
across America.
The electrical age was born, and with it hundreds of municipally
owned electric utilities with small generating plants at the heart of
their systems.
It would take several decades before the construction of the
Niagara and St. Lawrence River projects, as well as Hoover and Grand Coulee Dams, which
would turn the power of rushing water into electricity. Along with
these large hydro generation facilities came the requisite
construction of transmission lines to transport electrical power to
distant customers. During the same time period, numerous coal-fired
steam generating plants joined the nation's generation pool, many
being built at the sites of vast coal deposits.
Throughout the remainder of the twentieth century, high capacity
transmission systems were built by various utilities to serve their
own territories. At first, lines were built to transport energy from
large base-load plants to urban load centers serving each utility's
customers. As the various utilities expanded by buying or merging
with other utilities, longer transmission lines were added to allow
centrally-generated power to flow throughout a utility's service
area. For reliability reasons, a number of neighboring utilities
interconnected their transmission networks in order to support each
other's systems. Eventually, power reliability pools were developed
as a number of large utilities interconnected their systems providing
for improved reliability and some economic benefits. A resultant
by-product was the development of a limited wholesale power market
between utilities.
By 1965, the vertically integrated utility industry was relying on
the transfer of power from one regional system to another for
reliability as well as economic purposes. In the Northeast, for
example, a block of hydropower was typically purchased from Ontario
Hydro or Hydro Quebec by Northeast utilities to supply cities from Boston south to Washington, DC.
That power may have been cheap, but the transmission system that had
evolved was not as robust and reliable as many presumed. On November
2 of that year, it took only twelve minutes for a failure at a power
facility in Canada
to trigger a cascade of electric system failures down the East Coast,
eventually affecting 30 million people over an area of 80,000 square
miles.
The 1965 Northeast blackout resulted in increased regulation of
the nation's transmission facilities by the Federal Power Commission
(now the Federal Energy Regulatory Commission). The Commission placed
a renewed emphasis on the reliability of the transmission system and
required power pools to beef up their local generating resources. Even
with decades of increased regulation, however, the Northeast blackout
of August 2003 again revealed the continuing fragile condition of the
nation's transmission system. This blackout was the largest in United States
history with its effects penetrating virtually every segment of
society throughout the Northeast.
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Role
of Large Regional Utilities
Today, industry observers are concerned that the electrical
infrastructure, which evolved under the old regulatory regime, will
not function as well in the free market as advocates of competition
would have us believe. These observers predict a period of higher
power supply costs and coupled decrease in reliability well into the
future.
If this should be the case, what is the solution for local
municipally owned electric utilities? First, it must be recognized
that long-established investor-owned utilities no longer play the
predominant role as in previous years. Many of these utilities are
divesting themselves of their older, larger generating plants, most
of which were built in the utility growth years of the 1950s and
1960s when the industry was attempting to achieve greater economies
of scale. Today, a number of these base load plants are nearing the
end of their useful lives and environmental as well as market
questions dictate that many will likely be closed instead of being
rebuilt. The list of suspect plants includes both coal-fired and
nuclear plants. Of the latter, some nearing the end of their
forty-year licenses will not be re-licensed. For example,
Maine-Yankee, one of five nuclear stations supplying power to New England, was selected for closing in 1999.
In addition, the integrity of the aging transmission backbone on
which the safe, reliable flow of electrical power depends is being
brought into question. A recent study by the PJM RTO revealed that
the average age of high voltage transmission system transformers will
soon exceed thirty-five years.
At the same time that aged large-scale plants may be closing,
electrical consumption in the United States is
projected to rise significantly. These trends, coupled with the
deregulation of the wholesale electrical industry in 1992, have
combined to create a volatile wholesale market for electric energy to
supply hungry consumers.
Across the nation, consumers of electricity have been promised
lower electricity costs from competitively priced electricity. The
promise of cheaper electricity brought about by electric deregulation
depends on two key resources: large amounts of economic base-load
generation and the capacity of the nation's electric transmission
system to transport the power. As capable as the regulated utility
world was to generate and deliver electricity in the past, the future
deregulated one may not be able to deliver on the promises of
improved costs and improved reliability for the consumer.
When considering the prospects of such a changing future, one
might ask why local distributing utilities faced with rising loads
and volatile markets would not simply import power over the
transmission lines from regions with excess generation resources. The
answer is twofold. First, those large utilities possessing excess
generation are bidding their generation into the volatile wholesale
markets in hopes of gaining improved profit margins. And second, as
previously mentioned, the nation's electrical transmission system was
not designed for a competitive industry operating across vast regions
of the United
States.
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The
Myth of the National Electrical Grid
The basic fact is, no unified national electrical grid exists to
effectively deliver competitively-priced electricity to all
consumers. The national grid is actually a patchwork of
interconnected regional systems with many bottlenecks at their
interfaces that act as physical impediments to large scale electrical
transport north-south and east-west across the continent. Why, one
might ask, don't we have an electrical interstate transportation
system similar to the interstate highway system where unfettered and
reliable trade could function? The answers lie in finance and
politics. Prior to the federal deregulation of the wholesale
electricity market in 1992, there were few economic incentives for
large utilities to spend millions of dollars to build lines and
import bulk power from neighboring utilities. Each utility earned a
guaranteed rate of return on power plant investments in its own
territory and had little incentive to import lower cost power from
neighboring utilities. The incentive was to build large power plants
in their own territories and earn more return on the investment.
Consequently, transmission lines connected to other utilities were
built more for regional reliability purposes than for power
acquisition.
When the cost of construction for large-scale power plants became
so expensive during the 1970s and the 1980s, state public service
commissions began to more tightly control utility investment. The
result was an exodus of investors from the electric utility world to
the lure of more lucrative markets. Thus, during the 1980s and 1990s
while large generating stations were aging, few were being replaced.
Instead, utilities began downsizing to prop-up ledger sheets and
increase investors' returns.
When the cost of new large-scale power plants became so expensive
during the 1970s and the 1980s, state public service commissions
began to more tightly control utility investment. The result was an
exodus of investors from the electric utility world to the lure of safer,
more lucrative markets. Thus, while large generating stations were
aging, few were being replaced. Instead, utilities began downsizing
to prop-up ledger sheets and increase investors' returns.
Ever since the Eisenhower Administration in the 1950s, Congress
has futilely attempted to pass a substantive national energy policy
act that would bring about the construction of a national
transmission system. Today, our nation is still mired in the
equivalent of a labyrinth of undersized, poorly-connected, privately-owned
toll roads. In many areas of the nation, each transmission utility is
still left to decide which freight will pass on its lines and at what
cost. Additionally, environmental concerns have slowed or prevented
the construction of new and desperately needed high capacity
transmission lines. During the last decade, such environmental
concerns led to the abandonment of plans for two 500 kV transmission
lines across western Pennsylvania
and western Virginia.
Both lines would have helped connect generation resources in the
Mid-West with load growth regions on the Eastern Seaboard. With
national resistance to new transmission system construction and
little incentive to increase the capacity of interstate transmission
ties, municipally owned utilities could be caught in a difficult
squeeze between rising wholesale power prices and the expectation of
retail consumers to see steady or even falling retail rates.
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Economic
and Reliable Power for the Consumers
One bright spot coming out of this dilemma could be action by
Congress to bolster the reliability of the electrical industry
through tougher national policing rules. Congress still hopes to pass
a national reliability mandate to empower the Federal Energy
Regulatory Commission to develop a new reliability agenda. Though the
positive effects for consumers will be years away, this initiative is
still a hopeful one.
A second and more near-term solution is the opportunity to take
advantage of improved generation technology and install smaller
distributed generating plants throughout the nation. This concept
received national attention during the year 2000 when United States
Department of Energy Secretary William Richardson toured the United States
proclaiming the urgent need for the construction of small scale
distributed generation plants. Bill Richardson was correct. No other
solution will reach rapidly growing electric loads fast enough.
Political and legal squabbles over who reaps the financial benefits
from interstate and inter-utility transmission line construction will
continue to plague the rebuilding of our transmission grids for years
to come. Even with the ultimate settlement of the political and legal
battles, environmental concerns will continue to present formidable obstacles
to the siting of new high capacity transmission lines.
The previously discussed plan to create a tougher reliability
mandate for the nation will actually serve to advance the acceptance
and integration of distributed generating plants across a national
network. Central to the plans for a stronger FERC and a more powerful
NERC to enforce tougher reliability standards will be the creation of
integrated computer networks, which will link the federal
organizations with each of the regional utility control networks
already in place. This combining of separate utility information
networks into large scale regional systems is beginning to take place
and will help ensure that individual generation plants are properly
monitored and coordinated into large regional pools of economic and
reliable generation. In the end, the nation's electrical system will
be supported by an increased number of small dispersed generating
plants, thereby providing for greater redundancy and with less
reliance on the limited transmission interconnections that exist
today.
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Solution
for the Local Municipal Utility
When it comes to the evolution of the electric utility industry,
it seems that history is repeating itself. From the dawn of the
electrical age in the 1880s through the early years of the twentieth
century, locally placed, small generating stations energized our
towns and cities with light and power for citizens and industry
alike. For many in the arenas of public power, the "electric light"
is once again beginning to dawn with the realization that what was so
necessary for growth and stability one hundred years ago is once
again the answer; i.e., local distributed generation It now
appears that control of one's own energy resources will be as
paramount to the success of municipal utilities in the early years of
the twenty-first century as it was at the beginning of the twentieth
century. Reliable, cost-effective electrical power will be key to
sustainable commercial, industrial, and residential growth. In a
deregulated marketplace, however, governmental agencies and
vertically integrated utilities cannot be depended upon to make this
happen. Wise public power managers and planners should seriously
consider investment in on-site generation resources as vital
components of their overall power supply plans. Local generation
properly integrated with wholesale power supply planning will provide
crucially important tools to enable public utilities to navigate
through a future sea of economic and reliability adjustments. Years
ago, availability of reliable and cost effective electrical service
was taken for granted; today it must be planned for through new
creative approaches. New market intelligence will be needed and new
tools will be required. One of the most important of these will be
the use of distributed generation resources.
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Contact
For further information on the benefits of local distributed
generation, contact Downes Associates, Inc. at 410-546-4422. You can
also send George E. Owens an e-mail at: geowens@downesassociates.com
