electric developments i consulted with kevin before i took the oars in trying to answer your
question , as well as the questions raised in drew ' s e - mail . here ' s what we
found out . . .
steve ' s question :
what economics would determine if a developer could site a power plant in new
mexico ( maybe 3 , 000 mw ) and build a line to the grid in california versus us
expanding to deliver the gas to a power plant in california ?
what you ' re really asking here is " what are the comparative economics of
energy delivered by wire versus energy delivered by pipeline ? " in this
analysis , there are a few considerations - - ( 1 ) original capital cost to
construct facilities , ( 2 ) the operating cost of the facilities , including
energy loss , and ( 3 ) environmental and other permitting considerations .
engineers tell us that , as a rule of thumb , high voltage transmission lines
and tower facilities cost approximately $ 800 , 000 to $ 1 mm / mile to construct
turnkey . this figure is comparable to the $ 1 mm / mile " rule of thumb " we use
for turnkey construction of mainline diameter ( 30 - 36 " ) high - pressure steel
pipeline .
in terms of operating costs , for anything over 100 miles in length , there are
three ( 3 ) basic sources of energy loss in electric transmission : ( 1 )
transformation loss , ( 2 ) radiation loss ( efm ) and ( 3 ) heat loss across the
conductors . a rule of thumb for electric transmission loss is 3 % . this
number is comparable to the actual fuel used for compression on
transwestern ' s pipeline .
the most critical issue impacting construction of high voltage transmission
lines is in the area of permitting . there just aren ' t many new transmission
lines being approved . it was suggested by more than one source that an
electric transmission project on the order posited in your example , could
take anywhere from 6 to 10 years to secure authorization . the issues of
electromagnetic field ( emf ) radiation around high voltage power lines , along
with other wildlife endangerment concerns , are significant obstacles in
securing permits for right - of - way .
in short , the answer is that while the economics on face appear to be
comparable for construction and operation of both natural gas pipelines and
electric transmission lines , the protracted permitting process for electric
transmission lines tips the scale considerably towards the more immediate
returns available on investment in natural gas pipeline infrastructure .
drew ' s questions :
1 . what are the key factors that determine where a power plant developer puts
his plant ?
for purposes of this exercise , i ' m assuming we ' re talking gas - fired
generation . developers generally describe four considerations in deciding
where to site a new electric power plant :
1 . market area demand ( distributive ) and / or transmission access to market
2 . water rights for turbine cooling
3 . ease of permitting ( environmental , encroachment , fed / state / local
regulations , affected agencies / jurisdiction )
4 . proximity to natural gas pipeline / supply infrastructure
2 . do the transmission access and pricing rules of the various
utilities / power pools vary all that much or are order 888 tariffs pretty much
the same all over ?
ferc order 888 and 889 require public utilities to commit to standards of
conduct and to file open access tariffs affecting transmission among and
between other utilities and / or power pools in the various operating regions .
ferc ordered public utility transmission owners to provide transmission
access and comparable service to competitors and to functionally separate
their transmission / reliability functions from their wholesale merchant
functions . the rulemaking is analogous to the open access requirements under
ferc order 436 / 500 / 636 affecting interstate natural gas pipelines . it ' s
pretty obvious from the california example this past summer , that with
respect to the overall operation of a deregulated power market in individual
states , particularly as concerns the establishment and regulation of
independent system operators ( iso ' s ) , there is substantial room for
improvement ( and possible further ferc involvement ) .
" in the open access final rule ( order no . 888 ) , the commission issues a
single pro forma tariff describing the minimum terms and conditions of
service to bring about this nondiscriminatory open access transmission
service . all public utilities that own , control , or operate interstate
transmission facilities are required to offer service to others under the pro
forma tariff . they must also use the pro forma tariffs for their own
wholesale energy sales and purchases . order no . 888 also provides for the
full recovery of stranded costs - - that is , costs that were prudently incurred
to serve power customers and that could go unrecovered if these customers use
open access to move to another supplier . "
3 . how do ipp ' s decide what fuel supply strategy works best ( i . e . , buy
bundled delivered fuel from someone vs . buy gas , storage , transport , etc .
separately ) ?
in my experience , there is no " one size fits all " formula or strategy . for
example , in the past we ' ve seen calpine take a very hands - on approach to
supplying its ipp projects . in the mid to late ' 80 ' s , during the build out
of several qf ' s ( cogens ) , calpine bought natural gas reserves in the ground
and dedicated them to the project . in today ' s market , calpine has scavenged
the gas and basis traders from statoil and set - up a natural gas desk for the
purchase and transportation management of gas supplies needed for its western
u . s . power projects . in other projects , developer / owners and their lenders
are satisfied with a less active role in securing gas supply / transportation
to the project . in short , projects look at the liquidity of the gas supply /
transportation market in deciding whether they can achieve project economics
and secure reliable supply by taking bids or rfp ' s for gas
supply / transportation , or whether to take a more hands - on approach ala
calpine .
4 . what is the rto rule and why should we care ?
last december , the ferc issued order no . 2000 , a final rule on regional
transmission organizations ( rto ' s ) . order 2000 builds on the foundation of
orders 888 and 889 ( issued in 1996 ) . according to ferc chairman jim hoecker ,
order 2000 makes " a persuasive case for separating control of grid operations
from the influence of electricity market participants . " therefore , order
2000 can be seen as a natural outgrowth of the perceived limitations on the
functional unbundling adopted in orders 888 and 889 , continuing balkanization
of the electric transmission grid based on corporate , not state or regional
boundaries , as well as pressure to provide guidance on acceptable forms of
privately - owned transmission companies .
ferc prescribes a voluntary approach to rto participation . the order
initiates a regional collaborative process to foster rto formation . the
order also imposes filing requirements on the privately owned " public
utilities " that are subject to ferc jurisdiction , and requires these private
utilities to describe in their filings how they have attempted to accommodate
the needs of transmission owning state / municipal , cooperative and federally
owned systems . ferc believes that , regardless of format , rto ' s will offer
the following benefits : ( 1 ) alleviate stress on the bulk power system caused
by structural changes in the industry , ( 2 ) improve efficiencies in
transmission grid management through better pricing and congestion
management , ( 3 ) improve grid reliability , ( 4 ) remove remaining opportunities
for discriminatory practices , ( 5 ) improve market performance , ( 6 ) increase
coordination among state regulatory agencies , ( 7 ) cut transaction costs , ( 8 )
facilitate the success of state retail access programs , and ( 9 ) facilitate
lighter - handed regulation .
critics point out that with its emphasis on flexibility , voluntary rto
formation and transmission rate reforms ( i . e . , incentives ) , order 2000 defers
for case - specific disposition many of the tough issues that must be resolved
in order to create an operational rto . moreover , order 2000 does not compel
any transmission owner to join an rto , but provides only regulatory guidance
and incentives for willing participants , as well as a veiled threat of
further consequences for the hold - outs .
as to the final part of the question ( " why should we care ? " ) , presumably , the
development of a fully - functioning rto network will promote both the
efficiency and market transparency goals of the original ferc orders . as
ferc reads it , the future of gas - fired generation for both merchant and
utility systems , depends on an efficiently operated open access transmission
system . therefore , the promise of the rto is to stimulate competition and
the ongoing investment in new generation infrastructure . unfortunately ,
sources tell me that the voluntary nature of the rto program may ultimately
cripple its effectiveness in meeting its stated goals .
5 . has $ 5 / mmbtu gas killed the gas fired power market ?
natural gas prices of $ 5 / mmbtu can only " kill " gas - fired power plants in
those instances where ( 1 ) there are more economical alternatives to natural
gas fuel , ( 2 ) demand for electric power is offset through demand side
management or ( 3 ) natural gas in an environment of short supply is expressly
prohibited from use as a power plant fuel . in the western u . s . marketplace ,
particularly in california , i see no viable alternative to natural gas fuel
for electric power generation . renewable resources currently meet less than
5 % of the total electric resource requirements . $ 32 / barrel oil prices give
fuel oil no clear economic advantage over natural gas ( even at a $ 5 / mmbtu
price ) . moreover , california environmental and permitting regulations make
the installation of new electric generation based on anything other than
natural gas fuel or renewable resources virtually impossible . while demand
side management programs are the politically correct approach to meeting
resource needs , historically , they have served only a minor role in
offsetting the growth in electric power . as to the final point , i ' m unable
to comment on the risk of future legal / regulatory restrictions governing the
use of natural gas as a boiler or turbine fuel .
steven harris
10 / 26 / 2000 10 : 05 am
to : kevin hyatt / et & s / enron @ enron
cc : jeffery fawcett / et & s / enron @ enron
subject : re : electric developments
since you are the " expert " in this area , i need to know what economics would
determine if a developer could site a power plant in new mexico ( maybe
3 , 000 mw ) and build a line to the grid in california versus us expanding to
deliver the gas to a power plant in california . if you could let me know by
next friday i would appreciate it .
kevin hyatt
10 / 25 / 2000 04 : 32 pm
to : sharrisl @ enron . com
cc :
subject : electric developments
steve , see below . drew asked me to help him out with his meeting .
kh
- - - - - - - - - - - - - - - - - - - - - - forwarded by kevin hyatt / et & s / enron on 10 / 25 / 2000
04 : 34 pm - - - - - - - - - - - - - - - - - - - - - - - - - - -
enron energy services
from : drew fossum 10 / 25 / 2000 01 : 49 pm
to : dari dornan / et & s / enron @ enron , lee huber / et & s / enron @ enron , tony
pryor / et & s / enron @ enron , maria pavlou / et & s / enron @ enron , susan
scott / et & s / enron @ enron , jim talcott / et & s / enron @ enron , kathy
ringblom / et & s / enron @ enron
cc : michael moran / et & s / enron @ enron , kim wilkie / et & s / enron @ enron , kevin
hyatt / et & s / enron @ enron , john dushinske / et & s / enron @ enron , shelley
corman / et & s / enron @ enron
subject : electric developments
when we originally decided to use my staff meetings for " graduate education "
one of the hot topics was the electric industry . we all had a first lesson
on this topic in shelley ' s electricity seminar last summer . now , john and
kevin have graciously agreed to join us tuesday at 1 : 30 to discuss recent
developments in electric markets and nn ' s and tw ' s efforts to attract power
generation load to the system . specific topics i hope to cover include the
following :
1 . what are the key factors that determine where a power plant developer
puts his plant ?
2 . do the transmission access and pricing rules of the various
utilities / power pools vary all that much or are order 888 tariffs pretty much
the same all over ?
3 . how do ipps decide what fuel supply strategy works best ( i . e . , buy
bundled delivered fuel from someone vs . buy gas , storage , transport , etc .
separately ) ?
4 . what is the rto rule and why should we care ?
5 . has $ 5 / mmbtu gas killed the gas fired power market ?
depending on how deeply we get into these topics , we may need to schedule a
follow - up session at a later date . i look forward to seeing you on tuesday .
df
electric developments
i consulted with kevin before i took the oars in trying to answer your
question , as well as the questions raised in drew ' s e - mail . here ' s what we
found out . . .
steve ' s question :
what economics would determine if a developer could site a power plant in new
mexico ( maybe 3 , 000 mw ) and build a line to the grid in california versus us
expanding to deliver the gas to a power plant in california ?
what you ' re really asking here is " what are the comparative economics of
energy delivered by wire versus energy delivered by pipeline ? " in this
analysis , there are a few considerations - - ( 1 ) original capital cost to
construct facilities , ( 2 ) the operating cost of the facilities , including
energy loss , and ( 3 ) environmental and other permitting considerations .
engineers tell us that , as a rule of thumb , high voltage transmission lines
and tower facilities cost approximately $ 800 , 000 to $ 1 mm / mile to construct
turnkey . this figure is comparable to the $ 1 mm / mile " rule of thumb " we use
for turnkey construction of mainline diameter ( 30 - 36 " ) high - pressure steel
pipeline .
in terms of operating costs , for anything over 100 miles in length , there are
three ( 3 ) basic sources of energy loss in electric transmission : ( 1 )
transformation loss , ( 2 ) radiation loss ( efm ) and ( 3 ) heat loss across the
conductors . a rule of thumb for electric transmission loss is 3 % . this
number is comparable to the actual fuel used for compression on
transwestern ' s pipeline .
the most critical issue impacting construction of high voltage transmission
lines is in the area of permitting . there just aren ' t many new transmission
lines being approved . it was suggested by more than one source that an
electric transmission project on the order posited in your example , could
take anywhere from 6 to 10 years to secure authorization . the issues of
electromagnetic field ( emf ) radiation around high voltage power lines , along
with other wildlife endangerment concerns , are significant obstacles in
securing permits for right - of - way .
in short , the answer is that while the economics on face appear to be
comparable for construction and operation of both natural gas pipelines and
electric transmission lines , the protracted permitting process for electric
transmission lines tips the scale considerably towards the more immediate
returns available on investment in natural gas pipeline infrastructure .
drew ' s questions :
1 . what are the key factors that determine where a power plant developer puts
his plant ?
for purposes of this exercise , i ' m assuming we ' re talking gas - fired
generation . developers generally describe four considerations in deciding
where to site a new electric power plant :
1 . market area demand ( distributive ) and / or transmission access to market
2 . water rights for turbine cooling
3 . ease of permitting ( environmental , encroachment , fed / state / local
regulations , affected agencies / jurisdiction )
4 . proximity to natural gas pipeline / supply infrastructure
2 . do the transmission access and pricing rules of the various
utilities / power pools vary all that much or are order 888 tariffs pretty much
the same all over ?
ferc order 888 and 889 require public utilities to commit to standards of
conduct and to file open access tariffs affecting transmission among and
between other utilities and / or power pools in the various operating regions .
ferc ordered public utility transmission owners to provide transmission
access and comparable service to competitors and to functionally separate
their transmission / reliability functions from their wholesale merchant
functions . the rulemaking is analogous to the open access requirements under
ferc order 436 / 500 / 636 affecting interstate natural gas pipelines . it ' s
pretty obvious from the california example this past summer , that with
respect to the overall operation of a deregulated power market in individual
states , particularly as concerns the establishment and regulation of
independent system operators ( iso ' s ) , there is substantial room for
improvement ( and possible further ferc involvement ) .
" in the open access final rule ( order no . 888 ) , the commission issues a
single pro forma tariff describing the minimum terms and conditions of
service to bring about this nondiscriminatory open access transmission
service . all public utilities that own , control , or operate interstate
transmission facilities are required to offer service to others under the pro
forma tariff . they must also use the pro forma tariffs for their own
wholesale energy sales and purchases . order no . 888 also provides for the
full recovery of stranded costs - - that is , costs that were prudently incurred
to serve power customers and that could go unrecovered if these customers use
open access to move to another supplier . "
3 . how do ipp ' s decide what fuel supply strategy works best ( i . e . , buy
bundled delivered fuel from someone vs . buy gas , storage , transport , etc .
separately ) ?
in my experience , there is no " one size fits all " formula or strategy . for
example , in the past we ' ve seen calpine take a very hands - on approach to
supplying its ipp projects . in the mid to late ' 80 ' s , during the build out
of several qf ' s ( cogens ) , calpine bought natural gas reserves in the ground
and dedicated them to the project . in today ' s market , calpine has scavenged
the gas and basis traders from statoil and set - up a natural gas desk for the
purchase and transportation management of gas supplies needed for its western
u . s . power projects . in other projects , developer / owners and their lenders
are satisfied with a less active role in securing gas supply / transportation
to the project . in short , projects look at the liquidity of the gas supply /
transportation market in deciding whether they can achieve project economics
and secure reliable supply by taking bids or rfp ' s for gas
supply / transportation , or whether to take a more hands - on approach ala
calpine .
4 . what is the rto rule and why should we care ?
last december , the ferc issued order no . 2000 , a final rule on regional
transmission organizations ( rto ' s ) . order 2000 builds on the foundation of
orders 888 and 889 ( issued in 1996 ) . according to ferc chairman jim hoecker ,
order 2000 makes " a persuasive case for separating control of grid operations
from the influence of electricity market participants . " therefore , order
2000 can be seen as a natural outgrowth of the perceived limitations on the
functional unbundling adopted in orders 888 and 889 , continuing balkanization
of the electric transmission grid based on corporate , not state or regional
boundaries , as well as pressure to provide guidance on acceptable forms of
privately - owned transmission companies .
ferc prescribes a voluntary approach to rto participation . the order
initiates a regional collaborative process to foster rto formation . the
order also imposes filing requirements on the privately owned " public
utilities " that are subject to ferc jurisdiction , and requires these private
utilities to describe in their filings how they have attempted to accommodate
the needs of transmission owning state / municipal , cooperative and federally
owned systems . ferc believes that , regardless of format , rto ' s will offer
the following benefits : ( 1 ) alleviate stress on the bulk power system caused
by structural changes in the industry , ( 2 ) improve efficiencies in
transmission grid management through better pricing and congestion
management , ( 3 ) improve grid reliability , ( 4 ) remove remaining opportunities
for discriminatory practices , ( 5 ) improve market performance , ( 6 ) increase
coordination among state regulatory agencies , ( 7 ) cut transaction costs , ( 8 )
facilitate the success of state retail access programs , and ( 9 ) facilitate
lighter - handed regulation .
critics point out that with its emphasis on flexibility , voluntary rto
formation and transmission rate reforms ( i . e . , incentives ) , order 2000 defers
for case - specific disposition many of the tough issues that must be resolved
in order to create an operational rto . moreover , order 2000 does not compel
any transmission owner to join an rto , but provides only regulatory guidance
and incentives for willing participants , as well as a veiled threat of
further consequences for the hold - outs .
as to the final part of the question ( " why should we care ? " ) , presumably , the
development of a fully - functioning rto network will promote both the
efficiency and market transparency goals of the original ferc orders . as
ferc reads it , the future of gas - fired generation for both merchant and
utility systems , depends on an efficiently operated open access transmission
system . therefore , the promise of the rto is to stimulate competition and
the ongoing investment in new generation infrastructure . unfortunately ,
sources tell me that the voluntary nature of the rto program may ultimately
cripple its effectiveness in meeting its stated goals .
5 . has $ 5 / mmbtu gas killed the gas fired power market ?
natural gas prices of $ 5 / mmbtu can only " kill " gas - fired power plants in
those instances where ( 1 ) there are more economical alternatives to natural
gas fuel , ( 2 ) demand for electric power is offset through demand side
management or ( 3 ) natural gas in an environment of short supply is expressly
prohibited from use as a power plant fuel . in the western u . s . marketplace ,
particularly in california , i see no viable alternative to natural gas fuel
for electric power generation . renewable resources currently meet less than
5 % of the total electric resource requirements . $ 32 / barrel oil prices give
fuel oil no clear economic advantage over natural gas ( even at a $ 5 / mmbtu
price ) . moreover , california environmental and permitting regulations make
the installation of new electric generation based on anything other than
natural gas fuel or renewable resources virtually impossible . while demand
side management programs are the politically correct approach to meeting
resource needs , historically , they have served only a minor role in
offsetting the growth in electric power . as to the final point , i ' m unable
to comment on the risk of future legal / regulatory restrictions governing the
use of natural gas as a boiler or turbine fuel .
steven harris
10 / 26 / 2000 10 : 05 am
to : kevin hyatt / et & s / enron @ enron
cc : jeffery fawcett / et & s / enron @ enron
subject : re : electric developments
since you are the " expert " in this area , i need to know what economics would
determine if a developer could site a power plant in new mexico ( maybe
3 , 000 mw ) and build a line to the grid in california versus us expanding to
deliver the gas to a power plant in california . if you could let me know by
next friday i would appreciate it .
kevin hyatt
10 / 25 / 2000 04 : 32 pm
to : sharrisl @ enron . com
cc :
subject : electric developments
steve , see below . drew asked me to help him out with his meeting .
kh
- - - - - - - - - - - - - - - - - - - - - - forwarded by kevin hyatt / et & s / enron on 10 / 25 / 2000
04 : 34 pm - - - - - - - - - - - - - - - - - - - - - - - - - - -
enron energy services
from : drew fossum 10 / 25 / 2000 01 : 49 pm
to : dari dornan / et & s / enron @ enron , lee huber / et & s / enron @ enron , tony
pryor / et & s / enron @ enron , maria pavlou / et & s / enron @ enron , susan
scott / et & s / enron @ enron , jim talcott / et & s / enron @ enron , kathy
ringblom / et & s / enron @ enron
cc : michael moran / et & s / enron @ enron , kim wilkie / et & s / enron @ enron , kevin
hyatt / et & s / enron @ enron , john dushinske / et & s / enron @ enron , shelley
corman / et & s / enron @ enron
subject : electric developments
when we originally decided to use my staff meetings for " graduate education "
one of the hot topics was the electric industry . we all had a first lesson
on this topic in shelley ' s electricity seminar last summer . now , john and
kevin have graciously agreed to join us tuesday at 1 : 30 to discuss recent
developments in electric markets and nn ' s and tw ' s efforts to attract power
generation load to the system . specific topics i hope to cover include the
following :
1 . what are the key factors that determine where a power plant developer
puts his plant ?
2 . do the transmission access and pricing rules of the various
utilities / power pools vary all that much or are order 888 tariffs pretty much
the same all over ?
3 . how do ipps decide what fuel supply strategy works best ( i . e . , buy
bundled delivered fuel from someone vs . buy gas , storage , transport , etc .
separately ) ?
4 . what is the rto rule and why should we care ?
5 . has $ 5 / mmbtu gas killed the gas fired power market ?
depending on how deeply we get into these topics , we may need to schedule a
follow - up session at a later date . i look forward to seeing you on tuesday .
df