The Energy Wiz: What Makes The Market Shake
Who Supplies Your Power?Most facility managers see the local utility as their electricity supplier, but may have little idea how that power is actually obtained. While some may be generated by utility power plants, part (or all) of it may come from a wholesale power market that includes other utilities, merchant plants, and power trading firms that buy and sell power made by others. Such active wholesale markets exist in two dozen areas covering most of North America. When some states deregulated their retail markets, retail power vendors accessed that wholesale market to buy power for their customers.
If most of the power is still generated by the utility (true for parts of the South and Midwest), the immediate impact of the recent meltdown may be minor, but could show up in several years. If most of the power comes from the wholesale marketplace, the effects may already be starting. Where the supply/demand margin is tight, the effects already may be appearing.
Investors Get A Rude AwakeningWhen the economy slowed down and some suppliers (e.g., PG&E and Enron) went bankrupt, investors saw how risky the power industry had suddenly become. When claimed profits turned out not to be real, power supplier stock values and credit ratings plummeted. Low-interest capital is the lifeblood of the power industry, and when investors withhold it, many projects are cancelled or put on hold. While nearly 100,000 MW was added over the last few years, another 85,000 was recently cancelled or suspended.
Staying Ahead Of The Demand CurveExcess capacity over and beyond peak demand is needed to maintain a competitive and reliable power market. Where a surplus exists (e.g., Texas), a lack of construction may not have an impact until the excess is consumed by demand growth. In other parts of the United States (e.g., New York), the supply/demand margin is tight. When combined with plant or power line outages, extreme weather, and market forces (both fair and unfair), tight markets can create the worst of all worlds: high prices and low reliability.
A Bumpier Ride Ahead?Downgrading credit also impacts power trading, in which access to capital is essential. Liquidity (i.e., amount of trading) at key trading hubs has dropped 70% from 2001, with some firms eliminating their trading staff. Less trading and fewer traders reduces the "smoothing" effects of multiple, smaller, and longer-term trades, potentially causing greater variations among deals, and possibly wider seasonal price swings.
Parallels To The AirlinesThe power industry is now looking a lot like the airlines: megamergers, less competition, bankruptcies, sales of major assets, service reductions in high-cost areas, plus higher and/or more volatile pricing. The impact of such changes will likely vary at the retail level depending on local supply/demand margins, grid constraints (analogous to airline routes serving rural areas), restructuring laws, etc.
In some urban areas, the cost of on-peak power has risen much higher than off-peak (analogous to varying airline fares). Where variations in wholesale power pricing are passed through to endusers (e.g., via fuel adjustment charges), month-to-month retail power pricing then becomes more difficult to predict. Demand charges may also vary significantly during the year.
Recently proposed changes to the wholesale marketplace, now being developed by the Federal Energy Regulatory Commission (FERC) through its Standard Market Design process could, in the short run, magnify such problems even as it seeks to overcome them. Such changes are slated to take effect by 2004.