With today’s blackout at LaGuardia (globe-trotting wife Christine finally got another flight to Newark), here’s a timely tutorial from a non-TXU energy executive about Texas’ immediate needs:
Generating capacity from coal, nuclear and other assets resident within the ERCOT grid provide enough power to meet roughly 55% of the state’s load within ERCOT on a given day; such coal and nuclear assets, due to the cost and complication of start/restart operations, are in operation 24/7/365.
The remainder of the state’s ever-varying load is met by natural gas-fired turbines, which are relatively easily cycled on and off (with incrementally less-efficient turbines coming “online” as needed) and when directed by ERCOT towards meeting the state’s dynamic load.
However, since this marginal need is always satisfied by the use/non-use of gas turbines, the marginal price structure of electricity in Texas is unwaveringly established by the prevailing price of natural gas: simply put, over time the cost of electricity trades in direct correlation to the price vacillations of the natural gas market.
Natural gas turbines are easy enough to install into the ERCOT grid (perhaps a 24-month lead time) and are clean-burning units; yet nonetheless —- and ignoring for these purposes the market price spikes that devolved from last year’s Katrina/Rita catastrophe — a consensus has emerged to the effect that we have witnessed the end of the Cheap Natural Gas Era.
Moreover -— and while the price of coal has semi-correlatively increased relative to the increases in natural gas cost —- given our nation’s plentiful coal reserves, it is undeniable that the cost of coal-fired generation is cheaper now than natural gas turbine generation (and is even likely become even more so in the future)
TXU and more particularly, John Wilder, are interested in this market as — to the extent that the cost of coal-fired generation remains materially cheaper than natural gas-fired generation: but so long as wholesale market electricity pricing within ERCOT is dictated by the cost of natural gas generation —- there are potential windfalls to be realized by a firm that owns comparatively lower-cost coal and nuclear generation assets.
Remember all the hullabaloo about Texas Genco earlier this year? The meteoric rise in the value of those generation assets was precipitated by the late 2005 price spike in the natural gas market and the fact that Texas Genco’s assets are almost exclusively lower-cost coal and nuclear generation plants.
Why is TXU advocating coal over nuclear? Nuclear assets have a much longer lead time in terms of development and commissioning and have here to now been the subject of even greater public protest.
Why is Rick Perry supporting the plan? Other than the fact that TXU has been a significant supporter of the Governor, the further reality is that Texas is going to be facing something of a capacity crunch in terms of generation wherewithal by 2010 —- and the rolling blackouts that we experienced only in April, while mainly precipitated by ERCOT’s capacity management ineptitude, are but a harbinger of what may occur during the period beyond 2010 without the addition of significant incremental generating capacity.
