22 planned power plants could help meet the state's growing demand for electricity

Kelly Yamanouchi / SF Chronicle 22nov00

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As California energy prices have soared, the state's power generating companies have cried foul at efforts to put a cap on the price of electricity. They claim that putting a lid on their profits will wipe out any incentive to build new power plants.

But state records show that's a hollow threat. In fact, no fewer than 22 new plants are on the drawing boards and four are being refurbished.

Together, these plants will have the capacity to generate nearly 16,000 megawatts of power, or nearly a third of the maximum amount currently consumed daily in the state.

That power boost will help utilities around the state meet demand during peak periods by 2002, said Claudia Chandler, assistant executive director of the California Energy Commission.

If all goes well, five new power plants are expected to come online by September and produce 2,183 megawatts. The second batch of power is expected at the end of 2002 when three more plants will provide 2,600 megawatts. Combined, these plans will generate enough power for 4.6 million households.

Despite their complaints about price caps, the companies proposing these plants see the California market as a lucrative opportunity created by a thriving economy with a robust appetite for electricity that is taxing existing power plants.

Demand was so acute during the summer that power companies were getting a lofty $750-per-megawatt hour during peak periods.

And the demand has continued to be healthy even during the recent cold weather as power emergencies reduced reserves to less than 5 percent. That has "made us aware that we have market conditions to contend with all year long," said Chandler.

To combat electricity shortages for next summer, the energy commission has begun a faster process of licensing small, "peaking" plants that operate only during emergency periods of peak demand between June and October for up to three years. The two companies that have filed applications under that process have agreed to get the plants online by August.

Building a new plant is quite a balancing act. On the one hand, it takes a significant amount of time, money and resources to put up a new plant. A new 850-megawatt plant can cost as much as $510 million to build and take years of planning, development and construction.

It can take years from the day a company announces plans for a new plant before it ever churns out power. Ordinarily it can take as long as a year to get the state energy commission to approve a project and another year and a half to build a plant.

Looming over the application and development process is the uncertainty of the energy markets. The power companies are worried that it might not be financially worthwhile to continue to build plants if the wholesale price for energy continues to fall, as it has since reaching $166-per-megawatt hour in August.

Despite the drop, no companies have withdrawn plans to build full-size permanent power plants. Thus far, Calpine has three plants under construction and one awaiting approval. Enron has three in the pipeline; and Duke has plans for one plant approved and has announced plans to put up another.

Deregulation was supposed to act like an invisible hand in the marketplace, producing the best wholesale prices for consumers through an efficient system that matched supply with demand.

It hasn't worked that way. The wholesale price of energy has skyrocketed out of control as demand has outstripped supply. That has caused the California Independent System Operator, which oversees much of the state's electricity grid, to impose price caps to keep energy costs down for consumers.

Those high prices prompted the Independent System Operator to intervene and lower the cap to $250-per-megawatt hour. The Federal Energy Commission recently has gone so far as to propose shifting to a soft cap of $150-per- megawatt hour.

Duke Energy is so disturbed about the caps that it has publicly threatened to stop building power plants in the state.

Specifically, the Houston power company wonders whether it can turn a profit at these levels.

Despite the public airing of those concerns, Duke is quietly going ahead with plans for two plants that will produce an additional 1,600 megawatts, enough to power 1.6 million homes.

Tom Williams, a Duke spokesman, said the company is continuing with planning to refurbish its Moss Landing plant in Monterey County and Morro Bay plant on the central coast of California.

But Williams said Duke is keeping a close eye on the market. He said the company may reconsider its plans if the Independent System Operator lowers its price cap for wholesale electricity any further.

"All of these investments, they're based on certain rules and economic models," Williams said. If the price cap is lowered, "the board of directors scratches their heads and says, maybe we should invest in the Midwest instead of California."

He said prices for running peaking plants can run as high as $170 per megawatt. Those costs are compounded by rising fuel prices because 90 percent of operating costs go to pay for natural gas.

It's difficult to get a consensus on exactly how much it costs per megawatt to operate a power plant and break even. At $250 per megawatt-hour, Williams said, Duke's earnings are not negatively affected, but at a lower cap, "we would not only have concerns about earnings, but also about the viability of the plant."

He added that although Duke plans to move forward with its plants, a company could halt plans for a new facility that has made it as far as the construction phase.

"Things could be pulled at any time," Williams said. "There are half-built plants all over the country."

Duke and others continue to fight legislators, utilities and the Independent System Operator to keep the wholesale price cap from being lowered further, by threatening to stop investing in plants in the state.

Power plant companies can wield considerable clout to influence what prices they can sell power at, given that without enough power plants, the state is at risk of brownouts and blackouts. That concern has led many to take very seriously their threats to leave California for more profitable regions.

Houston's Dynegy Inc. has said it already put plans to invest in plants in California on hold until the market has more regulatory stability.

"At the end of the day a $250 price cap hasn't added one megawatt of generation to California. In fact, it's deterred it," said Steve Bergstrom, president and chief operating officer of Dynegy.

Thus far, the companies that have applied for power plants in the state include PG&E's National Energy Group in Maryland, energy industry giants Enron in Texas, Duke in North Carolina and Southern Energy in Georgia, and California firms Calpine, Sunlaw Cogeneration Partners and Sempra. Their plans are in various stages of the lengthy application-development process.

The earliest batch of new power is expected to come online is next summer when two new approved plants are supposed to start operations. In addition, two smaller plants, not yet approved, are expected to begin operations in August.

Five plants that have been announced have not had formal applications filed with state energy commission.

In the Bay Area, Duke plans to file an application to refurbish its Morro Bay plant.

AES, an Arlington, Va., power company, has had two plant proposals on the list for more than a year, including one for South San Francisco, but hasn't filed applications yet.

By announcing plans for a plant early on, a company can get the energy commission to allocate resources to process the coming application, said Glen Davis, vice president of AES Pacific Co., a unit of AES.

AES said it is working with the city council in South San Francisco and residents on those plans. The company said it hasn't invested enough money that it needs to make a decision on whether to formally file an application. Uncertainty over the price caps is one of the things that could halt plans, Davis said. All sides agree that it's still important to attract new power generation to the state. The reasons:

• More power supply is needed because residential and commercial consumption of electricity is increasing at a greater rate than expected.
• Over the long haul, a greater power supply could help ensure electricity reliability should the amount of power the state can import falls because of heightened demand for energy in other regions of the country. During days when energy use is extremely high, the state imports as much as 7,000 megawatts out of the approximately 53,000 megawatts consumed, according to the California Energy Commission.
• A larger energy supply could also help stabilize prices for electricity by introducing more competition.
• The new plants would replace many power plants in the state that are 30 or 40 years old, increasing efficiency and environmental soundness.

Bergstrom of Dynegy said planning for a plant in California poses even more barriers than in other parts of the nation.

He said it took Dynegy only eight months to get a plant approved in Chicago, compared to as much as two years in California.

One of the first steps is finding a site for the plant.

"It's very difficult in California, because of the 'not-in-my-backyard' people who don't want power plants anywhere where they can see them," Bergstrom said. "There's a very strong environmental presence and a very strong anti-industry presence."

Next, the company must apply for air and water permits to meet local air and water quality standards or buy offsets that mitigate any environmental problems.

The Independent System Operator, power plant companies and others in the industry are looking at a number of ways to build plants faster without going through the lengthy standard licensing process.

San Jose's Calpine is one company that is searching for such options. Facing strong opposition from residents and city officials, it has been trying to gain approval for a Coyote Valley plant in south San Jose for more than a year and a half.

Power Plant Licensing Cases Before the California Energy Commission Since 1998