Where Were You When the Nation's Power Ran Out?

 | Jan 10, 2014 | 6:00 PM EST  | Comments
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Stock quotes in this article:

exc

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aep

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d

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etr

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nrg

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cpn

Jan. 7 was the day the U.S. ran out of power. From New Jersey to the Rocky Mountains, there was no power anywhere. Grid managers were forced into difficult decisions of either dropping customers or finding more energy sources. For a short time, they reduced the quality of the system's energy through brownouts. Their last option was rolling blackouts.

To get an idea how serious the issue became, look at this amazing picture.

Source: PJM Interconnection

Everywhere, prices are red. Normally, prices are in the $40 per megawatt range (should be colored green and yellow). This heat map, provided by PJM Interconnection, shows prices in the $1,800 range across the grid.

Notice market prices are the same from one geographic region to another. Traders quickly recognize that there are no price differences between locations. This means transmission lines are not the issue or the problem. The issue behind the red is lack of power plants.

Of course, PJM will argue this was about very cold temperatures. System planners claim the lack of power supplies was an unusual event caused by offline power plants and unusual weather.

In all likelihood, it was about system planning. Grid managers failed to plan, or their plan failed.

Grids are supposed to maintain reserve margins. There are supposed to be enough power plants to assure system reliability. Best practices suggest grids maintain power plants in reserve to assure reliability and to respond to unusual events. This includes periods of unusual consumer demand, inevitable days when plants are down for maintenance and unusual weather events.

The red in the heat map suggests grid managers blew past their reserve margins. The fact that PJM was forced to put their system into brownout mode suggests there were zero margins available.

Exelon (EXC) and American Electric Power (AEP) have been warning about this problem. What was expected in a decade is now front and center. The nation is out of power plants. Reserve margins are evaporating. Reliability is being sacrificed.

An easy solution is not at hand. Power plants are about intrastate commerce. States, not the federal government, decided to restructure their electric utilities and deregulate their power plants. When they restructured, states surrendered their economic sovereignty to regional transmission organizations.

However, regional transmission organizations are about interstate commerce, not intrastate commerce. As a federally regulated entity, regional transmission organizations have no responsibilities for power plant economics.

Regional transmission organizations seem to expect reliability will come at no cost. Some seem to argue that their preferred approach is to allow the market to break, permit the broken market to gouge consumers with high prices and reduce reliability and then watch more producers enter.

Investors are not buying it. Very few are willing to invest in markets that deliver uncertain returns. To replace the massive exodus of nuclear, coal and oil plants would require massive amounts of investments. So far, very little has appeared.

In fact, they are walking. Dominion Resources (D) walked away from all but one of its England plants. Entergy (ETR) is rumored to be retiring their entire merchant fleet of nuclear power plants. Exelon is rumored to be closing two sites in upstate New York and maybe one in the Midwest.

More important, if rumors published in the Wall Street Journal are correct, New England could be stripped of all its nuclear plants. They could also be stripped of most of their coal plants.  While they watch investors exit, they cannot come to an agreement about building new gas turbines. They even argue about merits of a new transmission line from Canada. For New England, the math does not add up to future of reliable or economic energy.

New York is in the same fix. Like New England,it could be stripped of all six of its nuclear power plants. Worse, it cannot rely on neighboring states because investors in those states are joining the exit.

In the end, there will be winners and losers. The winners will likely be Exelon, NRG Energy (NRG) and Calpine (CPN). They will own the remaining assets. Those assets will provide strong earnings in a high-barrier market.

The losers will be the nation and consumers. If unchecked, the nation could find grids providing increasingly unreliable sources of power. Consumers could see incredibly high prices for whatever power makes it to their meters.

However, the problem appeared early -- far earlier than prognosticators expected. Now that it is staring us in the face, there may be time for stakeholders to find a timely solution and resolve the issue.

However, it will take public participation. They are important stakeholders. The public has to participate and they must buy into the solution.

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