By James Laughlin, WaterWorld Editor
The current U.S. energy crisis is the result of a temporary imbalance in the supply and demand for power. That should change as the energy industry reacts to rising prices by building more infrastructure and instituting demand-side management programs, according to industry experts.
The down side is none of the fixes will come in time for this summer. The solutions tend to be long-term; in some cases years away. The energy industry is drilling for natural gas, building gas pipelines and constructing power plants at an unprecedented pace as companies respond to higher energy prices by significantly increasing investment. In the short term, however, management of customer demand by encouraging energy efficiency and good management practices could play a more important role, analysts believe.
In releasing his new energy plan in May, President Bush said the energy crisis was defined by a "fundamental imbalance between supply and demand." His plan called for increasing supply through a variety of measures to boost production of oil and coal, and even reducing restrictions on nuclear power. On the demand side, he called for $10 billion in tax credits for conservation measures and use of alternative energy sources, including biogas.
"In the short term, we will see higher prices until we see the supply and demand curve come back in line," said Michael Valocchi, a director with the Pricewaterhouse Coopers Energy/Utility practice.
For the water industry, the current energy crisis provides both challenges and opportunities, according to industry analysts. The current escalation in energy prices comes at a bad time for the industry, which is already facing increased federal regulation and the seemingly insurmountable task of repairing and replacing an aging infrastructure.
As energy prices continue to rise, water utilities will be forced to raise rates to cover the cost of service. This comes at the same time that many utilities need to raise rates to fund infrastructure improvements.
On the opportunity side, the water industry is still very unsophisticated in its handling of energy issues, which means there is a lot of room for improvement.
"The water industry uses about 3 percent of electric power generated, or $6 billion a year. In terms of electricity, it's the largest single user as an industry," said Roger Patrick, a principal consultant with the PricewaterhouseCoopers Energy/Utility practice who specializes water and wastewater utilities.
"When you think of what's been done proactively (by the water industry), it's miniscule compared to what large industrial and commercial users have done," Valocchi said. "We have a lot of sophisticated buyers out there for electricity. They've been going to utilities and negotiating rates, even without the vale of deregulation. And then you have the water industry, which has not been a sophisticated buyer. The current situation should be seen as a wakeup call for the industry. They've got a lot to gain by being proactive and proposing something that is different from the norm."
Although California has been hardest hit by the recent energy crisis, it is not representative of the rest of the country, Valocchi said.
"California is a unique situation," he said. "The basic problem in California is that there is a market mechanism in place that had little chance of succeeding. There are mechanisms in place to control retail prices but no mechanism to control wholesale prices, so the people in the middle are getting squeezed, i.e., the local distribution companies."
In the long term around the country, natural gas prices should drive electric power costs, since most plants built in recent years have been natural-gas fired. If the price of natural gas rises, other fuels may come back into vogue, including coal and even nuclear power.
Even though the U.S. has seen a sudden increase in natural gas prices over the last year, the problem is not a resource issue. It's a matter of getting the gas to users. In recent years the low cost of natural gas has driven down exploration and development efforts. Until recently, industry had also reduced construction of transportation and storage capacity, which further exacerbates the problem of supply.
Even as higher energy prices create a sense of crisis, an investment boom is underway that promises to provide an increase in supplies that is expected to stabilize or even reduce prices in the years ahead, many industry executives and private analysts say.
"Prices go up and we start drilling," said Jerry Jordan, whose company in Columbus, OH, plans to dig 10 to 20 natural gas wells this year, as quoted in the New York Times.
The Time reported that big oil companies plan to invest about $41 billion to expand natural gas supplies this year, while new drilling rigs in operation have hit an all-time high of 955. Power companies, reacting to high electricity prices in California and elsewhere, plan to add 90,000 megawatts of electricity generating capacity in the next 18 months, one industry estimate says. That is nearly one-fourth of what the Department of Energy says is needed to meet growth in demand through 2020.
Rising natural gas demand has prompted companies to build transportation pipelines at a frenzied pace. The federal Energy Information Administration says 1,895 miles of new pipelines were added last year. It expects companies to complete 4,300 miles this year and 4,650 miles next year, record increases in capacity.
Even though the power industry is building, construction and expansion are not the answer, Valocchi said.
"We can't bank on the idea that we are going to build our way out of this. People are not running to build power plants. That's a large economic investment, and I don't think we can assume that's the answer," he said.
"There will be things done on demand side to help flatten the supply curve," Valocchi said. "Conservation and demand side management will come back into vogue."
As power companies look to their customers for help in managing the power supply, proactive water utilities should benefit, Patrick said.
"From a water utility point of view, if they were smart right now they would make their own management plans and proposals. I wouldn't be waiting to hear what the next rate proposal would be from the energy company," he said. "Water utilities should come up with their own view of what would be a better tariff structure and take it to the industry. Water utilities are the experts about where their energy is used. There's a big opportunity here."
In the wake of concern over power supply problems, many water utilities are improving their own ability to generate power on site. As the cost of natural gas and electric power rises, the use of alternative-fuel power systems becomes more attractive, said Bob Bjorge of CalEnergyConsulting, free-lance consultancy.
"The use of microturbines and engine generator sets will continue to grow in importance, as will any application where there can be some form of co-generation," Bjorge said. "We're seeing fuel cells being more common from a demonstration standpoint, although I think we're at least two to five years off from seeing commercially available fuel cells in the 250 kW range."
The Bush energy plan calls for tax credits to encourage development of energy plants that use organic waste, or biomass. It also includes a measure to provide tax benefits and regulatory relief for co-generation plants that produce both heat and electricity.
