Thursday, February 13, 2014

Cold water poured on Hydro in Manitoba - not by me

A micro and macro view of energy pricing today.
In Manitoba, concern about the economics of large hydroelectric projects as American consultants figure gas will hold down pricing forever.

Cold water poured on Hydro - Winnipeg Free Press:
A bid by the Selinger government and Manitoba Hydro to build two new dams and associated transmission lines faces an uphill battle when a special Public Utilities Board hearing on the plan starts March 3.
Two independent reports prepared for the PUB's Needs For and Alternatives To (NFAT) hearing paint a dim picture of the government's expectations of northern hydro development and Hydro's own research. The two studies, requested by the PUB in advance of the NFAT hearing, were done by La Capra Associates Inc. of Boston and Potomac Economics of Fairfax, Va. Both reports, with confidential information on Hydro's pricing for export power sales redacted, are posted on the PUB website.
Collectively, the reports call into question the wisdom of spending billions in upfront capital costs on the Keeyask and Conawapa generating stations and accompanying transmission lines when one or both could be put on hold indefinitely in favour of building less costly combustion turbine plants that burn natural gas to produce electricity.
A couple of years ago I was writing about "The Coming Glut of Energy" - a famous article from the height of the 1970's oil crisis.
I think the same principles likely call for a coming shortage of energy - at cheap gas prices exploration stops.

Speaking of economic principals... from prominent energy economist Dieter Helm, Why are electricity prices so politically toxic?
That leaves gas. If coal is ruled out and the capacity margin gets tight, the wholesale price should rise to the energy price of new gas. But it is unlikely to do so any time soon. The reasons are several, but one counts strongly. Outside the market, through ROCs and FiTs, the government is encouraging onshore and offshore wind, and solar. These technologies have high fixed costs and almost zero marginal costs. When the wind blows and the sun shines, as the Germans have discovered, renewables could eventually cover total demand for periods of the day. The result is a zero or even negative wholesale price. A new gas station is now at the mercy of the wind and the sun and hence it cannot be assured that it will run base-load. Intermittent renewables render everything else intermittent too. This wreaks havoc with new gas investments.
The result is that nothing much is being built except through fixed price contracts, and new gas stations will need fixed price capacity contracts too. The system becomes a complete single buyer model, with the state through the system operator determining investment. The wholesale market is no longer the economic signal for new investment
What is emerging on the generation side is something which has a number of similarities to the CEGB [Central Electricity Generating Board] model and in particular a fully-fledged central buyer. The government already determines the investment in almost everything except gas and it will soon determine gas too. There is not much left of the market. If it is going to be a central buyer, it should at least try to do the job properly. Once intervention starts it tends to have its own momentum. Each intervention begets another, and as the complexity piles up so do the unintended consequences and the costs. There is now a clear choice – back to the CEGB or back to a competitive model.

No comments:

Post a Comment