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Who’s To Blame For The Texas Power Crisis?

February 19, 2021

Who’s To Blame For The Texas Power Crisis?

Our last report focused on the uniqueness of the Texas wholesale electricity market, ERCOT, and how it was specifically designed to evade federal utility regulation. And as if he were our paid spokesperson, former Texas governor Rick Perry stated publicly that Texans were happy to suffer blackouts and other hardships if it meant evading federal regulatory scrutiny. Whether the good (and shivering) citizens of the Lone Star State agree is another matter. But today, instead of dealing with politics, we’ll take a closer look at ERCOT as a state planning agency.

First the good news. One of the hardest parts of every planning agency’s job is correctly estimating future demand. This is doubly hard in a dynamic, fast growing economy like Texas. Consequently we were surprised at how good their planning estimate was for this winter’s electrical load of about 67,000 megawatts. Because of the blackouts we can’t precisely know what peak electrical demand in Texas would’ve been given the extreme winter demands from home heating and the like. But the shadow estimates published by ERCOT suggested about 72,000 megawatts of peak demand.

In total, ERCOT has the ability to supply electrical capacity of about 80,000 megawatts. This amount of available electric power generation should have been adequate to meet demand this week. Not by a wide margin but adequate. Barely. As an aside we should point out that ERCOT runs “light” in terms of electric system reserve capacity with reserves typically about 8%. This compares with other US grids where targeted reserve margins are about 15%. Lower reserve margins are cheaper but mean less back up for emergencies.

Our first tentative conclusion is that Texas would have withstood this recent snowstorm and polar vortex event in pretty good shape from a grid perspective IF thermal plants were available to meet skyrocketing demand.

…click on the above link to read the rest of the article…

California’s Blackouts Are Part Of A Far Bigger Problem

October 28, 2019

California’s Blackouts Are Part Of A Far Bigger Problem

California Blackouts

This past weekend, Pacific Gas & Electric had to resume electricity blackouts to 930,000 customers affecting upwards of three million people around San Francisco. Meanwhile, two major wildfires, one of which may have been caused by malfunctioning utility equipment, are burning and evacuations are underway. PG&E has informed customers that power in the affected areas may be out for up to one week.

It would not be overstating the case to talk about an air of crisis or panic in the state. Unfortunately, good ideas to resolve difficult, thorny issues seldom arise in troubled circumstances. And California’s Governor Newsom provides us with a ready case in point.

Yesterday Bloomberg News reported that the California Governor was interested in a takeover of PG&E by Warren Buffett’s Berkshire Hathaway Corp. On its face, it sounds logical in several ways. First, Berkshire already owns utilities serving California, Oregon, Washington, Nevada, Utah. Wyoming and Idaho. PG&E would fit in. Second, Buffet notoriously has told investors to buy when there is “blood on the streets”, that is, where the investment outlook looks bleak and most investors stay away, fearful of principal risk. Presumably, the governor envisages Berkshire purchasing the PG&E’s equity at a steeply discounted price, replacing a considerable portion of the utility’s outstanding long-term debt and appointing new senior management and a new Board of Directors.

There is one difficulty here in viewing Mr. Buffett as a potential financial white knight riding to California’s rescue. The current crisis is caused by an extensive above-ground high voltage transmission network sparking wildfires in an increasingly arid environment. Stated differently, the world that this transmission system was built for no longer exists. This is a profound operational problem.

 …click on the above link to read the rest of the article…

What’s Behind the US-Saudi Nuclear Mega-Deal?

November 28, 2018

What’s Behind the US-Saudi Nuclear Mega-Deal?

Up to 16 nuclear power plants for civilian purposes? Really?

Last week, the NY Times ran a front-page story on Saudi Arabia’s efforts to purchase nuclear fuel enrichment capabilities and as many as 16 nuclear power generating plants from the US. The principal concern expressed here was the Saudi’s insistence on ownership of nuclear fuel-enrichment technologies.

Typically, when the US has exported its reactor technology, it is accompanied by a fuel purchase agreement. We sell the fuel more or less as finished product. In the past, reluctance to export fuel-processing technology stemmed from concerns regarding proliferation of nuclear weapons. Saudi Arabia does have domestic sources of uranium they could mine but they have also expressed the need to respond to a potential nuclear arms rivalry with Iran.

But this article omitted the most important point. The key question is what are the Saudi’s motives regarding construction of a vast number of nuclear power plants for supposedly civilian purposes? The answer is obvious. There is no earthly commercial or economic reason for them to produce those quantities of electricity in the proposed nuclear fashion.

We should also point out that the seemingly large number cited for these nuclear power plants, $80 billion, is understated by a factor of almost five. Sixteen Westinghouse-designed nuclear stations with two reactors apiece would cost roughly $30 billion apiece! And 16 such plants would cost $480 billion – not $80 billion.

This sounds to us more like a bribe. Sell us nuclear fuel-processing technology (which it appears they really want), and we promise to purchase a large number of extremely expensive power plants from the US (the need for which is presently unclear).

…click on the above link to read the rest of the article…

The Return of “Beyond Petroleum”: All Talk and No Strategy?

October 3, 2018

The Return of “Beyond Petroleum”: All Talk and No Strategy?

BP even changed the logo.

“Oil and gas companies are becoming energy companies,” according to Bob Dudley. He heads the giant British oil company, BP, and stated this in a National Public Radio interview. Interestingly, his company under legendary CEO Lord Browne changed its name from British Petroleum to the far more ambiguous BP.

Browne informed the public that BP (now) stood for “beyond petroleum.” He changed the corporate logo to a green and yellow sunburst design and built up a renewable energy portfolio well ahead of other major energy companies.

But after Browne left, BP’s new senior management team refocused its commitment away from renewables (except for the environmentally-sensitive appearing) green logo and returned to their corporate roots, oil drilling.

Mr. Dudley’s proclamation comes shortly after two of the giant oil majors, Exxon and Chevron (upon retirement of long serving CEOs), decided to join the Oil and Gas Climate Initiative. This is a petroleum industry group established in 2015 that supported greenhouse gas emission curbs including the Paris Climate Accord.

Meanwhile, the drip-drip-drip of news about business accommodation to climate change continues. Transportation usage accounts for about 70% of the oil consumed in the United States. Running just cars on electricity (apart from trucks, planes and ships) would make an appreciable dent in demand for oil.

Tesla has led the way. Elon Musk and company captured the imagination of the public while raising billions from investors. Tesla’s finances as well as recent run-ins with the SEC and possibly the DoJ make many nervous for clear and good reason. But that is beside the point. Every major auto manufacturer now offers electric vehicles as an option.

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China’s Global Electricity Takeover

June 14, 2018

China’s Global Electricity Takeover

Powered by low-cost state-funded capital

There has been no shortage of stories recently about looming trade wars and foreign investments with questionable implications for national security. But the business press recently took notice of one particularly large investment number: $452 billion. This is the amount China’s state controlled power companies have invested abroad over the past five years.

The list of actual and potential Chinese utility investment locations includes Pakistan, Russia, Nigeria, Brazil, Chile, Portugal, Philippines, Germany, and the UK.

Roughly one third of this almost half a trillion dollars of investment relates to power transmission projects. The Chinese are exporting their ultra-high voltage transmission technology. This, supposedly, is the secret of China’s technology-export success. Generally speaking, moving bulk electricity at higher voltages reduces line losses, which in turn reduces the cost of transmission.

Transmission expenses, however,  account for slightly less than 10% of end-use electricity costs, a relatively small piece of cost of the final product.  A typical high voltage transmission line experiences losses of about 4% on average. An ultra-high voltage line brings losses down to about 1%. But reducing losses in this fashion requires more capital. Obtaining meaningful savings elsewhere in the power production process should count for far more.

In the semi-deregulated power markets common nowadays, transmission operators run the power grid – somewhat like policemen at a busy intersection directing traffic. Although only minor government functionaries, those directing traffic have a considerable amount power. They decide who proceeds and who shall have extra time to respond to text messages. In the context of the power transmission grid, grid operators as traffic cops have a considerable amount of power and responsibility. For this reason, some local authorities have been reticent about ceding this vital function to Chinese investment and control.

…click on the above link to read the rest of the article…

Another Nuclear Bailout?

May 31, 2018

Another Nuclear Bailout?

As pulp fiction aficionados, we love a good hostage situation.

Last week, New Jersey joined the list of states seemingly eager to bail out politically well-connected nuclear power plant operators. Governor Phil Murphy signed a bill that would grant subsidies of up to $300 million per yearto the owners of the Salem and Hope Creek nuclear power stations, two plants in southern New Jersey approaching the end of their useful lives.

PSEG Nuclear, an affiliate of the state’s largest utility, owns 100% of Hope Creek and 57% of Salem. It made clear that it would not put any new investment into these large, aging power stations without a subsidy, threatening a full closure within a brief period.

As pulp fiction aficionados, we love a good hostage situation. In this case the “hostages” are several thousand utility employees and presumably voters.

The potential adverse economic impact of a power plant closures is regionally significant. State and local governments have become dependent on property and related taxes levied on these facilities. Not surprisingly for this genre the hostages, so to speak, have relatives.

The state legislature’s bill would add a surcharge on electric utility customer bills. This would amount to about $40 per year for a typical residential customer, adding a not inconsiderable 3% to the average electric bill in the state. A ransom is also typical in these dramas.

The nuclear plant’s owners commissioned a study that laid out the supposed costs of a plant closure. It concluded that average electric bills would increase by 3-4%. Retiring plants of this size and type entails two types of expenditures that would be passed along to ratepayers:

  • The cost of replacement power.
  • Accelerated expenditures for nuclear plant closure.

However, the legislature voted to keep the nuclear plants open and raise customer electric bills by almost the amount that closure would have cost.

…click on the above link to read the rest of the article…

Nuclear Follies in the UK: in Search of High-Cost Power without Strategy at the Wrong Time

February 8, 2018

Nuclear Follies in the UK: in Search of High-Cost Power without Strategy at the Wrong Time

Then there is the issue of long term predictions.

It was the February 4 article in the Financial Times titled, “Nuclear Hazards: struggling industry aims for power surge,” that got our attention. There’s been so much going on in the UK with Brexit and such. It’s almost easy to forget that the country remains steadily on course to build (and subsidize) multiple new nuclear power generating stations employing multiple designs and technologies.

The FT article was so polite. Author Andrew Ward pointed out that the UK is the only western nation pursuing nuclear new build on anything remotely approaching this scale. Let’s call it what it is, shall we? The policy is barking mad.

First, the consensus view is that South Korea and France have had the most successful large scale nuclear build out programs. They had one thing in common. A single reactor design relentlessly improved in each successive installation.

Labor practices and efficiencies also improved with each successive iteration as the labor force became more skilled. In addition, these countries invested considerable sums in infrastructure for fabricating plant parts (like forges), mining, uranium processing, and especially spent-fuel handling and storage.

The May government in the UK appears to neither understand nor appreciate how these strategies contributed to the successes of the French and Korean efforts. It has not laid a framework, either, to bring the employment and technology benefits that come with developing the ancillary services need to maintain the nuclear establishment.

In sum, the May government has no strategy to exploit nuclear power.

The second problem is the plant’s unattractive price tag of £20 billion. The government has guaranteed the owner/builders of Hinkley (EDF and China’s CGN) a generous contract price of £92.50 per MWH for 35 years, of course with adjustments for inflation.

…click on the above link to read the rest of the article…

Can You Really “Shut Down” a Nuclear Power Plant before a Hurricane?

September 13, 2017

Can You Really “Shut Down” a Nuclear Power Plant before a Hurricane?

Soothing words before the storm: “Our nuclear plants are now shut down.”

There are those who believe the answers to life’s most pressing questions can be found in one of two movies: “The Godfather” (part one) or “The Princess Bride.” In the latter movie, think of the Spaniard’s vaguely taunting response: “You keep using that word. I do not think it means what you think it means.”  Which might also be the reply to: “Our nuclear plants are now shut down.”

Right now we are thinking about the Turkey Point and St. Lucie nuclear power stations in South Florida, in the aftermath of hurricane Irma. But we could have been referring to the South Texas Nuclear Project south of Houston, just a week or two earlier.

Those Westinghouse pressurized water reactors have six modes of operation, sort of like gears in a car. The highest level of performance, mode 1 includes power operations all the way up to 100% power. Mode 6, the lowest level of operation, describes a plant in the state of being refueled.

Senior management at NextEra’s utility subsidiary, Florida Power & Light, placed their nuclear reactors in mode 4, “hot shutdown,” as the hurricane advanced towards the plants. (Mode 5 is cold shutdown with far lower internal reactor temperatures.)

In so-called hot shutdown, a nuclear plant has one primary requirement for ongoing safe operation — a reliable supply of electricity (assuming competent staff of course).

Even though nuclear plants produce electricity for the grid, they also require large amounts of electricity to maintain their own operations particularly in this instance for: 1) cooling the fuel in the recently operating nuclear reactor core and 2) cooling the spent fuel pools where used fuel rods are placed after removal from the reactor. These activities are known as residual heat removal.

…click on the above link to read the rest of the article…

Two U.S. Utility Giants Just Got Even Larger

August 27, 2017

Two U.S. Utility Giants Just Got Even Larger

natgas storage

Two major electricity industry takeovers were announced within a few days of each other. Energy Capital Partners, a private equity firm, announced its planned acquisition of Calpine, the nation’s largest generator of electricity using natural gas as a fuel. The acquisition valued Calpine at $17.3 billion ($5.6 billion for the common stock plus assumption of $11.7 billion of debt).

Days later, Sempra, a California-based utility, outbid Warren Buffet’s Berkshire Hathaway to buy Oncor, a Texas utility spin off from a disastrous private equity acquisition of TXU (the old Dallas-based Texas Utilities). Sempra’s bid values Oncor at $18.8 billion ($9.8 billion for equity and $9 billion to take responsibility for ex-isting debt).

In the case of Oncor, both final bidders had clear motives. Berkshire Hathaway has cash to invest and Mr. Buffett and Co. have targeted U.S. electric utilities for investment As a relatively large financial player, his investments have to be of a size to make a positive impact. In this case that means making relatively large acquisitions. Small ones barely register at Berkshire Hathaway.

But big electric utilities don’t hit the auction block too often.

Sempra may lack Berkshire’s investable cash, but is nevertheless a solidly credit worthy utility. Its stock sells at an impressive price. If it wants to go shopping for say an electric utility in Texas, it can raise the money.

But let’s take a step back. Why all this seemingly frenetic M&A activity recently? If the U.S. electric utility industry was a river we’d say it sits at the confluence of three troublesome tributaries; the No Growth, the Looming Competitive Threat and the High ROE (great name for a ranch). And so the utility industry consoli-dates.

Power generators, fearing the wrath of rating agencies and competitive markets have been acquiring lower risk regulated electric utility businesses whenever possible.

…click on the above link to read the rest of the article…

What A Westinghouse Bankruptcy Could Mean For U.S. Utilities

March 29, 2017

What A Westinghouse Bankruptcy Could Mean For U.S. UtilitiesToshiba Reactor

International news services now report that Japan’s Toshiba Corporation (9502.T) is preparing to make a chapter 11 bankruptcy filing for its Westinghouse Electric subsidiary as soon as this Monday, March 27. For most of our readers this news evokes little surprise. This is merely another chapter of a slow moving financial and accounting train wreck involving nuclear design and construction firm Westinghouse and its troubled Japanese parent, Toshiba. But like an old, leaky garbage scow there is much to clean up in its wake.

The two U.S. utilities with the most at risk are Southern Company and SCANA Corp. Westinghouse is presently constructing two unit, AP 1000 nuclear power stations for each utility. These projects are over-budget and behind schedule. It appears that Westinghouse offered both utilities a fixed price contract for these new nuclear plants. Our best guess is that this fixed price construction guarantee has doomed Westinghouse and prevented other potentially willing buyers from stepping in. No one it seems is willing to take on this seemingly open-ended nuclear construction liability.

What does this mean for the two domestic utilities embroiled in this international financial quagmire?

First, we expect that they will complete both nuclear construction projects. The bulk of heavy capital expenditures for both utilities seem to be in the 2017-2019 period.

Second, it is in all interest of all potential litigants to see these plants completed. Westinghouse/Toshiba, for one, would at least get to showcase the AP 1000 design and its successor entity could advocate for additional sales of this reactor design. A working design has value. (What happens in the UK is another matter where Toshiba hoped to build several plants). The utilities, which need new power stations, get large, rate based, non-fossil base load power generating resources for the next 40-60 years.

…click on the above link to read the rest of the article…

Olduvai IV: Courage
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Olduvai II: Exodus
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