November 16, 2008
Look for Rising Power Costs

Expect sharply rising electricity costs in manufacturing and distribution operations in certain areas of the country.  The cost to build new power plants has increased 100% since 2000, but some markets display especially worrisome problems beyond escalating construction costs.

The North American Electric Reliability Corporation (NERC), a nonprofit corporation which manages the bulk power supply in the U.S. and Canada, compiles regional data on the U.S. power system, which points to several troubled markets.

California, part of NERC’s Western Energy Coordinating Council ("WECC-CA" in the accompanying charts), already is one of the highest cost locations for industrial customers, at an average of 10.5 cents per kWh. The state suffers from generating infrastructure that is primarily fueled by oil and natural gas, which has seen prices skyrocket. Market conditions have ameliorated somewhat, but are still highly volatile.  California is also the heaviest importer of electricity in the U.S., accounting for nearly 28% of its consumption. If not for these lower cost imports, the industrial power cost structure in the state would be even worse.  In Texas, (the Electric Reliability Council of Texas-ERCOT) power markets have been deregulated in about 75% of the state…the most deregulated market in the U.S. But this has delivered few benefits. 

Over 30% of generating capacity is fueled by high cost oil and natural gas, and despite the state’s fast growing wind generation sector, this resource runs at only 8% of nameplate capacity, and accounts for only 7% of the state’s energy.

And this wind infrastructure has a downside. There is inadequate transmission infrastructure to get wind-generated electricity from west Texas to the metro areas that need it.  Texas is largely isolated from the integrated transmission system over which utilities export and import power nationwide.  With only two interconnections with other U.S. transmission sources, the state has very limited opportunity to import cheaper power from outside its borders. Wholesale prices have been as high as $4.00 per kWh this summer.

Businesses seeking locations for new or expanded manufacturing plants or distribution centers are wise to study long term trends and infrastructure plans before selecting a site.

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