Guest Juice: Take Back Our Energy Future

California is allowing unregulated energy firms to define the state's strategic energy planning. The state's political and regulatory institutions are doing little more than expediting the most politically connected energy firms' business plans. As liquefied natural gas developers aim to line California?s shores - - along with sites along the Atlantic, Pacific, and Gulf - - the state needs to take back its energy future by owning or controlling assets. More specifically, the state should oversee or hold natural gas storage and pipeline capacity and transmission lines to high-value renewable resource areas. Why? In the case of natural gas, the objective would be to supply the fuel requirements of utility core customers and the power plants that serve them. It would have to be a long enough time to break the financial will of one company or a cartel of companies that may attempt to create an artificial bull market. In the case of renewables, the objective would be to ensure that the Achilles' heel of remote high-value solar, wind, and geothermal sites with adequate transmission to load centers is squarely addressed. The high-voltage wires billed as "renewables" lines must not be co-opted for other purposes. The state relies on regulated utilities to initiate renewables transmission projects. Those utilities are owned by unregulated parent companies that are, in some cases, ardently pursuing LNG and coal projects to supply the same territories served by their utility affiliates. The unregulated parent company calls the shots. The result is predictable: bait-and-switch transmission schemes hyped as renewables lines when in fact they will carry an ounce of renewables for every pound of conventional fossil power. Transmission projects that fit this mold in California are the Frontier Transmission Line (a little wind from Wyoming and a whole lot of coal power) and the Sunrise Powerlink (a dash of geothermal from Imperial County and a whole lot of combined-cycle power fueled by imported LNG). If the state genuinely wants to maximize renewables development, it needs to own the transmission lines to major renewables sites outright. And the lines need a sign on them: "renewable power only; conventional fossil power need not apply." The purpose of the lines must be clear, simple, and nonnegotiable. In the one renewables transmission bright spot, the Tehachapi wind collector transmission system project proposed by the California Public Utilities Commission to access up to 4,000 MW of additional wind power, the federal government is resisting the distribution of the cost of this transmission network among the state?s utility ratepayers. Let's forget about the investor-owned utilities getting permission to rate-base renewables transmission projects. They are a strategic asset to the state, and the state should own them, instead of utilities that are responding to more than one master. In any event, utilities will ultimately charge their customers at least as much as those same customers would pay in tax dollars to build the transmission. The state would collect wheeling charges on the lines from renewable power developers and would ultimately recoup its investment. The California natural gas situation reflects the dangers of a de facto state policy of acquiescing to the whims of the energy industry. A case in point is the lack of construction of new domestic natural gas pipelines to serve California. During the long-term natural gas supply proceeding before the CPUC in 2004, Kinder Morgan Pipeline Company bucked the tidal wave of industry support for LNG imports by highlighting the security and price benefits of the 750 MMcfd pipeline the company proposed to build from Colorado to California. One year later, Kinder Morgan signed an agreement with Sempra Energy, owner of two of California's natural gas utilities, to pursue building a 2,000 MMcfd pipe - - to the East! 2,000 MMcfd is the average daily natural gas demand of all of California?s core users. Coincidentally, Sempra Energy is the most ardent promoter of loading up California's natural gas utilities on LNG imports. I see an unbroken bull market for natural gas prices on California's horizon. These firms view fair prices and adequate supply as a bear market where prospects for windfalls are slim and profits are thin. Bear markets are to be avoided at all costs if you are in the unregulated energy business. The rest of us view fair prices and adequate supply as a reasonable expectation in a competitive market. If California's utilities, and the power plants that supply them, are owned by unregulated parent companies, we are effectively doomed to endure perpetual price volatility. The ability of California to auto-supply its most vulnerable customers with natural gas for extended periods of time would be a form of self-protection. This is even more important as the LNG era dawns, where one or two or three multinational energy companies could control a major portion of the state's natural gas supply. California desperately needs a realpolitik defensive strategy if it does not want to find itself hostage to these same companies. Auto-supply is one potential approach; effective regulation and enforcement of private suppliers is another. Given California's current reluctance to regulate despite the energy crisis, owning pipeline capacity and expanding natural gas storage capacity under the direct or indirect control of the state may be the strategy of choice. Owning the pipe would also give California great leverage over production practices in the gas fields serving the pipe. The Rockies are awash in controversy about the dense spacing of coal-bed methane (CBM) gas wells and attendant discharges of large quantities of brackish water. These unacceptable practices, along with shallow depth, are among the reasons that CBM is dirt cheap to produce - - in the range of $1/MMBtu. People who embrace LNG imports as an antidote to pin-cushioning the West to access CBM are wishful thinkers. Landing LNG on the West Coast is four times as expensive as producing CBM. However, if you control the pipe that provides that CBM access to the market, you can effectively dictate the terms of how that CBM is produced as long as you are willing to pay the incremental cost associated with those terms. You say adequate CBM well spacing and effective produced water cleanup and disposal would add 50 cents/MMBtu to the price? Fair enough. The citizens of California may decide to pay that increment to ensure that only natural gas produced using state-of-the-art environmental protection practices moves on the state's pipeline. LNG is held up by some environmentalists as the counter to more coal development, the lesser of two evils. This is na?ve. Importing LNG to the West Coast is expensive?$4/MMBtu to $5/MMBtu by the time it enters a pipeline. If LNG ultimately sets the floor price of natural gas in the West, it virtually ensures that a coal plant will be a profitable venture relative to a gas-fired plant. Building a state pipeline to secure California's own supply of domestic natural gas would have a decided dampening effect on the building of coal-fired power plants in the West. California dwarfs other Western states in power demand. New coal plants are cost-competitive with natural gas?fired combined-cycle plants when the cost of natural gas is in the $4/MMBtu range or higher. In most of Western North America, the natural gas production (wellhead) cost ranges from $2/MMBtu to $3/MMBtu, though it can be as low as $1/MMBtu in the case of CBM. If a major portion of the state?s core natural gas demand is being provided at a price in the $3/MMBtu range, it will tend to set the floor price of natural gas regionally. It would also take the steam out of the LNG train with its inherently high delivered cost on the West Coast. If spot gas prices begin to show irrational exuberance for unexplainable reasons, as they have for the last two and a half years, the state could potentially make some of its supply available on the open market to contain the exuberance. Industry claims that these stratospheric prices are in response to a physical gas shortage, and thus the need to diversify supply with LNG. However, predicted jumps in natural gas demand have not materialized. Meanwhile, the U.S. Department of Energy projects a steady, modest increase in domestic natural gas production over the next 20 years and estimates at least 60 years of domestic reserves at current consumption rates. Industry claims of a physical shortage don't hold water under scrutiny. Another bull-market daydream has become reality. The latent threat that the state could turn a bull market into a bear almost overnight would go a long way toward preventing these shenanigans in the first place. California is on the mark with its prioritization of energy conservation and renewables over new natural gas-fired power generation in the state?s Energy Action Plan. The effect of ambitious efficiency and renewables targets on reducing natural gas demand is dramatic. Natural gas demand in California has declined 20 percent since 2001 statewide. Finally, we need a comprehensive vision of where we want to go and how we are going to get there that is not scripted by LNG and coal promoters. Putting efficiency and renewables at the top of the list of new supplies before building fossil plants is fundamental. Streamlining transmission to remote renewables sites, by unloading existing fossil lines to accommodate renewables or building dedicated renewables transmission where appropriate, is a key element. Reasonably priced domestic natural gas is indispensable if this strategy is to work. Otherwise, a wave of speculative LNG and coal projects looms in the wings to undercut any benefits realized from efficiency and renewables. Let Kinder Morgan and Sempra Energy build their new natural gas pipeline to the East. California will build its pipe to California. One example of vision is the Apollo Alliance, a broad-based alliance of organized labor, environmental organizations, businesses, and communities working to build decent-wage American manufacturing muscle around a massive nationwide renewable energy mobilization. That is vision. Offering long-term utility contracts to the world's largest energy companies to ensure our dependence on LNG is not vision. It is time for the state to assert its core role of protecting the public interest in the energy arena. Otherwise, the citizens are at the mercy of the bull marketers. Bill Powers is head of Powers Engineering and can be reached at bpowers@powersengineering.com.

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