Environmental pressures have forced us to generate more of our power from natural gas, and this focus on gas has caused power prices to increase … right?

Wrong, conventional wisdom notwithstanding. And the lessons from the last 15 years indicate the importance of considering how markets will respond when mandating new technologies and fuels.

Consider: In 1990, the U.S. had 184 GW of natural-gas fired generation, from which we produced 373 million MWh of electricity. Electric load grows reliably at 1 to 2 percent per year, mandating consistent increases in generation investment, and environmental considerations have made it virtually impossible to site anything other than gas-fired generators. (When I say anything, scale is implicit. Yes, you can site solar and wind, but — recent growth notwithstanding — these are still impractical for the many GW of load growth we need to add on an annual basis. Yes, they’re part of the mix, but they’re not yet significant enough to offset the big four of coal, nuclear, gas, and hydro.)

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Fast forward to 2005 (the most recent year for which the Department of Energy has complete data together), and the gas fleet had more than doubled, to 437 GW, while total generation from gas had increased to 758 million MWh.

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But look at those numbers more closely. The installed base increased by a factor of 2.4, but the generation increased only by a factor of 2.0. In other words, the gas plants we built are running for ever smaller portions of the year.

This, in a nutshell explains why Calpine went bankrupt — their investors certainly never thought that those plants were going to run so infrequently. Why didn’t we run those gas plants more? Did the industry overbuild the capacity?

The answer lies in coal and nuclear power. During the same time period, we effectively haven’t built any new capacity in either, with the combined total coal and nuke capacity staying effectively constant at 440 GW. But the generation from coal and nuclear capacity increase from 1990 to 2005 from 2,148 million MWh to 2,795 million MWh.

Let’s consider what this means. As environmental pressure compelled new gas plant construction, demand for natural gas drove up the price. As price went up, power prices started to rise, at which point the coal and nuke plant owners realized they were sitting on gold mines. By simply running their plants longer, they could mint money, selling a relatively cheap-to-produce commodity into a market that was increasingly set by gas. So we ran those plants harder. In effect, we became more dependent on coal and nuclear derived power as an indirect result of trying to get away from same!

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In other words, we separate environmental intent from economic consequences at our peril. Simplistically, but not entirely inaccurately, one can conclude that the pressure to reduce NOx, SOx, mercury, particulate emissions, and radioactive waste made it very profitable to be in the coal and nuclear business. Weird, huh?

What’s interesting is what will come next. You cannot increase plant capacity factor indefinitely, for the simple reason that there is a finite number of hours in a year. (“Capacity factor” is simply the total MWh of generation, divided by rated power output in MW times 8,760, the total number of hours in a year. So capacity factors must always be less than 100 percent). From 1990 to 2005, the nuclear plant capacity factor increased from 61 percent to 85 percent — which is about as high as it can go, once you factor in the need for periodic maintenance shut downs. Coal during the same period increased from 54 percent to 68 percent, suggesting it still has more to give, but this is a bit deceptive, since there are still hours in the year when the total load exceeds the nuke plus hydro capacity (the cheapest stuff to run), and therefore the coal dials back. So the coal CF will grow, but only as the baseload demand increases. Which means that we will very shortly face serious price increases, as we lose the ability to hedge away gas price increases with greater coal and nuclear use.

This will be particularly interesting politically, as the coal and nuclear fleet tends to be concentrated in the states that have the loosest environmental standards. To date, those states have been largely insulated from the big price spikes seen in more environmentally-conscious areas in the Northeast and California. But those same states are now starting to grapple with really hard choices: do they allow huge spikes in power costs so that they can build new coal plants, or do they allow huge spikes in power costs by allowing their gas plants to run harder?

In other words, this is the time to start approaching those regulators with a better path, focused on energy efficiency and cleaner power. But you better factor economics into those conversations. Telling them they must invest in technology X which happens to be expensive (but also happens to be clean) isn’t a politically palatable option to a typical state regulatory commissioner, especially one of the “fool me twice, shame on me” ilk. On the other hand, telling them that they have a choice to lower costs and clean up the environment with technology Y is.