DALE STEFFES' ENERGY OUTLOOK

DALE STEFFES' ENERGY OUTLOOK

IS THE IDEA of cogeneration of electricity really a new one? Or do the issues just keep getting recycled?

I get a bit nostalgic thinking back on my experiences marketing cogeneration. In 1967, I was one of two people in the marketing department of a major gas transmission company that were assigned the responsibility of promoting natural gas to cogenerators. At the time the effort was called GATE, Group to Advance Total Energy. Among the major supporters were the American Gas Association and many interstate pipelines.In the '60s, the electric utility industry was growing about 8 percent a year and the natural gas industry was growing about 4 percent a year. At the time, there was fierce interfuel competition for the end user's energy demand.

With these large growth rates, the real prices of electricity and natural gas actually declined during most of the 1960s. This was due to improved economies of scale, which in turn was due to even larger plant expansions, which increased the demand for gas and electricity.

Vendors of both fuels wanted to keep up the high growth. So, the electric companies promoted all-electric homes and offices, while the gas distribution companies touted "total energy" for commercial applications. The total energy system used natural gas to generate a customer's electricity requirements, as well as provide heating and cooling.

The marketing efforts of the electric and gas suppliers would have maintained the high growth while continuing to push prices down.

I vividly recall a gas industry strategy meeting where the subject was the electric competition's forecast of a price of 0.3 cent a kilowatt hour by the 1980s. This low price was based on continued growth in demand and nuclear- generated power that would be too cheap to meter. The gas industry feared all-electric would destroy the market for gas.

But the overall economics of total energy just didn't work out. The problem was that a redundant power supply system had to be installed because the electric company would not provide service on a standby basis. These small systems carried a lot of overhead.

Today's phenomena of large cogeneration plants was never satisfactory in practice until the government passed legislation that forced electric utilities to provide the backup. This required a utility to purchase the electricity from a cogenerator at the utility's avoided cost. The avoided cost is what it would have cost a utility to provide the power if it had to build the same amount of capacity. This amount is, and will always remain, an unknown.

This regulation favorable for cogeneration was passed in the name of conservation. This will work for awhile, as long as the utility has ready reserve from past plant additions. When that is gone, who should install the standby capacity?

In many areas, utilities are using competitive bidding procedures to attract the construction of outside capacity.

But two central issues remain: which party should be economically subsidizing which party, and who is responsible for system reliability?

If the electric supply system becomes less reliable, the end user will install his own generating equipment, meaning the overall cost for society's electricity will go up.

Once again, we are getting down to a cost for poor utility regulation.

Because energy didn't grow in the 1980s, it disrupted nearly every energy company's long range plan.

Instead of power at the forecasted 0.3 cent a kilowatt hour, U.S. electricity averaged about 6 cents. The utility forecasters missed their forecast by a factor of 20. Not too bad for utility planners. When they miss, they generally miss big.