Securing Our Energy Resources

It’s easy to take energy for granted. You hit the switch or plug into the outlet, and the power is there for you to run your business and live your life. We in the Phoenix Metropolitan Area experience only minimal disruptions to power and those come mainly from stormy monsoon weather rather than overloads on the grid. This is a testament to the power of planning by our energy providers, whose prowess has enabled Phoenix to avoid the blackouts and brownouts that have occurred in California and elsewhere.

But the process of planning for energy has grown increasingly complex and the factors impacting energy supply and demand are in flux as never before. This makes for a particularly challenging environment in which energy providers must work to ensure energy availability and affordability, while embracing new opportunities.

Traditionally, energy providers have had to balance two fundamental and interconnected concerns in their planning: load growth and cost management. As SRP’s Director of Resource Planning and Development Tom Cooper says, “We have to have the power available before it’s needed. Understanding economic conditions, we have to anticipate people’s power consumption — what resources do we need to add, and when?”

The ability to accurately predict demand is essential to effective cost management. Obviously, utilities don’t want to get caught short. That’s when blackouts and brownouts happen. At the same time, building too much capacity too soon places the burden of the development cost on a population that doesn’t need the power yet. Not a popular policy.

Historically, Arizona load growth has risen at a rate of 3 to 4 percent annually, which is considerably above the national average of about 1 percent. But because of the economic recession, as well as increasing efficiency, load growth may currently be around 1 percent, according to Amanda Ormond, an energy consultant and former advisor to the Symington and Hull administrations. Load demand is not expected to go down further, but how much it will go up is an open question.

Never a simple calculation, the equation for energy planning has become even more uncertain today due to two additional and intimately related factors — increasing environmental regulation and new energy sources, including renewables.

“The potential cost of environmental regulations could be really big,” says Jim Wilde, director of resource planning for APS. “We don’t know what new regulations are coming up and are waiting to see what regulators’ determinations will be on applying current laws.”

An example of this is the application of the Clean Air Act at the Navajo Generating Station, a coal-burning plant in Page. The owners, which include both APS and SRP, are waiting for final recommendations from regulators on emission standards, in order to determine what is the most cost-effective way to comply.

The numbers are in on another coal-burning facility, Four Corners Power Plant, and they have required definitive action. Three of the five generating units at Four Corners were recently closed. EPA’s proposed emissions limitation for particulate matter for the three units would have required the installation of baghouses and selective catalytic reduction equipment at an estimated cost in excess of $586 million, which would have rendered the continued operation of those units uneconomical.

Coal No Longer King

This is an indicator of a broader trend away from coal power generation, according to Michelle De Blassi, co-chair of the Arizona Energy Consortium who is an energy and environmental lawyer at Greenberg Traurig. “Environmental Protection Agency greenhouse gas regulations are making coal less and less viable,” says De Blassi. “Coal is relatively inexpensive, so replacing it is going to be a challenge.”

Coal is currently both APS’s and SRP’s largest single source of fuel for generation, accounting for 35 percent at APS and 53 percent at SRP. So ramping down this established and affordable resource represents a significant shift.

The ideal answer, some argue, is renewable energy sources. Why replace one limited fuel source with another? But there are significant cost and operational issues to resolve before renewables can take Arizona’s energy center stage, according to energy providers.

“We can’t control renewable sources the same way we can traditional sources,” says SRP’s Tom Cooper. “With wind, you get energy only when the wind is blowing, whether you need it or not. The same with solar. How do we store solar in the winter when we need less, so that we have it in the summer? Having a system that can accommodate this is a challenge.”

While solar generation is now considered affordable, storage technology has not yet caught up. It is expected that technological advancements and economies of scale will ultimately bring storage costs down to competitive levels as well. The question is when.

Renewables also introduce usage issues, simply because they are new, and the dynamics of distribution haven’t been worked out down to the retail level. The all-too-public fight over net-metering that played out in the Phoenix media recently is a good example. The dispute centered on who should pay for the increased grid costs associated with rooftop solar installation. Because solar is so new, this matter had not been thoroughly explored previously. Moving forward, a rate structure will need to be developed to address this.

This is not to say that energy providers are dismissing renewables; only that they tend to view them with a cautious eye. Renewables already represent a significant percentage of the mix — 10 percent at APS and 12 percent at SRP. SRP is committed to generating 20 percent of its retail energy from sustainable sources by 2020. APS is committed to the state-mandated goal of 15 percent by 2025.

Even advocates concede the high capital costs involved in developing the storage capability to address the intermittent nature of renewable energy. But they argue that the stability and predictability of cost as compared to the fluctuating cost of commodities like coal, oil and natural gas helps make up for it. As Ormond notes, “You would know exactly what the price of energy is for the next 30 years.”

Renewables also eliminate the extensive use of water that fossil fuels demand, which in our desert environment could be an important boon to development. According to the U.S. Geological Survey, in 2000, thermoelectric facilities nationwide used 195,000 million gallons of water a day. This represented almost half of all of the water withdrawn in the United States.

Diversification Is the Answer

Energy providers seem to agree there is no single answer to the energy supply challenges we face. Rather, diversification of their energy portfolios is the real answer. APS and SRP both blend coal with nuclear, natural gas and renewables, along with gains in energy efficiency. Arizona’s nuclear power generation is not expected to grow any time soon (Palo Verde is already the largest nuclear power plant in the country). Renewables are expected to grow gradually as technological advancements make storage more financially viable, along with overall efficiency.

In the near term, this leaves natural gas as the go-to resource. If renewables represent the revolutionary option in Arizona energy, then natural gas is the evolutionary option. While still a fossil fuel, natural gas is considerably cleaner-burning than coal, while offering comparable reliability.

“Natural gas is the integrator, which can balance out the intermittent nature of renewable energy,” says Wilde. “Natural gas can respond to changing needs on the grid.”

Tom Cooper voices the same view. “Natural gas offers a gradual approach to transitioning energy sources. It really helps us to meet peak summer demand.”

Yet there is some uncertainty planners must consider as well. Natural gas is currently relatively affordable. But as a commodity, it has historically been volatile in price. Developments in the process of accessing natural gas known as fracking have helped keep costs low. But there are questions regarding the environmental impact of fracking that could impact supply.

Also, many existing natural gas facilities are equipped with outdated technology that goes back as far as the 1960s when they were first built. Wilde views modernizing existing infrastructure as an important priority in APS’s strategy moving forward. “When you look at utilities across the country, a lot of electric generation built was 40 to 50 years ago, so today’s technology is much more advanced, efficient and flexible,” he says.

For example, an old natural gas unit built in ’60s can take six to eight hours to start up. With today’s technology, a unit can come online at full load within 10 minutes, in order to respond to system events and maintain grid reliability. In addition to such enhancements in performance, there are environmental benefits to be gained as well. Where an old unit would use 1,000 gallons of water per megawatt hour, a new state-of-the-art facility uses less than 50 gallons.

Energy as a Growth Driver

Historically, the energy cost to do business in Arizona has been highly competitive.

“Energy is a major component of why people site facilities here in Arizona, like Apple,” says De Blassi, referring to Apple’s plan to build a new manufacturing facility in Mesa, including a solar capability to power it. This is attributable in part to able performance by Arizona energy providers, as well as the cost advantage of nuclear energy. Nuclear energy accounts for 19.1 percent of Arizona’s power, making Arizona the most nuclear-powered state in the U.S.

The low cost of energy, along with the relativity cheaper real estate, remains a key element in the overall rationale for attracting new business. According to Leisa Brug, director of the Arizona Governor’s Office of Energy Policy, Arizona’s per-kilowatt-hour cost is 21st highest in the U.S. Add to this that we have minimal natural disaster threats, good labor resources and generally pro-business policies, and the case is even more compelling.

“Arizona is strategically poised to be the major energy center for the region,” says De Blassi. “We can develop projects much faster, which means we can sell power for less in places like California.”

Another major market could be Mexico. As Mexico privatizes its energy industry, significant opportunities for Arizona growth present themselves. Business could be driven by both energy imports and exports, with Arizona serving as a hub to North America. “For businesses that want to be close to that market, but not across the border in Mexico, we are the ideal location,” says De Blassi.

For example, Arizona-based manufacturing companies would have an advantage when it comes to providing the solar supply chain to Mexico with components. There will also be growing opportunity to support transmission infrastructure maintenance and expansion there. In addition, Mexican representatives are already reaching out to Arizona to gain development expertise, including legal, technical and government relation consultants.

Arizona offers a range of reasons for energy-related businesses to locate here.

What’s missing is a more collaborative planning and coordination process that would give investors a stronger sense of confidence in the stability of favorable conditions, and streamline the development process by removing unnecessary impediments.

“Investors run from turmoil,” says De Blassi. “States that nurture a strong energy presence succeed because all levels are working together — public as well as private. We don’t have that here yet.”

The net-metering battle is a good example. While having little direct bearing on many larger energy issues, it did nothing to inspire investor confidence in Arizona’s ability to resolve conflicts and efficiently implement new policy to address emerging conditions brought about by advancing energy applications. Certainly there were clashing interests, particularly between the local solar industry and the utilities. But it’s in everyone’s interest to establish a clear, coherent policy moving forward. Instead of resolving differences through a mediated process guided by private and public leaders, the conflict became politicized and the conflict magnified.

Nevertheless, on behalf of Governor Brewer, Brug insists that “Arizona is trying to regulate measurably and thoughtfully.” She points to the proliferation of rooftop solar as an example of an overall Arizona success story. Arizona is second in installed photovoltaic solar, behind only California, according to Brug. “We’ve led on that, and we’re huge compared to other states.”

The next step, Brug says, is to expand our storage capacity. “The more storage for solar we can invest in, the more growth we’ll see, because that accommodates variability on the grid.”

Innovation On the Horizon

Enter Solano Generating Station, owned by Spanish company Abengoa Solar. This new, three-square-mile facility near Gila Bend that came online last October uses concentrated solar power technology and thermal energy storage to generate electricity. The storage component enables Solano to continue generating power five to six hours after sunset, according to Wilde. Its capacity is 280 megawatts, enough to provide energy for 70,000 Arizona homes. APS is contracted to purchase all of the station’s output, increasing its solar energy portfolio by 50 percent.

The business of energy in Arizona is clearly in flux. The immediate need is to plan for power generation using less coal, which carbon emission regulation is pricing out of the market. Coal has been the stalwart generating fuel resource, not just in Arizona, but in the entire West. Rather than replacing one “silver bullet” solution with another, energy providers insist they are pursuing greater diversity and flexibility in their portfolios moving forward. While natural gas appears to be the most likely candidate to pick up the slack left by coal in the near term, it is often discussed as a bridge to transition Arizona power to a future founded on renewables.

Within this current energy landscape of change, projects like Solano fulfill multiple missions. They support energy providers, in this case APS, in their quest for greater diversity and flexibility. They further the cause of solar and renewables in general. And they help establish Arizona’s identity as an innovator in energy and a smart place to site new energy endeavors. New technological applications, such as those at Solano, will undoubtedly continue to emerge. The challenge will be how to effectively and strategically deploy and regulate them.