Electricity Outlook 2001: A Matter of Urgency

A Matter of Urgency

The rapid run-up in electricity prices experienced by electric customers in New York City during the summer of 2000, and the even higher prices and power outages being experienced by regions of California, have abruptly focused public attention on the fledgling process of electricity deregulation in the United States, and have raised concerns for the adequacy of supply and the stability of electricity prices.

These concerns are now a matter of urgency for New York City, as growing demand for electricity has absorbed most of the available supply of In-City generation, while the process involved in approving new generating facilities is imposing considerable delay on construction and delivery of new supply.

Electricity is vital to New Yorkers and to New York City, which is the financial, corporate and communications capital of the United States and a leading world destination for business and tourist visitors. Electricity makes possible the daily functioning of the City's vast underground mass transit system and commuter rail terminals.

New York City has been experiencing an economic boom and population growth since the early 1990s that has created more businesses and jobs, and more demand for offices, homes and hotels.

This higher level of growth, and the increasing intensity of electricity usage by both businesses and residents, has increased demand for electricity by 1400 MW over the past decade without being matched by any significant increase in generating capacity. The result, when combined with the newly deregulated, competitive wholesale market for electricity, has been the rise in wholesale electricity prices and price volatility during periods of peak demand such as those experienced in June of 2000.

This publication summarizes a report that has been prepared out of concern for New York City's electricity needs by the Energy Committee of the New York Building Congress, co-sponsored by the Association for a Better New York, the Building and Construction Trades Council of Greater New York, the New York City Partnership, and the Real Estate Board of New York.

The purpose of the report is to share these concerns and our understanding of the issue with political leaders and with the business and residential public of New York City, and to urge the adoption of long-term public and private solutions that will assure the adequate supply and price stability of electricity necessary to maintain the City's economic preeminence and quality of life through the early years of the 21st century.

Included herein is a brief overview of the supply deficit that has emerged in New York City's electricity industry, and suggestions for promoting more supply of power and more efficient usage of electricity.

Overview
New York City is facing a critical deficiency of 2000-3000 megawatts (MW) of electricity over the next five years that threatens to affect the City's residents and businesses alike. The decisions of businesses to expand or relocate to the City -- and thus the health of the City's economy -- will largely be determined by the sufficient supply and price of electricity. Unless immediate action is taken to provide additional supply, New Yorkers could well experience routine spikes in the price of electricity, brownouts, and even blackouts.

The years 2001-2002 are considered to be the most critical.The level of new supply needed for market stability and reliability, and to accommodate the projected increase in demand, is estimated to be 1000 MW in 2001, growing to almost 1500 MW by 2002.

The only immediate potential for additional supply appears to be from the plans by the New York Power Authority (NYPA) to site several small generating units in New York City. If fully implemented by the summer of 2001, these units could produce up to 450 MW. While this represents much needed short-term supply, it is urgent that permanent, larger, new generating facilities be approved and that construction start without delay.

We urge the leaders of New York State and New York City to take the actions necessary to accelerate the process of siting permanent, new electric generating capacity in the City, and to encourage conservation and increased use of alternative energy technologies.

Three very important developments over the last several years now present immediate challenges to New York City's electricity supply

1.Strong Growth in Demand
New York City's economy has experienced significant growth, with rapid increases in businesses and jobs and in personal and corporate incomes. The City's population has increased by over 100,000 in the past decade. As a result, business and residential consumption of electricity has soared; the Ôpeak load demand', or maximum need, for electricity has increased by approximately 170 MW per year since the mid-1990s and by a total of 1400 MW over the past ten years.

In recent years, little progress has been made in reducing demand through conservation measures, as many government supported conservation programs have been scaled back. Nor are there adequate incentives in the electricity tariff rates for either businesses or consumers to encourage reducing demand during peak load conditions.

2. Deficit in New Supply
The excess supply of electricity that existed in New York City in the early 1990s has been gradually absorbed by the strengthened economy, while during the past decade there has been only a slight addition of new generating capacity. At this time, there are no new generating facilities under construction. Importing of power is limited, as transmission capacity into the City is fixed at approximately 5,000 MW.

When the peak load summer season of 2001 begins, we estimate that New York City will need approximately 1000 MW to accommodate continued growth in demand, to assure market stability, and to meet the 80 percent In-City generation requirement, which is estimated to be deficient by approximately 318 MW.

3. Deregulation of Electricity Industry
As of 1998, the electric industry in New York State has been restructured to eliminate most government regulation of the supply -- but not the delivery -- of electricity. The regulated supply of electricity has been replaced with a market-based system that is driven by supply and demand.

Resulting Volatility in Prices
During June of 2000, with tight supply and demand conditions in New York City, electricity prices increased sharply in the short-term pricing market, pushing up July's average household power costs by 40 percent.

Price volatility in New York City eased during the remaining summer months due to cooler temperatures, but similar price hikes in the next five years can be expected unless sufficient additional generating capacity is achieved.

Projected Electricity Needs in the Next Five Years
Our estimate, based on discussions with the industry, is that between 2000-3000 MW of new generating capacity will be needed in New York City during the next five years. This amount results from:

• the need for an immediate 800-1200 MW to assure market stability, critical in a deregulated industry where scarcity of supply can engen der high bid prices in the short-term pricing market;
• the need for between 700-900 MW over the next five years to accoomodate the increase in demand for electricity based on projections for economic growth in the City and heightened use of electricity by businesses and residences; and,
• the need for between 500-900 MW of capacity to replace aging plant and equipment. This will also bring significant environmental benefits since new plants would use more efficient technology and reduce overall air emissions for the same amount of generation.

Potential Solutions
We conclude that the strongest of the potential solutions to fill the bulk of projected electricity needs for New York City in the next five years, is to add new generating capacity. Active political leadership is needed to speed up the process of siting facilities for this needed supply.

To date several plants totaling over 5,500 MW of capacity have been proposed by a number of energy generators for the New York City area. However, at this time only one proposal has reached the approved application stage. The formal siting process in New York State, called "Article X", involves at least 12 months for each application after reaching this stage before construction can begin.

Complementing the primary need to site new capacity, other potential solutions include encouraging new technologies, and implementing more widespread and effective conservation incentives and mechanisms that would allow consumers to respond to price changes. It is estimated that accelerated conservation measures could save as much as 500 MW of projected generation need.

• Accelerated programs to encourage energy efficiency in public buildings and consumer purchases of energy-efficient appliances could help offset growth in demand.
• Peak load demand could be reduced if clearer price signals and time-of-day pricing were available to both business and residential consumers.

Investment in new transmission capacity might enable increased imports of electricity into New York City from energy surplus regions such as upstate New York, although during times of peak load demand, other regions adjacent to the City could also be under similar supply constraints which would reduce the import potential.

Transmission system investments are expensive, subject to difficult siting problems and significantly longer construction times, and thus are not likely to be available in the next five years. Additionally, in the newly deregulated environment, it is no longer clear who has the responsibility for investment in transmission capacity, or what return can be expected from the investment.

New generating capacity must then be added to fill the bulk of projected need for electricity in New York City over the next five years.

Recommended Actions
We believe it is important to bring the need for electricity generation in New York City to the forefront of public discussion. Public officials and business leaders must strongly convey the message now to all New Yorkers that, without new electricity generation, the City could be faced with higher electricity prices and threatened by brownouts and blackouts in the very near future.

We call upon the Governor and the Mayor to help forge this common agenda, and make the following recommendations:

I. Take actions necessary to ensure that the responsible state and local agencies expedite siting of new generating facilities in New York City.

• At least 1500 MW of additional supply is necessary for the critical deficiency expected in years 2001-2002, and there is a total estimated need of between 2000-3000 MW by the year 2005.

II. Accelerate measures that could save at least 500 MW of electricity, such as:

• more widespread use of price-responsive programs that would encourage major business users to curtail or shut down operations during periods of peak load emergency, or high electricity prices;
• initiation of programs to enable small businesses and apartment buildings to invest in new distributed generation units, or use existing standby generation, to provide additional power supplies during similar periods; and,
• use of public funds to accelerate conservation measures and public information campaigns that would provide incentives to both business and residential customers to use energy-efficient appliances.

Economic Impact of Not Acting
Meeting the electricity needs of New York City is now a matter of urgency. The City's present and future economic growth and prosperity depend on an ample and reliable supply of competitively priced electricity.