Powering the Future of Texas

by C. John Wilder
CEO
TXU Corp.

World Energy, v10n1 Read more articles from this issue

Customers, investors and the general public all demand to know what our industry is doingto address energy reliability and high prices. These are complex challenges with no easy solutions.

Reliability is not just a grid issue. We also need adequate generation supplies. As Joseph Kelliher, chairman of the Federal Energy Regulatory Commission, recently said, "It isn't just setting reliability standards and enforcing them. It's having enough electricity supply to meet the needs of consumers."

According to the U.S. Energy Information Administration (EIA), more than half of the power-generation capacity in the U.S. was placed in service prior to 1980. Much of current U.S. coal capacity went on line in the 1940s and 1950s, and the last significant wave of coal generation was built in the 1970s.

The Challenge

The United States is facing real reliability issues during this time of rapid demand growth. Over the summer, outages affected millions of Americans for both short and extended periods. Record heat and infrastructure challenges caused interruptions for 100,000 New Yorkers during the nine hottest days of the summer, and millions of Californians were without power for a weekend after 13 days of temperatures over 100 degrees.

These and other recent outages occurred in markets with reserve margins generally above 20 percent. Even Texas, a market with more than 25 gigawatts (GW)of new generation added in the last decade, had a weather-related surprise this past April when temperatures rose above 100 degrees while generation capacity was unavailable because of scheduled maintenance outages. That modest blackout, the first in 17 years, was a wake-up call for how delicate the supply situation can be.

According to the Electric Power Research Institute (EPRI), outages cost the U.S. economy about $100 billion per year. That is 1 percent of gross domestic product, or roughly 50 cents for every dollar spent on electricity. EPRI predicts that the economic loss figure could rise to $300 billion per year unless substantial investments are made to U.S. power infrastructure.

In North Texas, where TXU is headquartered, every minute of downtimecosts the economy about $10 million, nearly $30 million for the state. Overthe first 15 years of the century, the state's population is expected to increase by almost 6 million residents - more thanthe entire population of Tennessee. With the Texas economy projected to grow at 2.3 percent annually over the next five years, demand for electricity is expectedto rise between 1 and 2 GW per year.

Without new generation, the Electric Reliability Council of Texas (ERCOT) forecasts that reserve margins would drop below levels deemed reliable by 2008. ERCOT's estimate for 2010 summer-peak reserve margins was revised down again in June and now is predicted to be 6.8 percent, as shown in Figure 1. According to ERCOT, the targeted minimum reserve margin is 12.5 percent. This is a call to action for the Texas market, and the costs will be substantial if it is not addressed.

Supply + Demand = Price

A basic economic principle is that supply and demand establish price. Nationwide, demand for electricity is growing 1.6 percent annually, and the EIA suggests that over the next 20 years, 200 GW of new capacity is needed just to keep prices stable, to say nothing about reducing consumer prices.

Between 1995 and 2005, more than 90 percent of U.S. generation capacity additions, or approximately 250 GW, were gas-fired. This primarily gas-fired buildout is a contributing factor in the expected 400 percent increase in natural gas imports over the next 15 years. The United States, which has less than 5 percent of world gas reserves, will have to rely heavily on nations located in less stable parts of the globe. Natural gas prices are almost four times higher today than they were from 1990 to 2000, and post-2010 prices are expected to remain high. Continued reliance on natural gas will lead to a less competitive U.S. industry and unacceptably high and volatile electricity prices for consumers.

The impact of this reliance on natural gas - coupled with older, inefficient generation - is already being seen around the nation. Old-generation units in PJM (Pennsylvania, New Jersey and Maryland) and the Northeast can be20 percent less efficient than new units. This not only increases prices, it increases emissions as well. Retail prices in Maryland could rise by 72 percent and in Illinois by 33 percent. Over the last four years, Texas power prices, which are driven primarily by natural gas prices, have increased by 56 percent. These high prices can have a cascading impact on the economy. Consumers have less disposable income for other goods and services, and industry becomes less competitive in the world market and shuts down or relocates, increasing unemployment. An economical, stable power supply is becoming a true strategic resource for an economy and a nation.

A Diverse Technology Portfolio

The decisions that TXU made for our generation investment program reflect the realities of the competitive market and the needs of customers. The decision about which generation technology to use is a good example. We asked customers what was important to them. They ranked reliability first and a lower price second.

We spent more than a year evaluating generation technologies and the ability to meet those two customer needs. We found that each presents its own challenges but that a balanced approach would best serve our customers.

Renewable energy technology is part of the answer. Texas is now the leading wind generator in the nation, and TXU is the state's largest buyer. In fact, TXU plans to double our portfolio of renewable capacity by 2011 through a new company, TXU Renew.

Unfortunately, wind power does not have the capacity or performance characteristics to meet Texas' power needs. When demand is highest, wind generation is lowest, as shown in Figure 2. Also, 58 percent of wind is produced at night, while 72 percent of Texas' power needs are during the day. In fact, ERCOT assumes only 2.6 percent of wind capacity in their resource calculations. Wind is part of the solution but will be only a small part for decades.

TXU also evaluated efficient natural gas units, but they present their own challenges. Figure 3 shows that generation capacity in the Texas market is already72 percent gas-fueled. In addition, U.S. supplies of natural gas are shrinking, and forecasts are that prices will remain high and volatile in the future. Putting customers at the mercy of volatile natural gas is not prudent.

Nuclear generation has characteristics that make itan attractive choice. It has lower ongoing cash costs of production and zero emissions. But, as illustrated by Figure 4, the combination of fully loaded capital costs that are double those of coal-based generation and aconstruction timeline that can take up to 10 years eliminates it as an option to meet Texas's short-term power needs. Even under the best scenario, a nuclear plant is about $17 per megawatt hour (MWh) more costly than a coal plant.

Despite this, TXU believes nuclear generation can be part of America's energy future. In August, TXU announced plans to develop applications to file with the U.S. Nuclear Regulatory Commission for combined construction and operating licenses for 2 to 6 gigawatts of new nuclear-fueled power-generation capacity at one to three sites. TXU expects to submit the applications in 2008, which would facilitate bringing the new capacity on line between 2015 and 2020. While new nuclear generation cannot come on line in time to meet the short-term power needs of Texas, it offers the potential to deliver customers lower, stable prices and reduce Texas' overreliance on natural gas.

Coal Is the Logical Choice

Of all the options TXU examined, coal generation emerged as the logical choice to meet immediate, short-term demand for reliable power at a lower price.

As shown in Figure 5, the United States has sufficient economic coal deposits to supply an estimated 250 years of power generation. The Department of Energy has stated: "The low cost and abundance of coal is one of the primary reasons why consumers in the United States benefit from some of the lowest electricity rates of any free-market economy." The real question for us was the type of coal technology to use.

Sub-critical coal technology was considered. It is extremely economical to build, potentially at costs less than $1,000 per kilowatt (kW), but the lower efficiency and higher emissions profile did not meet our threshold for environmental performance.

Integrated gasification combined cycle (IGCC) technology was another possibility. Unfortunately, it remains a demonstration technology and is unproven in two critical aspects: on the coal supplies available to Texas and in a large-scale commercial environment.

Only two units are in operation today. Both are small, heavily subsidized and have emissions profiles that are not as clean as the supercritical coal plants TXU plans to build, as illustrated by Figure 6. Moreover, neither unit captures or disposes of carbon dioxide (CO2).

While IGCC units have the potential to deliver slightly lower emissions with sulfur dioxide (SO2), they clearly do not offer cost savings relative to other coal technology. Current capital costs are more than $1,800/kW, excluding any potential costs to capture CO2. Operating costs also compare unfavorably. Capacity factors are expected to be less than 85 percent, and fixed operations and maintenance costs are more than double those of conventional coal technology. Announced costs to capture or dispose of CO2 have been as high as $2,200/kW. Over the life of a plant, this incremental capital cost could translate into prices that are $28/MWh higher for customers relative to a supercritical coal plant.

Ultimately, we determined supercritical coal technology was the best option for ERCOT customers. It has the best commercial viability, cost, time to build, environmental performance and operating profile.

In Europe, where CO2 emissions rules have already been adopted, and across the other competitive U.S. wholesale markets, more than 117 GW of traditional coal have been announced versus only 6.6 GW of IGCC. This market test is perhaps the most compelling statistic in favor of supercritical coal.

A new supercritical coal generation facility is 15 percent more thermally efficient and 75 percent more environmentally efficient than the average existing U.S. coal facility. And, important for Texas, new plants can be built in time to help lower prices and ensure a reliable supply by 2011.

While TXU's analytical review identified supercritical coal as the right technology for today, our evergreen assessment continues across multiple time horizons. TXU is investing $1.5 to $2 billion in the next generation of technology, and Figure 7 shows which technologies we expect to become competitive over the next 25 years.

Over the next 12 months, we expect to make announcements concerning a series of specific investments. In addition to supporting a commercial IGCC solution, this investment will likely include funding for pulverized coal retrofit technology. In Texas, we will continue to support the FutureGen project through a long-term power-offtake agreement. We remain committed to a zero-emissions coal facility and will invest to make it a commercial reality.

Size and Scale Matter

Skeptics have asked why TXU is building so much capacity so quickly when the next technology advances seem to be just a few years away. The answer is simple.

First, the ability to bring plants on line in time to meet growing demand depends on scale. Only a scale developer like TXU can bring on a plant at nearly 30 percent less cost and in about 25 percent less time. Time is a critical dimension to address the immediate, short-term needs in the Texas market.

Second, a scale buildout also provides wholesale savings to pass on to customers and to fund TXU's voluntary environmental commitments.

Based on the typical construction costs of $1,450/kW, construction time of six years and average operations, the best all-in cost a single coal plant can achieve still exceeds $60/MWh. In other words, it brings no material savings to customers.

TXU has invested tens of millions of dollars and countless design hours to develop a plant that can be built for $1,100/kW and be on line by 2010. This will allow TXU to deliver an all-in cost of about $50/MWh, providing significant savings to customers.

A key part of TXU's goal is to give Texans access to the cleanest power-generation fleet in the country. Although doubling the size of TXU's coal fleet, 100 percent of nitrogen oxide (NOx), SO2 and mercury emissions from the new units will be offset. In addition, TXU plans to reduce overall coal-fleet emissions an additional 20 percent. The relative productivity improvement, in terms of emission rates, is almost 70 percent. And this does not take into account the incremental 12,500 tons of NOx that TXU will remove by displacing less efficient generation.

This is the largest voluntary reduction program ever in the United States. Once completed, it will result in TXU being the most environmentally efficient scale coal generator in the country, ranking first with the lowest emissions of SO2 and NOx and second-lowest emissions of mercury.

A Balanced Plan

In all, TXU's plan will meet the requirements customers most want:
• Reliable, affordable power now: TXU's plan will provide urgently needed supplies in Texas, where reserve margins are projected to fall below safe levels within two years. Blackouts, which can cost the North Texas economy about $10 million each minute - along with higher prices and lower economic growth - are likely unless market participants act now.
• Lower costs: TXU's plan will save wholesale electricity purchasers $1.7 billion. TXU will be able to provide long-term, fixed-price power to wholesale customers at up to 20 percent below current prices. By reducing Texas' overreliance on natural gas, the entire market will benefit.
• Cleaner air: TXU's solution will provide new plants that are 80 percent cleaner than the average U.S. coal plant. While doubling its generation capacity, TXU volunteered to reduce total key emissions by 20 percent, and it has asked the state to make that a legally binding commitment. TXU will also invest $2.5 billion in the best-available control technology and retrofits at existing plants. This will make TXU the cleanest scale power generator in the United States. If others follow this standard, Texas will have even better air quality.

TXU's energy plan focuses on supercritical coal forthe near term and offers a balanced and diverse portfolio of energy solutions that will deliver the reliability, affordability and emissions reductions our customers have asked for.

C. John Wilder, 48, is chairman of the board andchief executive officer of TXU Corp., one of the nation's largest electric energy companies. He joined TXU in early 2004 as the first external CEO in the company's 120-year history and was elected chairman in May 2005.

A top-ranked leader in the energy industry, Mr. Wilder has demonstrated repeated success in building high-performing organizations. A year ahead of schedule, TXU has virtually completed the three-year turnaround plan he inspired and is headed toward its goal of industry-leading, customer-focused, top-decile financial and operational performance. Under Mr. Wilder's leadership, TXU is a strong, resilient company, delivering the innovative product choices, better reliability and world-class service customers deserve, with a renewed emphasis on corporate philanthropy and community commitment.

Mr. Wilder grew up in Missouri and graduated magna cum laude from Southeast Missouri State University with a bachelor's decree in business administration.In 2005 he was awarded the university's Merit Awardfor distinguished alumni. He also earned a master's degree in business administration from the Universityof Texas.