Is it 1979 All Over Again?

(Is History Repeating Itself in the Power Business?)

1979 may offer a glimpse into 2009, and we may learn something about the current recession by looking back at how the industry fared in post-1979 recession of the early 1980s.

Life in the late 1970s
In the mid-1970s, electric utilities in the United States were struggling to keep up with the growth in electricity demand. Nationwide demand was creating shortages of critical plant equipment such as turbines, generators, and large transformers. Prices were increasing rapidly, and with rapid load growth utilities found it hard to keep up with demand. As a result, they were making commitments for ever-larger plants, more frequently.

At Associated Electric, each generating unit was larger than the last. The 1960s ended with the completion of Thomas Hill Units 1 and 2. In the 1970s New Madrid Units 1 and 2 were completed in 1972 and 1977. So, at the end of the 1970s it was not at all unusual to consider adding Thomas Hill Unit 3, Associated's largest generating unit, planned to come on-line in 1982. In addition to the coal-based projects, Associated made commitments for a share in a large nuclear power plant, the Black Fox Nuclear project.

In the last 50 years in the U.S. there has never been a significant rise in the price of oil that was NOT followed by a recession. The Iranian Revolution of 1979 was just such an event. Oil prices shot up, driving inflation, and the US Federal Reserve enacted a tight monetary policy in response. This led to the extended 22-month recession of 1980-1982.

Increases in energy prices led to increased conservation by consumers, with the result that, by the time Thomas Hill Unit 3 was completed in 1982, not a single megawatt of its output was needed to serve customer demand. The 670 MW unit was entirely surplus to Associated's needs.

We weren't the only utility in this situation. Many of our neighbors had also made commitments for large generating units and the entire region found itself with extreme surplus capacity.

Moving into the 1980s
In order to pay for the increasing fuel costs and unneeded generating capacity, Associated enacted a series of rate increases throughout the early 1980s. The rate increases in turn resulted in further reductions in the rate of growth of customer demand.

In the years that followed in the early- to mid-1980s, Associated found that it could replace the output of its coal units at a price equivalent to running them. There was no longer a reason to spend extra money to shorten scheduled maintenance outages. Policies were enacted to suspend the use of overtime to shorten outages. A program known as “intermittent operation” was initiated at the New Madrid plant, in which one of the two units was shut down for economic reasons, and some of the workforce experienced a layoff.

Then and Now
Compare this situation of 1979 to our current situation. Since 1999 we have been building new generating capacity at a rapid pace. Intense worldwide competition for equipment such as turbines, generators, and transformers resulted rapid escalation in the cost of new plants. Strength in the rural Midwest economy kept customer demand increasing at a constant, reliable pace. Associated planned its next large generating unit (first Norborne, then Chouteau 2) and considered a commitment to a share of a large nuclear unit.

To cover increasing fuel and environmental-control costs, Associated enacted a series of rate increases over the past four years, putting additional pressure on customer demand.

There was not an Iranian Revolution, but in 2008 U.S. oil prices reached an all-time high following the announcement of Iranian missile tests. While the recession that followed is largely blamed on the collapse of the housing market, collateralized debt obligations and mortgage-backed securities, the increase in energy prices was a significant trigger to the mortgage meltdown.

Now one year later we find that customer loads are no longer growing at their former pace. The large generating unit under construction at Chouteau 2 is now expected to be entirely surplus at the time of its completion in 2011. Our participation in a previously planned nuclear unit has been suspended, and the equipment for our planned 100 MW peaker at Essex 2 has been placed in storage.

It is likely that we will find our neighbors with similar surplus capacity. New large coal-based units were recently completed in southwest Iowa and southeast Nebraska, and other units are nearing completion in Kansas City, southwest Missouri, northeast Arkansas, and western Illinois.

Even today our coal-units do not have the same value they had just a few months ago. Natural gas prices have collapsed, driven by low demand and high storage reserves. While we cannot yet buy energy for the same price as production, we are getting very close to those levels.

So, is it likely that we will see the situation of the early and mid-1980s repeat itself in 2010 through 2015? Might we see years of low customer demand growth? Might we find ourselves with the ability to buy surplus energy from our neighbors at prices competitive with our existing units? Might we find ourselves shutting a coal unit down for economic reasons? How might this impact utility negotiations with labor unions, railroads, and coal companies?

Exceptions
There are two additional significant factors that were not present in the 1980s: shale gas and carbon-dioxide regulation. Massive domestic reserves of natural gas trapped in shale formations, formerly considered uneconomic to recover, are now being extracted at very low incremental costs, a result of improved horizontal drilling technology. These reserves will put a price cap on natural gas, keeping our fleet of high-efficiency gas-based units competitive with some coal-based units. And the currently debated cap-and-trade bill, if passed, will further increase all energy prices, further depressing demand and placing coal-based units at an even greater disadvantage.

This future may NOT come to pass. This current recession could end and we could return to business as usual. But, if the current forces continue, we will need to maintain tighter cost control and top-tier unit performance in order to remain competitive in the market. Those who can do this well will survive. Those who cannot may find themselves looking for work. We want to be the former.

What do you think – are we back in the 1980s or will the roaring 1990s return? I would love to hear your comments.