Utilities Paying Premium to Stay at Full Capacity Level

Right now, the utilities are paying too much for electricity from third-party generators like windmill owners.

But capacity counts too, offsetting much of that cost.

Capacity is what a utility needs to supply all customers when all of them turn on all their appliances at the same time.

“We can’t plan our system for only one appliance at a time. We need to plan for everyone turning on everything at once,” said Alison Silverstein of the Pacific Gas & Electric Co.

Utilities like PG&E; have difficulty building large traditional plants to increase their own capacity because of politics, permits and protests.

But third-party generators are not as strictly regulated. So PG & E pays many of them for their capacity, as well as for the electricity that goes into the grid.

Silverstein said payments for “firm” capacity can range from $60 to $160 per kilowatt per year, depending mostly on availability during PG&E;’s peak periods. Wind turbine operators, because of the vagaries of the winds, usually qualify only for “non-firm” capacity, which pays much, much less.

Third-party generators, called qualifying facilities or QFs in the trade, include small producers who use solar, geothermal and many other sources of power.

Payments Vary

Payments for electricity delivered to the grid vary with type and age of contract. Many contracts offer 10 years at a high fixed price--7 or 8 cents per kilowatt hour--based on early 1980s petroleum prices and production efficiency and an additional 10 or 20 years at “avoided cost,” or what the utility would otherwise have to pay elsewhere.

Were those contracts to be written today, the price would be around 3 cents. Said William J. Steeley, senior projects engineer at PG&E;: “At the time, it was right. It might well have gone up to 10 cents.” PG&E; is still honoring those contracts, “but we really don’t need energy at that price,” he said.

“Avoided cost,” once around 8 cents per kilowatt hour, is now less than 3 cents, making it “real tough” to make money, in the words of Jerry Fuchs, manager of project planning for the Fayette wind-power company of Tracy.

Federal law, the Public Utility Regulatory Policies Act of 1978, required the utilities to contract with all viable third-party producers. The purpose was to promote efficient energy production, encourage the development of alternative sources of energy and reduce the reliance on foreign oil. The law also called for price incentives, which were translated by the California Public Utilities Commission into the fixed-price contracts.

The result for PG&E; in 1988 was that in August, at its all-time peak load, it needed 18,000 megawatts. Its own capacity was 15,030 megawatts, and it had 5,963 megawatts of third-party capacity under contract. The total is more than enough until the late 1990s or early 2000s.

Thus, PG&E; is caught in a short-term dilemma of obeying the law that is aimed at keeping third parties on line and holding down prices.

Silverstein said it can buy power from the federal Bonneville Dam on the Columbia River for 2.3 cents per kilowatt hour. But the average it pays all third-party producers is 5.7 cents per kilowatt hour--compared to a systemwide average cost of about 2.8 cents.

“If we are required to pay 2.9 cents from a QF (third-party producer), this precludes us from buying less-expensive power elsewhere. It’s not good for the customers,” Silverstein said.

When the demand curve starts climbing again, Silverstein foresees an auction system in which third parties would bid to fill holes in needs.