2/9/2004

KUFM / KGPR

T. M. Power

Northwestern Energy’s Electric Supply Plan for Montana

Those electricity customers who are served by Northwestern Energy, the company that took over the old Montana Power Company, have been at increasing risk of unstable electric prices because more and more of their electricity has been purchased in the regional market where the utility has to pay whatever the going price is. If electric markets were to breakdown again as they did in 2000-2001 and send electric prices through the roof, the average Montana household would face the same electric cost trauma that shut down many of Montana’s largest industries back then. Montana’s families and small businesses did not get hit with those high electric prices in the past because Montana Power had signed a five-year contract for electricity at relatively low prices.

Those contracts now have expired and have not been entirely replaced with stably priced new sources of electricity. So Northwestern is currently purchasing 25 to 30 percent of the electricity we use on the open market, paying whatever the price happens to be. The Montana Public Service Commission has been pressuring Northwestern to reduce this exposure to volatile electric prices, but the utility’s bankruptcy problems have made it difficult for it to enter into long-term commitments. As a result, electric supply policy has been drifting dangerously.

Northwestern recently filed its plan to correct this situation with the Public Service Commission. The analysis supporting the proposed electric supply plan documents the fact that the current heavy dependence on short-term markets is the most risky and potentially most costly alternative that could be pursued. The proposed plan makes a strong case for committing to additional relatively long-term resources.

Some of the results of this Northwestern electric supply analysis are likely to be controversial. Northwestern compares additional coal-fired and gas-fired generation head-to-head and concludes that gas-fired generation is the type of flexible resource that is currently needed in Montana. Given how many political and economic leaders have been pushing more coal-mining and coal-fired generation as a way to stimulate the rural Montana economy, this will disappoint, if not anger, some folks.

The Northwestern analysis emphasizes the need for a resource that can follow our electric loads as we get up in the morning, turn on a lot of electric appliances, get ready for work or school, and then leave home. During the middle part of the day electric use declines only to peak again as we return home. During the middle of the night, of course, load fall dramatically again. There are also significant seasonal fluctuations in the use of electricity with peaks in both the summer and winter. Montana Power used to use its hydroelectric facilities and a gas-fired plant in Billings to follow these loads during the day and across the year. But those low cost electric resources got sold off to a Pennsylvania electric holding company. Because of that, Northwestern, argues, the priority has to be to again obtain a flexible, load-following resource. Natural gas-fired generators fill that bill.

Coal-fired generators are designed for continuous operation. They cannot quickly increase or decrease their electrical output. When the local electric load falls, rather than backing down the generators, the excess electricity is sold to other utilities as far away as the West Coast. Unfortunately the transmission lines going that direction are clogged, and it would cost a fortune to build new ones. That’s why Northwestern concludes that coal is not a good fit for now.

Coal developers are likely to be more than a little miffed. Northwestern proposes substantial investments in about everything but coal. Besides proposing commitments to new gas-fired generation, Northwestern would invest in a relatively large amount of wind-electric generation in Montana and would double its investment in conservation and improvements in the efficiency with which we use electricity.

Before there is too much howling about “discriminating against” Montana’s “premier” energy resource, coal, it should be kept in mind that this electric supply plan is aimed at solving an immediate problem and covers only the period through the middle of 2007. In that year, Northwestern’s contract with PPL Montana that allows it access to the output of some of the old Montana Power generators will run out. Later this year Northwestern will begin the process of seeking resources to replace its contractual claims on those coal and hydro resources. Since those are baseload resources that provide electricity all year long, new Montana coal-fired resources will have an opportunity to fill the type of niche for which coal is best suited.

However, I wouldn’t hold my breath in expectation of a new coal boom in Montana. The facilities needed to burn coal are still very expensive. In addition, coal produces significantly higher levels of air pollution including greenhouse gases. Finally, much of the coal is located where there are no transmission facilities, boosting significantly the cost of utilizing that fuel. Moving the bulky fuel to load centers is costly and most cities are unlikely to welcome the accompanying pollution. So coal developers have their work cut out for them.

The key focus for the short-term is likely to be on flexible resources that protect us from electric market volatility. But the debate over how best to put an electric supply back together again in Montana, after we foolishly gave away the reliable, low-cost supply we already had, will continue for many years to come.