Formula Flame Feast

At our quarterly business unit meeting I listened to an interesting presentation from our top budget guy. These aren’t the sorts of things I had any interest in in the past. I’m an engineer; just give me the dollars and I engineer. Simple. I benchmark my performance by ensuring I work just hard enough so that they’ll fire someone else first…in case the budget impacts personnel.

But the doomer in me had a silent orgasm in the auditorium today hearing about what’s coming down the road for SMUD. And wouldn’t you know it, we can see it coming from forty miles away. We didn’t prepare for the housing bust or higher commodities yet we saw these coming from fifty miles down the road.

I know my bias, as do you. One has to filter the Franklin Monologues through it. I accentuate the negative when it comes to energy, and I likely always will because I take such personal issue with US energy policy. I don’t see it changing without a whole lot of misery and pain, because we are too fucking stupid to manage it preemptively. We wait until it becomes a crisis.

Anyway…SMUD will likely need a double-digit rate increase before 2010...and so will most California utilities. There are many factors at play. The biggest is natural gas, but I already blogged about that. There aren’t too many rosy forecasts about the price these days, and most expect natural gas to stay at or rise above current levels.

Secondly, we’ve had two bad consecutive water years. In the absence of good hydrology we have to purchase more market energy…which is always more expensive than our native hydro generation. Hydro is, far and away, the cheapest electricity you will ever get. Fuel costs are zero and the plants/dams/generators’ capital costs were paid off a long time ago. But consider this -- we, today, average about 10% less water than we got 60 to 90 years ago, even before we used it to generate. Historical Sierra Nevada records show an inexorable decline in water as each decade marches on…supposedly due to climate change. So while the EPA insists that California doesn’t have ‘compelling and extraordinary circumstances’ to warrant our own automotive fuel efficiency standards to combat global warming, the watershed for 2/3rds of the state is in slow decline and all signs point to future declines in quantity.

Thirdly, renewable resources are more expensive. We recently completed stage II of a 100 MW wind farm in Solano County for just over $120 million. Estimates for stage III, another 100MW, are now over $200 million. This is because demand for wind turbines is acute. Vestas wind turbines are in such demand these days they command top dollar, and demand is driving up renewable cost. Demand -- the same reason my solar panels today are almost 9% more expensive than when I bought them last year.

Fourthly, ageing infrastructure. SMUD sees huge capital investments necessary in the next few decades, and future spending will be geometric. Indeed, I worked all of Memorial Day weekend to support transmission line relay upgrades, relays that had been in service since 1968. The average age of our bulk transformers is 34 years. That’s the average; we have a lot of equipment still in service since the mid-fifties. And this is bulk power equipment, mind you, so when they fail, they fail hard. Hard to replace, hard to recover from, etc.

Added together, the situation looks bleak. It's a formula flame feast. Actually, from my chair here, it looks fetching; I’ll have guaranteed work for the next 25 years. But you the ratepayer -- prepare for higher electricity costs. Prepare. While I might be completely wrong, I don’t see a working cold fusion reactor or 2 penny nuclear coming back anytime soon.