In This Issue
Our Energy Future
June 1, 2002 Volume 32 Issue 2

The Future of the U.S. Energy Industry

Saturday, June 1, 2002

Author: E. Linn Draper, Jr.

A sound energy future will require restructuring of the industry, new technologies, environmental stewardship, and fuel diversity.

This article about the future of the U.S. electric power system is based on my experience as CEO of American Electric Power (AEP), an investor-owned, multinational energy company with 4.9 million American customers. Most of us know the expression that nothing happens until somebody sells something. For electricity, the parallel truism is that nothing happens until somebody engineers something. A century or so ago, Edison, Tesla, Steinmetz, and others engineered practical advancements of an idea and got U.S. commercial electrification rolling. As they say, the rest is history. Electrification now heads the NAE’s list of top 20 engineering achievements of the twentieth century. Not one other item on that list--from radio and TV to air conditioning, refrigeration, laser and fiber optics, and nuclear technologies--would exist as it does today, in most cases could not exist at all, without electrification.

In 1950, according to the U.S. Energy Information Administration (EIA), electricity accounted for 13.8 percent of the country’s energy consumption. Fifty years later in 2000, it accounted for 41 percent of total energy usage. The EIA recently reviewed its estimates of growth in electricity demand between now and 2020 and revised its figures upward from 1.3 percent a year to 1.8 percent. The increase is based partly on the wider use of electricity-consuming hardware, including power electronics, AC-DC converters, and electrical storage devices.

In little more than a century, electricity has become an essential prime mover of our society and our economy. In the second electric century, the value of its capabilities will grow at a pace that would have boggled the minds of Edison, Tesla, and Steinmetz.

Intensified Security Attention
We have a tendency now to gauge events in our lives as before or after September 11. The attacks on that day presented no threat or general harm to the U.S. energy infrastructure, but they caused huge damage to the electric system of Consolidated Edison in lower Manhattan. The amazing speed with which Con Ed restored temporary service is a great credit to its emergency preparedness. George Friedman of STRATFOR, a global strategic forecasting firm, has suggested that the attacks were more than terrorist strikes. They were special operations planned to cause major disruptions to vital systems, in this case including the financial markets and air transport. As we move forward, protecting the electric and overall energy infrastructure--in its physical and cyber dimensions--must have a higher priority than ever before, in both the private and public sectors. At the same time, we must anticipate disruptions from a variety of causes and be prepared to respond appropriately. In this respect, we might look back at the Y2K "crisis" of a few years ago. No one knew at the time that the billions of dollars spent by energy companies on Y2K preparations would have a second payoff less than two years later. Those preparations, which were intended to prevent computer or terrorist disruptions in the transition to 2000, have given companies a significant leg up on the additional security that must now be considered.

Whither Restructuring?
On the political and policy fronts, before September 11, the state-by-state restructuring of the U.S. electric power industry that had been ongoing for a while had come down with a bad case of "Caliphobia." The California malady had substantially infected restructuring activities that were in various stages of progress in numerous other states and essentially immobilized those activities in a number of them. Is this a permanent immobilization? Even with the new uncertainties, my answer is no.

The lesson from California and other states is that you can restructure. California just got it wrong. I continue to believe that state-by-state restructuring of the electricity industry will ultimately be resurrected and will proceed. I say that because wholesale competition continues to grow, and many customers continue to want retail choices of their electricity suppliers. As Pat Wood, the new chairman of the Federal Energy Regulatory Commission (FERC), put it, "Power generation, power sales are not monopolies. Power delivery is."

Prior to September 11, there were any number of energy and environmental policy debates in the Congress and federal regulatory agencies that are largely or completely off the agenda for now. Some of the debates that have continued have been redirected to focus on energy security, U.S. energy independence, the reliability of infrastructure, energy delivery interconnectedness, redundancy, backup, and so forth. Other debates will undoubtedly resume.

The bottom line is that the policy and politics of energy, which were complex and complicated before September 11, are even more so now. Sorting out the policy implications of September 11 is going to be a long and difficult process.

Addressing Uncertainties with Technology
In a time of many uncertainties, however, the focus, if anything, is sharper on engineering, scientific, and technological responses. Many aspects of engineering the future of the electric power system have not been changed. Other aspects will be accelerated by the new realities. We know, for example, that restructuring of the electricity industry is changing the way decisions about technology choices are made. Industry restructuring is reorganizing the energy value chain, from the vertical integration of traditional electric utilities to the unbundling of the power generation, transmission, and distribution components. Companies are reinventing themselves to prepare for the future and the increasingly competitive marketplace.

In the past, the rate-making process allowed companies greater flexibility in making technology choices to meet society’s needs. The economic models used in a regulated environment tended to favor capital-intensive investments that would result in lower power-generation costs, which, over a period of decades, often led to lower costs to society. Investment choices included coal-fired along with hydroelectric and nuclear power plants.

In the highly competitive, restructured environment, the investor’s time horizon is much shorter, and the least technical solutions are not always chosen. In this environment, technologies must be chosen to provide acceptable returns on investment without risking large amounts of capital for long periods of time. The economics of the deregulated environment place significantly more weight on lower capital costs than on lower fuel costs. The new model has favored investing in combustion turbines and combined-cycle power plants. In the past several years, gas turbines have captured more than 90 percent of the market for new power generation. In a competitive market that opens the transmission system to all participants, investments in technology benefit not only the owner but also competitors. Competitively oriented power plants dispatch electricity based on selling and contract requirements rather than on what might be optimal for the entire power grid or economical to consumers.

Issues related to power transmission, reliability, and adequacy, which were important before September 11, loom even larger in the face of heightened concerns about terrorism. These issues include: transmission congestion; the vulnerability of electric transmission lines and natural gas pipelines; and the security of key facilities, such as substations and control centers. The need for redundancy in the electricity delivery infrastructure and for stability-enhancing technologies is greater than ever. These technologies include: flexible AC transmission systems (FACTS); prompt spinning reserve; single-phase protection; faster relaying; automatic and remote-controlled load shedding; and real-time security analysis. FERC acknowledged these needs when it recently assured companies that they will be allowed to recover "prudently incurred" costs related to safeguards and new procedures.

Past underinvestment in transmission facilities has resulted in constraints at critical interfaces, created problems between regional grid systems, and is leading us toward large, independently operated regional transmission organizations (RTOs). Heightened concerns about reliability and security are further incentives for the formation of large regional transmission organizations with seamless interconnections between them.

The security of RTOs naturally will extend beyond their physical infrastructures to information technology and centralized transmission control. AEP supports the formation of for-profit independent transmission companies and has entered into a memorandum of understanding with PJM Interconnection, LLC, to become a member of the PJM RTO in the next year. In my judgment, large RTOs can effectively build in the reliability and security measures that will be imperative as we move forward.

Technology in the New Marketplace
Now I want to revisit the adage that nothing happens until somebody sells something. That could be the motto of the AEP (or any other) wholesale energy organization. In our strategies for the future, we have determined that selling is the principal growth engine of the company. The winning combination for success is an excellent trading and marketing team combined with an outstanding operations and technical group. An important given on the technical side is that the central electricity generation assets be efficient, optimized, and low cost. In other words, a successful energy company is a "big, efficient utility."

The companion piece to that traditional engineering is information technology that provides power plant operators with detailed information from the trading and marketing group about the expected prices for energy. The operators use that information to manage their generation assets effectively. Information and telecommunications technologies are coming together in support of both energy trading and asset management. The trading structure is constantly improving the availability of market information, trading details, and risk management. The key is to combine the effective application and advancement of traditional engineering concepts and modern information technology with a commercial mind set.

Sustaining Environmental Progress
Notwithstanding the present, crisis-related suspension of debates, more stringent multipollutant emissions constraints will be a reality for electricity-generating facilities within a decade. Coal-fired power plants will be hit first and hit hardest by the new regulations. This means that continuing innovations in cleaner, coal-burning power generation and the use of coal as a feedstock for other forms of energy, such as gases and liquids, will be critical.

Like many other companies, most (65 percent) of AEP’s electricity-generating capacity is coal-based. "Keeping coal in the money" is, therefore, a given for us. The critical challenge facing us will be to retain the value of AEP’s core capabilities and assets and, at the same time, improve environmental performance. And the key to effective environmental solutions is new technology. Last year, we created a special unit to support and invest in technologies that reduce emissions. We are moving forward with the installation of selective catalytic reduction technology in several of our plants to control nitrogen oxide emissions.

The current crisis may have temporarily sidetracked policy and regulatory debates about emissions control standards, but the industry is moving ahead with what needs to be done and will continue to do so. Smart companies will continue to shape their business strategies around environmental sustainability because it is the right thing to do and because it is good business.

Fuel Diversity
For strategic reasons, the U.S. government will continue to mount a strong push for energy independence. Therefore, a strategy for fuel diversity will be important to greater energy security in the power sector. An effective strategy will have to include a portfolio of generating fuels that maximizes the use of our most secure, indigenous resources. Of these, the supply of U.S. coal is the least vulnerable to disruption. The known recoverable supply of coal is estimated at 250 years’ worth. Unlike natural gas and oil, coal can be transported by rail, water, truck, or pipeline. Even before September 11, we knew that coal would play a critical role in meeting future U.S. energy needs; that reality has been reinforced.

Nuclear power was being reevaluated before September 11, especially safety and waste disposal concerns. Now the security of nuclear plants has become a matter of equal, if not greater concern. I believe that nuclear plants have been made safer every year and that waste can be safely stored. New reactor designs, such as the pebble-bed modular reactor, may well have a place in our future generation mix, along with new light-water reactors of designs similar to today’s 100-plus operating units.

I suggest that it is more important than ever for the U.S. Department of Energy to share in the cost and risk of new nuclear plants, as well as the cost and risk of bringing coal-based technologies, such as integrated gasification combined cycle plants, to commercial and competitive levels with currently available technologies. Coal gasification will reduce emissions and could produce two usable products, electricity, of course, and hydrogen, a clean fuel for fuel-cell generation. The hurdles are commercial, rather than technological. In addition, renewable energy technologies will be a small, but important, part of the overall generation mix and will continue to be advanced.

Distributed generation will play an important supplementary role, as a complement to the central generating station and to grid stabilization. Undoubtedly, the technologies and business models for distributed generation--including microturbines, innovative engines, fuel cells, and storage devices--will be commercialized in the next 10 years. A case in point is AEP Gas Power Systems, a joint venture company formed by AEP and G.A.S. Capital, Inc. This company will manufacture and market 1.2 megawatt gas turbine generators for use at remote sites, in cogeneration, in supplemental generation, and for backup applications.

The changing nature of the energy business will increasingly require new, more flexible sources of power generation to give industrial and especially commercial electricity customers a wider range of options. A diversified fuel mix will be important, and we will have to tap every available resource to meet the energy demands of the twenty-first century, while continuing to improve the efficiency of energy use. And there is no getting around the critical role of coal or the technical innovations that using it will require to protect the environment.

The history of the electricity industry has been a proud chronicle of technological discoveries and innovations. Everything that has happened in this industry happened because somebody engineered something. To meet the challenges in this new century with its new electricity industry and new uncertainties and perils, engineers must become more involved in the policy making and political processes and remain aware of the social context of the engineering disciplines. Engineers and engineering will certainly make a huge contribution to a safer, more secure, and more prosperous nation and world.

About the Author:E. Linn Draper, Jr., is a member of the NAE and CEO of American Electric Power. This article is based on a presentation given at the Technical Session of the NAE Annual Meeting in October 2001.