TXU's Vanishing Plants
Brian Wingfield, 02.28.07, 6:00 AM ET
Last April, TXU announced its intention to build 11 new coal-fired power plants in Texas to help offset the state’s soaring demand for electricity, which the company said would fall below reliability levels by 2010 if steps were not taken to meet rising energy needs.
But following the news last week that two private equity groups and Goldman Sachs intend to buy the Dallas-based company for $45 billion, TXU yielded to environmentalists' demands and reduced the number of new plants to just three.
The leveraged buyout announcement, which TXU formally announced Monday, leaves several questions unanswered: Why are 11 plants no longer needed to meet the state's future energy needs? How will the new company meet the increased demand for power? Will new generating capacity be added to Texas' electricity grid? And, really, just how important were the eight canceled plants if they were so easily scrapped?
"Even though TXU's business strategy has changed, the need for power still remains," says Kim Morgan, a TXU spokeswoman. The company still intends to build three of its previously announced coal-fired plants, adding 2,200 megawatts of generation to the grid. This is roughly 25% of the entire capacity that the 11 plants would have added.
TXU also plans to invest $400 million during the next five years in "demand side" management--essentially giving customers the option to cut back on their energy consumption when electricity demand is highest, such as the hottest of summer days. This is usually achieved through the installation in homes of advanced energy meters that can show customers when power rates are highest.
According to Morgan, the three plants that will still be built will help resolve Texas' energy needs for 2010. To ensure the reliability of the electric grid after that date, TXU is planning on building 1500 megawatts of wind generation and is considering building multiple nuclear facilities, though these would not come on line by 2015 at the earliest--too late to resolve the looming power shortage.
In addition, TXU said it could bring back into service several natural gas-fired power plants that are now offline. However, doing so could expose consumers to volatile natural gas prices. The company is already 70% reliant on natural gas. Moreover, its chief executive, John Wilder, said in November that the company probably invested too much in natural gas in the past.
According to Public Utility Commission of Texas spokesman Terry Hadley, "Clearly there’s a need for new generation" in the Texas electricity market, but he adds: "TXU wasn't the only player in terms of adding new generation." Further, Hadley says, there was doubt that 11 plants would even be built due to concerns about the company's potential monopoly power.
In fact, according to the Electric Reliability Council of Texas (ERCOT), the state's grid operator, more than 150 new generation facilities are in the development stage. But ERCOT cannot count on those facilities being built because they do not yet have regulatory permits or agreements to interconnect with other parts of the electric grid. In a preview earlier this month of its future energy needs, ERCOT predicted that it would not meet its reliability standards by 2009. Now that the eight scrapped plants will not be built, this picture becomes even more stark.
So where does this leave TXU? The company's individual business units--which were separated into generation, distribution and retail companies under Texas' deregulation law--will now become even more distinct, with separate boards of directors. The company’s generation business will be known as Luminant Energy, its electric delivery business as Oncor Electric Delivery. Its retail unit will remain TXU Energy.
And returning to the initial questions: Why are eight of 11 plants no longer needed to meet the state's future energy needs, and how will the company meet its increased demand for power? More generation in fact is still needed, but TXU says its diversified power facilities will help offset this demand in a much greener way.
Will new generation be added to Texas’ electricity grid? Certainly, even without TXU's three new plants and burgeoning wind industry. And how important were those eight plants, which have now been scrapped? This is the question that remains to be answered. Certainly consumers are better off environmentally without them. But during the next decade, an estimated six million people are expected to move to Texas. If TXU has to call into service its "mothballed" natural gas plants, or if new generating capacity in the state isn't enough to meet demand--causing prices to skyrocket--those additional facilities would have mattered quite a bit
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