POWER June 2016 - 57

ELECTRIC POWER
not necessarily for Talen. " I think that to get
that on the big scale, to do it economically, to
do that competitively, we're still many years
down the road, " he said.
Fuel Diversity Is Not So Easy
Considering that their companies serve distinct
markets in regions with varying energy
needs and fuel resources, it was no surprise
that the panelists were divided over whether
fuel diversity should be prioritized over capitalizing
on currently cheap natural gas.
Co. for leading on building nuclear plants .
. . but from an Entergy perspective, we just
can't go for it with a nuclear plant with where
gas prices are right now, " May said, noting
that Entergy had started down the path to new
nuclear, but as gas prices fell, the company
decided to push forward with new CCGTs
instead.
" The costs of building a new CCGT, not
only are they low, but they are quite sure, so
the risk of building a plant-you have to get
this through a regulatory process-it is just
Pricing is a big hurdle to achieving true fuel
diversity.
Hopf accepted that a dependence on gas
means " setting ourselves up as an industry "
for disaster during events like the 2014 polar
vortex. But the options are distorted, he
said. " In the merchant competitive markets,
you will see coal fleets and nuclear plants
challenged-there's just no way around it,
unless someone can see in the foreseeable future
[that] gas is going to make a significant
upward trend. "
During the 2014 polar vortex incident,
fuel diversity was indispensable, Trawick
countered, revealing that Southern Co. saved
customers more than $100 million that January
by switching from gas back to coal when
gas prices surged. Yet he cautioned that
maintaining fuel diversity in current circumstances
isn't as easy as it sounds. " The world
we're entering into is very different, and to
maintain that diversity, we're going to ask
the plants to do things differently than they
may have done years ago, " he said. " We have
to have a coal fleet that's going to be more
responsive than it was built to be, " even if
" they weren't built for all this cycling wear
and tear. "
Entergy is a vertically integrated utility
that operates in both organized markets and
merchant markets, and May agreed that fuel
diversity is important. But pricing is a big
hurdle to achieving true fuel diversity, he said,
because organized markets aren't adequately
paying plants for being emissions-free or for
their flexibility. " I know that in MISO, we're
looking at new pricing initiatives, including
looking multiple days out, so you can gain
some of that ability for less-flexible plants,
and you can get past that startup cost. "
The Case for Gas
Markets are also determining what kind of
plants are being built. " I applaud Southern
June 2016 | POWER
well-defined. Generally, when we are building
a CCGT, we're setting out how long it
will take and how much it will cost, and
generally we're building it in a shorter timeframe
and under budget. "
To offset price volatility, like several other
U.S. utilities (Trawick noted that Southern is
in the process of merging with AGL Resources),
Entergy is looking at acquiring " gas in the
ground, " and Louisiana regulators have opened
a docket to investigate that, May revealed. He
joked: " I've heard it said, and I believe it, that
the world is round because it's full of gas. "
Hedging to Ease Price Surprises
To guard against unexpected natural gas
price spikes, many utilities also do some
sort of hedging of fuel as a means of price
protection to essentially " lock in " a price
for natural gas (or coal) using a financial
instrument-typically with a commodity
futures contract, noted McMahon, whose
organization represents the bulk of the nation's
investor-owned utilities. Regulators
are taking an increasingly serious look at
hedging in the face of a series of severe
natural gas spikes.
Asked where their companies foresee regulation
going with respect to hedging, May
predicted that unless interference causes markets
to morph, gas prices would remain low.
He also explained that Entergy Louisiana is
limited to short-term hedging-suggesting
long-term contracts aren't as reliable-but
that has proved cumbersome because the
company is a large buyer of natural gas.
" Again, that's why we think gas in the ground
is a real opportunity. "
Trawick observed that, despite current low
gas prices, he has heard " more talk of getting
out of fuel hedging versus getting into
fuel hedging-which is completely upside
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down. " He suggested that could be because
of the way it is accounted for: When gas
prices fall, they show up as financial losses.
" And when those financial losses show up
from a hedging standpoint, it's very easy to
react and say, 'That was a bad decision,' " he
noted. The utility business is moving toward
acquiring gas assets, which have myriad benefits,
among them that it firms up supply for
customers, he said.
In the Shadow of the Clean Power
Plan
A deeper shade of uncertainty is being projected
on the industry by the Environmental
Protection Agency's Clean Power Plan,
which has been stayed by the Supreme Court,
panelists all suggested. During a discussion
of how the companies are making long-term
capital decisions in the face of the rule, most
panelists agreed that even if the rule doesn't
pass legal muster, future carbon constraints
are almost certain.
" Obviously, we'd prefer to see something
that is more in the posture of a national energy
policy of sorts, " Trawick said. That way
everything is accounted for, " not just what's
clean, but also what's affordable and reliable
for customers. " One glaring issue for Southern,
which operates in several states, is that
" it creates challenges for us in wholesale
markets, " he said. " How do you implement
this sort of program when states can go different
routes for compliance, and how will that
impact the wholesale market? " he asked.
From the perspective of a company
operating in an organized competitive
market, Hopf decried state interference
with markets, warning that when " carbon
comes into play, " it is unknown whether
states may or may not consider deals with
power companies to bolster nuclear plants.
He pointed to FirstEnergy and American
Electric Power's eight-year contracts with
the state of Ohio that subsidize power
plant operation even though, " economically,
they can't survive. " (Since this roundtable
discussion, on April 27, the Federal
Energy Regulatory Commission blocked
those subsidy agreements.)
Entergy Louisiana's total carbon emission
output technically already complies with
the rule, May said. But even that is uncertain
because the state has yet to draw up its
compliance plan. Depending on the price of
carbon, banking on natural gas may still be
the company's best bet, he said. " The issue
that needs to be worked out is from a regional
basis-how do we collaborate on a regional
basis so that all the compliance costs can be
in the middle? " he asked. ■
-Sonal Patel is a POWER associate
editor
55
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POWER June 2016

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