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Power Gridlock

Progress Snapshot
Release 3.1 January 2007

by Raymond Gifford and Adam Peters*

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Techno-pundit George Gilder toured an Ask.com server farm not long ago and described his experience in an article written for Wired.

Ask.com is the fastest-growing search engine on the Web. But the Ask.com server farm, which is currently housed on the East Coast, probably won't be located there much longer.

There isn't enough available electricity to power the servers, hard drives and air-conditioning equipment that is needed to meet Ask.com's burgeoning business needs, so the company is scoping out property in the Columbia River Valley of the Pacific Northwest, following competitors like Google, Microsoft and Yahoo! in a quest for affordable and reliable sources of energy.

Electricity is increasingly the fuel of choice for the nation's economy in general and is the main driver of the information technology sector in particular. It has been estimated that electric-powered information technology accounts for 60 percent of new capital spending.

Standing alone, the five leading Internet search engines will consume 5 gigawatts of electricity in 2006. That equates to the amount of electricity needed to run the city of Las Vegas.

Meeting the insatiable energy needs of technology firms and creating adequate power supplies for the new economy is, therefore, an issue of national and state import - both for international competitiveness and Colorado's comparative advantage in the national economy. Put simply, proximity to reliable, cheap power and adequate transmission is a critical factor driving companies' decisions on where to locate and grow.

Colorado faces severe challenges on both the supply and transmission fronts if it wants to keep apace with the new economy.

"Reliable" power means that there must be sufficient generating capacity to meet the needs of these firms on a going-forward basis. In a recently published report, the Colorado Energy Forum projected that Colorado will require from 2,000 to 7,000 megawatts of new generation capacity over the next 20 years. This analysis already takes into account capacity that is planned or under construction, such as Xcel Energy's Comanche Unit 3 in Pueblo.

Creating additional capacity toward the upper boundary of this projection may be necessary in order for Colorado to retain its reputation as a leader in the tech economy. This would be no small feat, considering that the new Comanche plant will generate 750 megawatts of power at a cost of $1.3 billion. Imagine having to build nine more such plants.

Reliable energy also must be affordable. According to the CEF, the cost of generating electricity in Colorado has risen consistently in the past three years. While costs for the coal and natural gas used to fire most of the power plants in the state have contributed to this increase, Colorado electricity prices have grown faster than the national average.

Statistics from the Energy Information Association illustrate that the average retail price of electricity for industrial consumers in Colorado was roughly 1 1/2 times the cost of electricity for industrial customers in Washington, with its cheap (and subsidized) hydroelectric power. Colorado's average industrial rates also exceed those of neighboring states such as Utah, Wyoming, New Mexico, Nebraska, Oklahoma and Kansas.

To make matters worse, Colorado's high-voltage transmission lines that move electricity over long distances to population centers are being fully utilized and are also in need of significant investment. According to the CEF, commissioning new transmission facilities takes an average of five to seven years, and Colorado will need to invest about $250 million to construct the transmission lines that will be required to meet the state's projected needs.

Given the significant lag time between planning and operation, there is a pressing need for policymakers to tackle this issue. Local opposition to transmission projects can delay necessary upgrades for years.

Renewable energy, while a laudable long-term goal and one that brings a degree of self-satisfaction, is not a viable answer for the state's voracious electricity needs. A renewable energy mandate passed by voters has made Xcel Energy the largest purchaser of wind power in the nation. Because of the mandate, Xcel also is contracting for some very expensive solar-generated electricity.

But neither wind nor solar power can be used to meet surging energy demands. And, while wind may be a low-cost resource when it is blowing, no renewable resources will provide for the large "base load" resources that Colorado needs the most.

That leaves coal, natural gas and nuclear as the three major resource possibilities for large-scale power generation. Natural gas plants have been the rage in recent years, but price spikes for fuel and concerns about supply may temper the viability of future plants.

Coal plants have lower marginal operating costs relative to natural gas and are cheaper to build, but climate change concerns may lead to increased restrictions on carbon dioxide emissions in the not-too-distant future, raising the cost of production.

Nuclear, with no greenhouse gas emissions, is very clean energy indeed. Yet nuclear engenders much opposition and requires enormous amounts of capital that would require specialized regulatory treatment. There are no easy answers here. Nuclear or coal, take your pick.

Part of the solution may come from the very technology that uses so much power in the first place. "Smart grids," which use two-way data streams to communicate price, demand and grid integrity, can promote conservation, energy efficiency and reliability.

Indeed, smart enough grids tied with smart consumers who react to price changes should eliminate the need to build some new resources altogether. So, computing not only uses energy, it also makes possible its more efficient use and conservation. More than renewable resources, smarter electric grids will allow conservation and lower prices.

Electricity and transmission supply really are the products of government policy. The legislature, governor and, principally, the Public Utilities Commission will determine Colorado's status as a low-cost energy leader into the future. The focus must be on supplying both enough generation and transmission to meet our needs and keep our costs low, and encouraging a smarter grid to encourage conservation and efficiency.

* Raymond Gifford is senior adjunct fellow for The Progress & Freedom Foundation, partner at Kamlet Shepherd Reichert LLP and past chairman of the Colorado Public Utilities Commission. Adam Peters is an associate at Kamlet Shepherd Reichert LLP and former research fellow and regulatory counsel at The Progress & Freedom Foundation. The views expressed here are their own, and are not necessarily the views of the PFF board, fellows or staff. This paper first ran as an opinion piece in the Rocky Mountain News on December 30, 2006 and can be found at:
http://www.rockymountainnews.com/drmn/opinion/article/ 0,1299,DRMN_38_5245730,00.html.



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