Research

Study recommends a 'balanced portfolio' of power sources for fast-growing Arizona

Arizona's policymakers face crucial decisions about how to ensure that future power needs are met for the nation's second-fastest growing state. The best way to assure adequate power at reasonable rates is "a balanced portfolio" of power generation using coal, natural gas, nuclear and alternative energy sources, according to Timothy Considine, a professor of natural resources economics at Pennsylvania State University. Considine was speaking at the "Powering Arizona: Planning for the Future" forum, presented by The Communications Institute with sponsorship from Arizona State University, the W. P. Carey School of Business and the Thomas R. Brown Foundation.

2008-06-18

Between 2000 and 2007, Arizona's consumption of electrical power grew at about three times the rate of the United States as a whole. Arizona's policymakers face crucial decisions about how to ensure that future power needs are met for the nation's second-fastest growing state. There are technical and economic realities to consider as well as the desire to preserve the environment.

The best way to assure adequate power at reasonable rates is "a balanced portfolio" of power generation using coal, natural gas, nuclear and alternative energy sources, said Timothy Considine, a professor of natural resources economics at Pennsylvania State University.

"The whole idea is you manage your electric grid like your private pension fund," he said. "You have a diverse array of assets. That way, some investments are not going to turn out as you expected — their rate of return is lower than you expected — and others exceed your expectations. But if you put all your eggs in one basket, you put yourself at higher risk for a bad outcome."

In the case of electrical power, bad outcomes would be higher electrical rates and higher carbon emissions, he said. Considine was speaking at the "Powering Arizona: Planning for the Future" forum, presented by The Communications Institute with sponsorship from Arizona State University, the W. P. Carey School of Business and the Thomas R. Brown Foundation.

The forum provided an opportunity for government and business leaders to hear expert presentations, then discuss the issues. "Powering Arizona," commissioned by TCI for this event, was coauthored by Considine and Dawn McLaren, a research economist for the JPMorgan Chase Economic Outlook Center at the W. P. Carey School of Business.

Generation mix

Arizona's electrical power comes from four main sources: coal-fired plants, nuclear, natural gas and hydroelectric. These generate more than 100 million megawatt hours (Mwh) — about 25 million Mwh's more than the state uses — according to the study. Arizona is currently an exporter of power and will continue to be one under long-term contracts. Coal is the leading fuel for the generation of electricity.

Arizona has the largest nuclear power plant in the United States — the Palo Verde Nuclear Generating Station about 55 miles west of Phoenix. Until the late 1990s, nuclear was the second-leading generating source for electricity in the state, but its share has declined — largely because maintenance issues have often taken one or more of its three reactors off line.

Over the past decade most of the increase in generating capacity has come through natural gas, Considine said. Natural gas was seen as a cheap, clean way to generate electricity, but it has increased dramatically in price and is likely to continue on that path, he said. The price of natural gas is tied to oil, which has reached record highs in real dollar terms.

Arizona has another abundant energy source — the sun. "Arizona has the most solar potential in the United States," Considine said. Arizona Public Service (APS), the state's largest investor-owned utility, has several solar generating stations with a total capacity of 5 megawatts. State-regulated utilities in Arizona have a mandate to generate 15 percent of their electricity from renewable resources by 2025.

Consumption

Population increase has been the main driver behind the growth rate in electrical use in Arizona. In 1970 the three categories of consumption — residential, commercial and industrial — were almost equal in Arizona, with residential being the smallest. In 2006, however, residential use of electrical power in the state was almost three times as much as industrial use, the study shows.

Part of the reason for the shift in proportion of use is that manufacturers have become more efficient. Another is the increase in the number of households. And, use per household is up about 20 percent over the past decade, according to William Post, CEO of Pinnacle West Capital Corporation (parent of Arizona Public Service).

Households are more efficient, but homes are larger and have more electronic gadgets. Jeff Schegel, Arizona representative to the Southwest Energy Efficiency Project, said that consumers should use less electricity and that conservation needs to be part of any state energy plan.

"If you are interested in affordability, the cheapest way to address your kilowatt hours and reduce your total bill is by using less of by using what you have more efficiently," he said. McLaren countered that past consumer behavior shows the residents are resistant to that concept. "It's all well and good to give the consumer an incentive other than price to conserve," she said.

"But it seems people have in mind a particular electrical bill they are willing to pay. So when they conserve on one thing, they will see they saved on their bill and then they'll start doing other things. Maybe they turn the thermostat down because they'd like to be a little cooler. They conserve on one hand and they change their behavior to consume more electricity on the other — unless they are getting that price cue," she said.

The price cue

Conservationists take heart — residential customers are likely to get many price cues in the coming years. In their study, Considine and McLaren assumed natural gas prices would continue to increase, adjusting for inflation, at about 3 percent a year. Since most of the new generating capacity has come from natural capacity in recent years, the economists assumed that trend would hold.

"The key primary fuel price in all of the analysis is natural gas prices for electricity," Considine said. It's not a pretty picture. Generation costs per Mwh are forecast to double from $50 in 2008 to $100 in 2030 in constant dollars. In terms of household bills, the average residential customer bill would rise from about $300 per month to $450 by 2030, in today's dollars.

"I live in a small house in central Pennsylvania — that's my mortgage payment," he said. Many factors could affect the actual prices of power, he said. With the price of gasoline going up, hybrid cars that are charged at least in part by plugging into the power gird are expected to become more popular. These vehicles would essentially replace gas with electricity.

Arizona is seeking to reduce carbon emissions to 15 percent below 2005 levels. Accomplishing this will probably require a different mix of fuels, including scrubbed coal, and solar, which is — at least initially — more expensive. Taking any existing generating facilities off line would add to expenses, Considine said.

Leaders react

Post said Arizona must make decisions now to ensure that its future is not decided by other states. "I can speak for the electrical side for a moment," he said. "You have a grid here that goes way beyond the borders of Arizona. You have to think from an electrical standpoint — not just what the demand is going to be in Arizona, but what's it going to be in California, what's it going to be in Nevada, what's it going to be in the Northwest. And how do we find ourselves in a situation to be able to protect the residents of Arizona from issues and problems that occur on that entire grid?"

The companies that provide the power should be making the decisions on how to do that most effectively, said John Kavanagh, a Republican state representative from Fountain Hills. While government can set standards, it should abstain from micromanaging the industry, he said.

"I've spent two years in the House so far and very few legislators have degrees in engineering or the hard sciences," he said. "We are not well qualified to judge the highly technical issues that are involved in this highly complicated field." Meg Burton-Cahill, a Democratic state senator from Tempe, disagreed.

"I don't have expertise in energy policy, but I do have a master's in public policy, in public administration," she said. "I believe we need to have more dialogue like this." She said many energy-related proposals are tabled in the legislature without getting a hearing. "We need to have open discussions down at the capitol, we need to have better debate and we need leadership," she said.

Bottom Line:

• Arizona is a fast-growing state that needs to find more capacity to generate electricity.
• Currently, Arizona gets most of its electric power from coal, natural gas, nuclear and hydroelectric. The state generates more than it uses and exports 25 percent of its power under long-standing agreements.
• Most of the capacity Arizona has added in recent years is generated from natural gas.
• Because of the state's dependence on natural gas to add generating capacity and a desire to reduce emissions, Arizona residents can expect to see substantial rate increases — in real terms — in the next two decades.

Economics Faculty