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California faces summer blackouts

By Alistair Osborne, City Correspondent

CALIFORNIA, home to some of the richest people in America, could be plunged into 1,100 hours of blackouts this summer, according to McKinsey, the management consultants.

In recent presentations to companies on the power crisis in the state, McKinsey has warned that the situation is likely to get worse. Last week, California's biggest electricity group, Pacific Gas & Electric, filed for bankruptcy under Chapter 11.

"Under a downside scenario, California could have up to a 13 gigawatt (13,000 megawatts) supply shortage during the summer peak period," the consultants said. To make up such a huge shortfall, California would need 13 large 1,000 Mw power stations. The usual yardstick is that one such station can power a million homes.

The situation could lead to a boom in demand for the type of temporary power equipment supplied by companies like GE Power and Caterpillar of America and United Kingdom-listed Aggreko. California is already in the throes of a serious energy crisis, which began when regulators prevented the state's electricity distributors from raising their prices to customers.

When wholesale power prices soared, the utilities racked up huge debts. The situation has been exacerbated by California's failure to build enough power stations because of strict environmental constraints. California's crisis has contributed to President Bush's decision to opt out of the Kyoto agreement on environmental pollution and instigate a major review of US energy policy.

Earlier this week, Southern California Edison, the state's other big utility, only averted a similar fate to PG&E by selling its transmission assets to the state for $2.76 billion, providing a much-needed cash-infusion.

McKinsey has warned that California could be heading for a massive imbalance between supply and demand in the summer when power needs soar. This is due to air-conditioning, not least to cool the vast computer systems of Silicon Valley. Warm weather could add 2,700 Mw to demand, McKinsey calculates, which is forecast to grow by 1,000 Mw anyway due to economic growth.

Including 4,800 Mw of imports into California, the state can currently supply 48,900 Mw of power against an estimated demand for 45,500 Mw. However, under a worst case scenario, McKinsey calculates that an expected 3,000 Mw of hydroelectric power, destined for California, may be lost because of low rain and snow falls.

The state could also lose 4,800 Mw of imports because wholesalers will not sell to its troubled power distributors. In addition, the consultants believe that due to the increasing age of the state's power plant, as much as 4,000 Mw may have to be taken out of service over the summer for repairs.

A further 1,900 Mw could be lost to tighter environmental regulations. Added together these factors could lead to a 13,100 Mw shortfall. To meet this, analysts are forecasting strong demand for temporary power equipment. Caterpillar is increasing its production of power generation plant by about a third this year.

Aggreko is also understood to have seen a significant rise in inquiries for its containerised temporary power plant, leading to a number of new contracts. As few large companies can risk seeing their computer systems crash due to power cuts, some are installing Aggreko's equipment as back-up in case of a blackout.

More than half of Aggreko's business is in the US, but the power crisis is believed to have more than compensated for the effects of an economic slowdown there.

-- Anonymous, April 13, 2001