Westar Energy plans for uncertain future

Westar Energy’s stock hit an all-time high last week as energy stocks rallied with news of a rise in oil prices. But despite that good news for investors, some experts are convinced Westar and other utility companies face an uncertain future.

Energy expert Karl Rabago, executive director of New York’s Pace Energy & Climate Center, points to the significant number of factors out of control of those in the utility industry — the commodity price of fuel, consumer behavior and the weather, primarily.

“Ninety-eight percent, probably, of the profitability of the old utility model is driven by factors beyond their control,” Rabago said. “This actually worked as a system for a hundred years. Customers always used more, there were always more customers getting added to the grid. And you really had huge local control over things like the state of the economy and how much customers wanted to consume.”

But today, Rabago and others see the need for the utility industry to redefine itself. There are as many options for doing so as there are utility companies nationwide. Rabago even questions the efficacy of the monopoly model that utility companies operate under, in which he said the regulators are supposed to act like competition would.

“Realistically, and this is a little bit of where you stand is where you sit — I’m a lawyer who believes in regulation and I believe there’s a deal on the table. You get to be a monopoly as long as you don’t act like one, as long as you perform the way competition would make you perform,” he said. “Since they don’t, regulators are supposed to be constantly measuring them and pushing them.”

Utility industry leaders are starting to take a look at potential changes in the way they do business, but Rabago said that may be guided by outside factors.

“The only question that’s on the table is whether economics, the market and the climate will allow them to take an incremental approach, or whether they’re going to need to come along a little faster,” he said.

Greg Greenwood, Westar Energy’s senior vice president of strategy, sat down with The Capital-Journal to talk about the challenge of looking ahead and determining the company’s direction. His answers are edited for space.

Q: How tough is it to plan for the future with multiple variables at play?

Greenwood: “From a long-term planning perspective, one of our guiding principles at Westar for well over a decade is that we have to acknowledge to ourselves, we have a limited ability to predict the future. Whether it’s the weather, or I didn’t predict that gas was going to be $1.70 a gallon, I didn’t predict interest rates were going to stay this low.

“What we do know is that our product is vital to our customers. It’s really the engine that makes our economy go, and it’s what makes their life comfortable and convenient. What that all means is that we have to plan for multiple futures, so that we can keep cost-effective and reliable energy available.”

Q: How are changing weather temperatures affecting Westar services?

Greenwood: “Thinking about weather and its impacts, what that means over the long-term is that we have to have a variety of generating resources that use a variety of fuels or wind to meet our customer needs. We can’t rely on any one fuel and think that we’re going to provide reliable, cost-effective power.

“If we have an ice storm, for the safety of equipment, we’re probably going to have to lock down the blades on our wind turbines. Also, if we have a major cold spell or some other major event that takes out a gas pipeline, our gas power plants don’t have a pile of gas or a pile of coal setting there waiting to be burned. It’s a just-in-time fuel supply when it comes to gas. On the other side of the ledger, and maybe not environmentally friendly but certainly low-cost and available at any given time, we’ll have 50 to 80 days of coal on the ground at our coal plant.”

Q: One of the weather impacts we’re seeing in Kansas is a lack of water from drought conditions. How does that affect Westar? I understand power plants use a lot of water.

Greenwood: “I think water is a really valuable resource, and we realize that by producing one-third of our retail customer’s supply on an annual basis from renewables, largely, wind, very little water is needed for that sort of generation. A lot of the water that’s used at power plants is eventually returned after it’s cleaned up, back to its source to be reused. Some evaporates in the process of producing steam and cooling the water, but a lot of that water is returned for other uses.”

Q: How do renewables fit into the picture?

Greenwood: “If you go back 20 years and you think about renewable energy — and maybe we’ll just focus on wind and solar, since we’re in Kansas. The technology was in its infancy, and it was nowhere close to cost effective, so it was kind of a science project at the time. In the last decade, with the help of federal tax credits and other incentives, wind energy first became closer to a cost-effective solution for customers. Even 7 or 8 years ago, the best-priced renewable energy that we could get was still twice our cost to produce power otherwise to our customers.

“But if you look at more recently in the last two or three years, the technology for wind and solar has improved; the cost of that better, more efficient technology has improved to the where the last three or four wind farms that we’ve purchased or contracted power for have been at or below our average production cost.

“I think the thing that people often miss that I’d like you to go away with is even with the cost-effectiveness of the energy that comes from or renewable resources and solar today is still about three times more expensive than wind, so it’s not cost-effective today. As it relates to our wind resources and solar, from serving customers what you have to remember is the price of the energy is pretty attractive today from wind, but it’s still only available when the wind decides to blow.

“By the end of this year, or early next year, we’re going to produce enough renewable energy at Westar to serve one-third of the energy used of our retail customers. If you think about Wolf Creek, which has no emissions to it, by the way, over half of our power will come from emissions-free resources. We do think customers find great value in that, whether they choose to take it or not.”

Q: What do all these variables add to the complexity of planning energy supply?

Greenwood: “What our nuclear plants and our gas plants and our coal plants bring is that we can grab a hold of a dial and we can feed more fuel in and we can grab more energy when our customers want it.

The complex part is how much of that variable resource like wind and solar can you add and still have enough of the other stuff that you can dial up and down to provide 24/7-365 power to our customers.

“If customer demand doesn’t change, then something else has to pick up. That’s an instantaneous business. There’s very little energy that’s stored. So if you reached over and flipped on the second light in your office, some generator somewhere on our system would spin just a little bit faster. It might be balanced by the person in your office that just shut off the light to go to a meeting.

“At some point, that generator is producing 100 percent of what it’s capable of and it has to go to the next thing. If the next thing takes 30 minutes or two hours to come online, then you better have thought ahead. You better have known what the forecast was, and you better have those resources ready to meet that need. That’s where it becomes tricky.”

Q: How far out are you looking in your projections to determine energy needs?

Greenwood: “We look out 20 years, typically, for those sorts of things, and then when we do that, we go back to principal number one, which is we acknowledge our limited ability to predict the future. We revisit that 20 years at least once a year. It’s a very dynamic process, and we’ve had times in our history where we thought we needed to add a generating unit, and found out ‘oh, we need that two years sooner.’”

Q: Coming back to weather impacts as we see gradual warming in the Sunflower STate, how do you predict for that?

Greenwood: “That all gets consumed in what do we think customer demands on our system will do. So if things get warmer, or they get more volatile, our job is to have a resilient infrastructure and reliable generation that’s cost effective that can be there. Whether the average temperature in Kansas is 78 degrees or 80 degrees over a year all that means is all else equal, we need to have a little more generation at the ready. We always plan to have a little bit of extra generation.

“We subscribe to long-term weather forecasts, we have access to long-term forward prices for natural gas and coal, etc., we have a contract with a meteorologist that can help us with weather forecasting, but it really comes down to the fact that every month, every year, the further out, it’s less and less reliable. You know it’s not right, it’s just a matter of whether it’s decision-quality data or not.”

Q: What impacts customer demand?

Greenwood: “Technology advancement. I’m 50 years old. Let’s go back to when I first graduated from college in 1988. I thought it was the coolest thing in the world that we were able to buy a home computer. I thought I had this state of the art machine. Those machines used electricity, so if I’m getting one, I’m probably not the only person. Nobody had a cell phone back then or very few people. Fast forward to today. A household has two or three computers, more TVs than you had 25 years ago, and you’ve got cell phones and tablets and all kinds of devices. Now, those have become more efficient over time, and obviously lighting and TVs are much more efficient, so it all kind of balances it out. We have big debates about what will sales be. In any one year, weather could be 10 or 15 percent hotter or cooler than normal, and we’ve seen both.

“All that plays into our planning. That’s why there are reserve margins in our ability to generate because we have admittedly a limited ability to predict that with any precision. The trick is to have enough reserve capacity in the system that customers get the power that they need, at the same time keeping that power cost effective for them.”

Q: Is there anything you think people don’t understand about your industry?

Greenwood: “I think the biggest thing that people don’t understand about their electricity is that it’s a real-time business. There’s not a storage tank of electricity sitting in a bunch of places, and whenever they want it we draw from that tank. If they want an appreciation for how reliable it is, 99.9 percent of the time, it’s there when you want it.