2007 Annual Report

Coal-fired generation, which traditionally has provided most of our nation's low cost electricity and still anchors our national economy, has recently fallen into disfavor with political leaders and citizens. Concern over global climate change and the contribution of coal generation to increasing carbon dioxide (CO2) levels in the atmosphere has shifted public policy to favor generation from renewable energy resources – wind powered generators in particular – and nuclear generation. These types of generators, which claim a zero carbon footprint, are the new and popular "love interests."

Legislators, regulators, electric suppliers and consumers, all of whom are stakeholders in the process, seek to chart a course that will result in the environmentally responsible generation and use of electricity. As I ponder the choices and decisions that must be made by these stakeholders, I'm reminded of Lucky Seven. This movie reflects some interesting parallels – and also some striking differences – to the challenges we face in planning for an uncertain future.

In Lucky Seven, at age seven, Amy Myer learns that her mother is dying. She is frightened by a future without her mother's guidance. To help young Amy cope with her fears, her mother prepares and carefully reviews with Amy a timeline for her growth years and early adult life. This chronology includes predictions, and perhaps a mother's expectations, of principal events to come in young Amy's life. The timeline encompasses summer camp, college and law school, and includes some very special guidance for dating and marriage. Amy's mom predicts six boyfriends, but tells her that it will not be number six, but the seventh – Lucky Seven – who will become her true love.

Amy, faithful to her mother's guidance, dutifully adheres to the timeline. As the years pass, her decisions and choices track her mother's timeline and her life proceeds smoothly. Then she "falls in love" with Daniel, boyfriend number six. Amy believes that Daniel is the one meant for her but is reluctant to depart from the timeline. She looks for a "loophole" to keep true to her mother's timeline and keep Daniel as well.

Amy decides to interject Peter, manager of her favorite bagel store, as an "interim" boyfriend whom she will consider number six, thereby making Daniel "Lucky Seven." However, Amy's attempt to manipulate the positions of boyfriends number six and seven requires her to look much more closely at Peter, whom she previously thought of only as a friend. Soon she is faced with uncertainty over which of her two boyfriends is really the right choice.

Like Amy, stakeholders in our industry also are experiencing uncertainty about the choices they must make. They share a common desire for sufficient generation to reliably and economically serve both existing and new electric loads, but are uncertain how to achieve that objective while also mitigating adverse environmental impacts. Given the totality of the choices and challenges involved in planning for future electric needs, one thing becomes clear: Amy had it easy.

Because new generation resources take years to design, permit and construct, generation planners must project future energy needs. Unlike Amy, whose mother thoughtfully supplied a timeline with answers to many future questions, generation planners have no Oracle to consult for advice on what the future holds. Instead they make projections about future load growth based on historic experience. However, the reliability of these traditional forecasting methods is now in question.

Consumers increasingly identify energy consumption with environmental issues such as global warming. To the extent this heightened consumer awareness translates into reductions in energy consumption by actions such as turning off lights when not needed, using energy efficient lighting in lieu of incandescent bulbs, or replacing old power hungry appliances with new "Energy Star" rated models, the need for generation is reduced.

However, these gains in conservation may be more than offset by the continuing expansion of electricity as a key element of our economy and our social lives. Generation planners must make the best forecasts that they can, but must be mindful that if they underestimate the need for generation the societal and economic consequences of that error could be severe.

As with the dilemma faced by Amy, emotions run high when electricity supply choices are considered. Renewable resources, especially wind turbine-generators, are viewed as an environmentally responsible source of electric supply. Wind turbine-generators emit no gases or chemicals into the atmosphere. Also, wind is the ultimate low cost fuel – it is free.

Large scale wind developments, such as are taking place in the areas served by Golden Spread's members, also bring substantial lease payments and income to the farmers and ranchers who own the land on which wind farms are situated. However, integrating wind energy is not without its challenges. Modern wind generators operate only when wind speeds fall within a defined range. A minimum wind velocity is required to produce any electrical output and the wind turbine shuts down when the wind blows too hard. Even when wind velocity falls within the wind turbine's operating range, actual output can vary as the wind velocity changes. Because changes in wind generation are independent of changes in load, the electrical output of dispatchable generation resources must increase or decrease to balance total generation to load. Failure to maintain generation in balance with load may lead to service interruptions to electric consumers.

Existing coal-fired and natural gas-fueled generating units generally cannot increase or decrease output quickly enough to be responsive to large changes in the output of wind turbines. Even Golden Spread's modern combustion turbine-generators are limited to normal change rates of approximately seven megawatts per minute, and in the SPS control area the aggregate "ramp" rate of all units that are on line may be only a fraction of the amount of wind power that could be lost or gained due to rapidly changing wind conditions. To the extent dispatchable generation cannot increase output quickly enough, the only alternative is to drop (interrupt) load. If wind generation increases rapidly, perhaps the result of a passing cold front, the only alternative may be to trip (interrupt) dispatchable generation.

As more wind generation comes onto the electric grid, generation portfolios will need to include rapid start dispatchable generating units. These new generators will be smaller, lighter and more expensive than typical utility generating units but they will have the capability to accelerate and decelerate (change output) with the agility of an Indy 500 car. They will likely rely on natural gas or diesel fuel. Over time, other power supply resources, such as compressed air driven generation and even large battery storage projects may achieve commercial viability and offer additional tools to manage the variability of wind generation.

One area of grave concern to utility planners is the difficulty in permitting and constructing new domestic coal-fired generators. Even though new coal plants feature state-of-the-art emission controls and have a fuel efficiency that results in much lower emissions per megawatt-hour than older units, they are encountering substantial resistance from some political leaders, regulators, and environmental advocacy groups. The opponents of coal generation focus on the CO2 emissions from the plants and cite global warming as a reason to deny necessary permits.

A case in point is the October 18, 2007, Order of the Director of the Kansas Department of Health and Environment denying Sunflower Electric Power Corporation's application for an air permit for construction of at least two new 700 MW pulverized coal generating facilities at the Holcomb Station site in western Kansas. Golden Spread expected to acquire a 400 MW ownership interest in one of those new Holcomb units. The denial of the air permit had the immediate and obvious effect of blocking construction of the project; however it triggered other consequences as well.

The Holcomb Expansion Project required several new high voltage transmission lines to move power from the project to the loads of its sponsors and participants. The transmission upgrades needed to move power from Holcomb to Golden Spread also would have benefitted wind generation. It would have enabled the interconnection and transmission of up to 1,500 megawatts of wind generation from the Panhandles of Texas and Oklahoma to other parts of the SPP. High voltage lines to be constructed by another Holcomb project participant, Tri-State Generation and Transmission Association, would have moved power from Holcomb to its loads in Colorado and other Western states. These lines would have supported the construction, interconnection and transmission of even greater quantities of wind energy from Kansas into those Western states. When the Holcomb air permit was denied, the SPP cancelled the high voltage transmission upgrades it had planned and Tri-State put its transmission plans on hold. As a result, millions of megawatt-hours of wind energy, that could have offset an equal amount of fossil fueled, CO2 emitting generation, has been delayed indefinitely.

Some opponents of coal plant construction believe the nation's future energy needs can be satisfied with conservation alone. Others look to natural gas-fueled and nuclear generation. While nuclear generation offers the advantage of no carbon emissions, it may be 15 years or more before a nuclear generating plant can be licensed and built in this country. At best, it is a potential longterm solution to the CO2 emission issue, and we remain saddled with the problem of long-term storage of spent nuclear fuel. Consequently, in the near to intermediate term, the only viable answer seems to be gas-fired generation operated in combination with wind turbine-generators.

Relying too heavily on natural gas-fired generation poses risks as well. Increased demand for natural gas in all sectors of the economy raises the related issues of cost and reliability. Growing competition for natural gas will put significant upward pressure on prices. If gas supplies become too tight, reliability will be affected. Supplementing domestic production with increased imports of liquified natural gas (LNG) may serve to mitigate the supply issue, but it also will make the United States increasingly dependent for critical energy needs on foreign countries that may be both politically unstable and hostile to the interests of our country.

Ultimately, foregoing coal generation in favor of excessive reliance on natural gas-fueled generation may lead to higher energy prices, increased reliability problems, and not significantly affect worldwide CO2 emissions. If higher prices and reduced reliability adversely affect our global competitiveness, we may lose domestic manufacturing and jobs to foreign countries that support the expansion of their industrial base with new coal-fired generation. From a global warming perspective, it makes no difference whether CO2 is released in China or Kansas. However, if the coal plant is in Kansas, it will be subject to federal environmental laws and can be required to add new emissions control technology as it becomes available. The same cannot be said of coal plants in China.

As stakeholders wrestle with the issue of CO2 and the environment, another consideration to keep in mind is that emissions from combustion of fuel by an electric generator represents only part of the carbon footprint. Activities involved in the recovery, processing and transportation of fuel also are likely to contribute to greenhouse gas emissions. For example, the carbon footprint of LNG also includes the energy consumption associated with extracting natural gas, construction and operation of liquification facilities, LNG tanker fleets, gasification facilities, and the compression and pipeline transportation of the gas to its point of consumption. The sum of these activities represents a great deal of energy consumed. In fact, researchers at Carnegie Mellon University recently published an article in Environmental Science and Technology, in which they showed that LNG imported from foreign countries and used for electricity generation could represent a life cycle greenhouse gas emission that is 35 percent higher than the greenhouse gas emitted by an advanced coal-fired power plant!

Unquestionably, wind generators cannot provide all of our electricity needs – unless, of course, consumers are willing to make the life style changes needed to accommodate electricity availability limitations when the wind does not provide for sufficient production. Assuming consumers will choose electricity on demand, as opposed to electricity when available, conventional (coal, natural gas, etc) generators must be built. When evaluating which types of generation to build, it is essential to look critically and comprehensively at many interrelated issues, exploring the options, advantages and disadvantages of each power supply alternative, before selecting the combination of alternatives that creates the best chance of doing more good than harm.

I do not believe that the decision to reject the Holcomb Expansion Project air permit was based on such a critical and comprehensive analysis. The Holcomb project offered the prospect of reliable, low cost energy to electric consumers in Kansas, Oklahoma, Texas and the Western states served by Tri- State. It also would have reduced reliance on, and competition for, natural gas, thus mitigating pricing pressure on that resource. While Holcomb, as is the case with all fossil-fueled power plants, would have emitted CO2, it also would have opened transmission paths for thousands of megawatts of new wind generators that would offset CO2 emissions from fossil-fueled plants. It does not appear that the Kansas permitting process gave appropriate consideration to the synergy (cooperation of two or more agents to produce a combined effect greater than the sum of their separate effects) between Holcomb and wind generation. Unfortunately, the decision to deny the permit focused only on increased CO2 emissions in Kansas.

In Lucky Seven Amy is faced with a single decision – selecting between two choices for a lifetime mate. In the utility industry we do not have an "either or" choice. We must select, install and operate multiple generating resource types to balance electrical loads.

Amy ultimately chooses Peter, the bagel store manager. She already knew Peter as a good natured guy with many positive qualities when she decided to manipulate her mother's timeline to make him boyfriend number six, saving the number seven spot for Daniel. Although Amy started dating Peter for the wrong reasons, she soon discovers that there is much more to Peter than initially met her eye.

There is much more to selecting the appropriate types of generating resources than what may initially meet the eye. Unlike Amy, we also must evaluate many different options. The "correct choice" for future power supply is the combination of generation and conservation options that will achieve optimal long-term benefits for the environment while providing reliable and economic service to electrical loads.

For stakeholders to have any hope of making the correct choice, they must keep an open mind and carefully consider all available choices, both on the supply side (generation) and the demand side (conservation). The challenges of integrating wind energy must be acknowledged and addressed. Coal generation cannot be dismissed summarily from there source mix. This type of generation, which makes use of an abundant, domestically available fuel source, and which can reasonably be expected to become ever more environmentally friendly as technology improves, offers much more to the economics and reliability of our energy supply than immediately meets the eye. The economic benefits and energy security offered by coal are too important to summarily dismiss in favor of what at first glance may appear to be more attractive alternatives.

Lucky Seven demonstrates that love doesn't always arrive on the schedule or in the form anticipated. When Amy falls for her substitute number six, she realizes that it is time to stop following her mother's timeline and make her choice based on what she has learned about Peter. Amy learned that while she was infatuated with Daniel, it was Peter she loved. Electric stakeholders must beware the risk of becoming so infatuated with generation technology that features low or zero emissions that they fail to carefully and analytically consider all power resource options. Such a failure will invite a "wrong" decision.

Finally, we must pursue as a national priority the development of economic carbon capture and sequestration technologies that can be applied to existing and new coal and gas-fueled generation throughout the world. A global problem requires a global solution.

Robert W. Bryant President