At EUCI’s Negotiation and Purchasing Strategies for Gas-Fired Power Generation Equipment Conference, a partner at ScottMadden, discussed major trends in the large power generation equipment market.
The U.S. electric generating fleet has been undergoing major transformations driven by regulatory policy, generation costs, renewables, technology developments, and customer expectations. Because of this transition, traditional planning and operating processes have all been shaken up, and require generation companies to think and act differently. Here we will survey the current landscape of electric generation, and examine how these key transformations are forcing changes.
View this presentation to learn about the energy sector, baseload retirements, and the ‘new normal’ for baseload generation in the U.S.
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Energy Sector: The View from Wall Street
Companies seek to put capital to work with a focus on improving earnings in a challenging environment. Each sector is positioned differently, but there are common themes.
Stressing the System: Baseload Retirements Accelerate
Creative Destruction – A Sign Markets are Working or Road to Ruin?
- Who decides whether to add or subtract generation? How?
- Open to debate: What, if anything, needs to be done?
- The average size of retired plants has been increasing, with retired coal plants more than tripling since 2000, while the average size of retired gas steam turbine plants has doubled
- The average age of baseload units at retirement has increased gradually since 1990
- Current operating baseload capacity is approximately 63% of total operating capacity
- Close to a third of current operating baseload capacity is over the age of 40
- Close to 10% of current operating baseload capacity is over the age of 50
The New Normal: Gas and Renewables
What does the future look like?
- Coal replaced with natural gas, growth in renewables, and new technologies (storage, distributed generation, etc.)
The New Normal: Turbine Sales Return to Historical Levels
- Heavy-duty turbine installations outpaced aeroderivative turbine installations in each of the past three years
- General Electric had the most total turbine installations over the past three years. However, Siemens had the most heavy-duty turbine installations
- Mitsubishi turbine installations had the largest average operating capacity in 2014 and 2016
The New Normal: Renewables Are Continuing to Expand
- Operating capacity from utility scale renewables will increase approximately 60% by 2027 based on projects currently under development or construction
- An additional 71,000 MW of operating capacity from utility scale renewables has been announced, but development has not begun
- Distributed energy resources (e.g., rooftop solar) are not included in the above chart
Changing Generation Landscape
The New Normal: Wind Power Generation
- Gangbusters growth – 25,819 MW of wind capacity under construction or in advanced development as of the end of the second quarter of 2017, a 41% year-over-year increase
- 28% of the installed capacity for the year is contracted to corporate and other non-utility purchasers
- Production tax credit boom bust – phase down from 2017-2019
Changing Generation Landscape
The New Normal: Solar Power Generation
- On December 18, 2015, the U.S. congress extended the 30% Investment Tax Credit (ITC) for solar through 2021
- +25 GW of extra solar capacity (2016-2020) and $40 billion in incremental investment
- Solar prices will likely continue to decline although at a slower rate
Changing Generation Landscape
Summary
- Generation development – "not dead yet"
- Focus on gas, wind, and solar, "the new normal"…until it isn't
- Gas continues to replace coal
- Despite a political "all of the above" political strategy
- Gas prices continue to stay low – even with exports
- Wholesale markets – zero or near-zero marginal costs continue to hammer coal and nuclear
- State and market issue in valuing capacity
- States losing jobs, markets losing diversity
- Load growth approaching zero (aggregate)
- Peakier peaks
- How will it impact generation installation decisions?
Recommendations
- Plan Strategically
- Use Real Options
- Collaborate
- Don't Forget the Basics
- Advocate
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