The U.S. power generation market is experiencing a unique set of transitional drivers, the biggest being the current economics within the energy market.
U.S. Market Drivers
A significant portion of the U.S. operates in a second-day energy market. There are some differences in how these markets operate, but the intent is to have a generator compete against other generation sources to provide low-cost power. Therefore, generators typically operate when there is the demand for power and the generator’s production costs beat the market price. Some markets also have a capacity market, which provides some revenue, but not sufficient to cover fixed costs. Supply and demand market principals are at work in these markets.
Another driver is the integration of intermittent renewables, which has accelerated the aggregation of load-balancing entities within the transmission independent system operators. While creating more efficient dispatch of generation resources, this transition more importantly mitigates the overall system impact from integrating intermittent wind and solar generation. This approach mitigates system ramping issues, but it also facilitates the ability of wind generation to operate profitably in these open markets at a negative power price (due to subsidies from production tax credits), greatly eroding profitable hours and capacity factors for baseload generation, particularly nuclear and large coal.
Those baseload sources are often required to run at less-than-optimum loads to balance renewable energy variability or, in the case of nuclear energy, run for many hours while production costs are higher than the market price. Generators with higher costs will operate little, if any, in a second-day market. Generating sources with higher fuel costs will be affected most. With current natural gas prices, many higher-cost Eastern coal units are particularly impacted.
Even if variable costs can be covered by market prices, little is left to cover financing fixed costs of large capital investments. This has been demonstrated in a variety of recent decisions, including nuclear plant shutdowns, decisions not to pursue nuclear power uprates, shutting down coal plants instead of investing in environmental project retrofits (because doing so would make them less competitive in the marketplace), and market power prices that don’t even support combined cycle gas plants in many regions of the country.
In contrast, the larger power markets and renewables penetration has created market opportunities for projects addressing transmission constraints and ancillary service markets, leading to a new class of flexible gas generation resources to balance wind. Some areas—where there is load growth demand or utilities are looking for a more even fuel generation balance—will be building natural gas combined cycle facilities.
Another factor is that distributed generation is growing in many areas to the point where the traditional rate structures have changed. Electric utilities may not be providing continuous energy to the customer in these instances yet are still on the hook to provide occasional energy and maintain a reliable and safe infrastructure. That situation has led to questions about the fairness of the rate structure being brought before state public service commissions.
In 2014, we expect these trends to continue.
On the demand side, little, if any load growth is occurring in the U.S., for a number of reasons, including more efficient appliances, industrial processes, and other energy uses; distributed generation; lackluster economic growth; and demand-response programs. We expect muted load growth in the U.S. to continue in 2014. However, overseas markets are seeing a large load growth increase, mainly in Asia, and these areas are providing opportunities for new, large baseload units.
The blessing of cheap natural gas forecasted for the U.S. market is unique within the world market. The Asian market continues to march forward with significant coal, nuclear and natural gas generation projects.
While growth in some Asian countries is moderately constrained by world economic conditions, in many cases the growth of the middle class in these countries has led to increased demand that outstrips this constraint and results in a significant market opportunity. Burns & McDonnell continues to leverage this growth and has greatly expanded our international presence and market, especially within Asia (Figure 1). The expertise gained in designing and building large-scale, highly efficient and environmentally exceptional generation facilities common in the U.S. market can be leveraged in Asian markets, as many countries now have grids of sufficient size to accommodate integration of these modern, large, efficient, and clean generating units. ■
— Grant Grothen (firstname.lastname@example.org) is principal in the Energy Global Practice and Block Andrews (bandrews@ burnsmcd.com) is strategic environmental solutions director at Burns & McDonnell.