New energy technologies, decreasing renewable energy costs, and low natural gas prices are forcing changes in the way traditional power companies must plan for the future.

“A fundamental rethink is now well underway about how energy gets produced, delivered, consumed, and managed in many parts of the world, including the U.S.,” said Ethan Zindler, head of Americas for Bloomberg New Energy Finance, an energy market research division of financial information provider Bloomberg LP.

The Winds of Change

Zindler’s statement came during a hearing before the U.S. Senate Committee on Energy and Natural Resources on January 19 (Figure 1). He noted that in 2015 the U.S. continued an unprecedented shift away from traditional, higher CO2 emitting power generation sources and toward clean renewable energy.

1. Ethan Zindler, head of Americas for Bloomberg New Energy Finance, testifies at a hearing on Capitol Hill. Courtesy: Committee on Energy and Natural Resources

“An annual record volume of coal-fired power generating capacity was either retired or converted to burn other fuels, such as natural gas or biomass,” Zindler said. “A record volume of natural gas was burned in power plants and gas accounted for approximately a third of all U.S. power—about the same as coal for the first time.”

“Solar photovoltaic capacity added hit an all-time high, with a strong growth in both rooftop- and utility-scale subsectors,” he added.

Zindler noted that global investment in new energy technologies—which includes things such as wind power, solar power, electric vehicles, energy efficiency technologies, and power storage—was $329 billion last year, an all-time high. The fact that unit costs declined helped to compound the increase in clean energy capacity.

“It is fair to say that clean energy is no longer an ‘alternative’ source, but now very much in the mainstream,” Zindler said.

Difficult Market Conditions

Yet, even as Zindler touted the record investments in new technologies, another witness, James Lucier, managing director and head of the energy practice at Capital Alpha Partners, an independent research advisory firm that serves mostly institutional asset managers and financial participants in the power markets, seemed to indicate that it isn’t easy to find the money needed.

“The single greatest challenge in the power markets today is financing the technology investment and the infrastructure upgrade cycle needed to replace retiring baseload and to handle new, perhaps even unforeseen, demands between now, 2030, and beyond,” Lucier said (Figure 2).

2. James Lucier, managing director and head of the energy practice at Capital Alpha Partners, testifies at a hearing on Capitol Hill. Courtesy: Committee on Energy and Natural Resources

Lucier suggested that the following five market conditions are challenging power generators to varying degrees based on a company’s business model and region of the country served:

  • Although consistent with historically stable price ranges, inflation-adjusted retail power prices are at historically low levels.
  • Wholesale power prices are at 10-year lows due in part to low interest rates and low natural gas prices, but low prices cannot be taken for granted, and there may be unsustainable design flaws in the wholesale markets.
  • Regulated utilities face difficulty increasing earnings—or even maintaining them for that matter—at a time when power demand projections are flat, or nearly flat, well into the future.
  • Merchant generators are hard pressed to show a return on equity that would justify new investment in competitive markets, not only because of the decrease in natural gas prices but also because price formation in the energy markets doesn’t appropriately compensate reliability and ancillary services.
  • The Environmental Protection Agency’s Clean Power Plan could drive the greatest investment cycle ever in the U.S. power industry, perhaps amounting to hundreds of billions of dollars, as existing baseload power plants are retired.

Alternatives Are Becoming Cost Competitive

Speaking of power prices, Zindler noted that natural gas has developed into the price setter for the market. However, he said that renewables are becoming more cost competitive, and he expects costs to continue to decline, not at the same accelerated pace witnessed in the recent past, but at a more gradual rate.

“[Renewables] are increasingly cost competitive. They’re not cost competitive everywhere,” Zindler said. “And essentially, the playing field on which this competition is taking place is growing virtually every day.”

“Obviously, the place where renewables are most competitive are places where you have excellent natural resources and/or very high incumbent power prices,” he added.

The economics of power storage were also mentioned. Zindler said that it makes the most sense on the distributed, behind-the-meter level because it helps to offset the cost of retail power, and surge pricing and excessive-use-of-power fees in some cases.

Zindler indicated that he understands why power companies are concerned about the effects of widespread deployment of distributed generation (DG) systems. When customers generate their own power, it means they need less from the utility, and in some cases the company can even be forced to buy excess power back from the customer at retail rates due to net metering policies. Therefore, DG does threaten the traditional power generator’s business model.

However, Zindler suggested that utilities should view consumers’ desire for DG as an opportunity, whether through direct installation of systems for their customers or through partnerships with the companies that do that sort of work. He said that the costs are coming down and the technology is getting easier to implement, so DG is not going away. He feels utilities would be better served by being involved rather than trying to buck the trend.

Aaron Larson, associate editor (@AaronL_Power, @POWERmagazine)