Shifting Sands – Changes Ahead for the US Power Industry

Not So Ancient Naval History

Thirty years ago I was an officer in the US Navy assigned to the engineering department of the USS Enterprise, the Navy’s first nuclear aircraft carrier that was placed in service in 1960. It was an impressive ship – nearly 1,200 feet long and nearly 100,000 tons in displacement with eight nuclear reactors – that could carry about 100 aircraft and about 5,000 men (women didn’t serve on combat ships back then). I can’t tell you the top speed because that was classified (you would be surprised – aircraft carriers are about the fastest ships the Navy has). The ship had participated in the blockade of Cuba during the Cuban Missile Crisis and also participated in the Viet Nam War.

In 1983 the ship was stationed in Alameda, CA, right across the bay from San Francisco. Returning to Alameda from a nine-month deployment to the Indian Ocean and the Western Pacific, the ship carried on board a group of dignitaries who were flown out to celebrate the return of the famous ship from a successful deployment. The dignitaries included then San Francisco Mayor, Diane Feinstein, U.S. Senator Samuel Ichiye Hayakawa and even George Takei – from the TV show Star Trek. Hundreds of sailors, at attention in their dress uniforms, manned the railings of the ship as she proudly sailed under the Golden Gate Bridge to return home – at low tide in order to help fit the tall ship under the bridge. It was an impressive sight to be sure. On the pier at Alameda Naval Air Station (since closed and turned into the location for Discovery Channel’s Mythbusters, among other things) a Navy band was playing and families breathlessly waited to see their loved ones return from the deployment. 

On the final turn to the pier, the massive ship leaned heavily to one side and slowed to a halt. The ship had run aground. For hours, families who hadn’t seen their loved ones for close to a year watched the hulking ship – only a few hundred yards away – as tug boats and the Enterprise crew feverishly worked to dislodge the ship from the bottom. As the tide came in, the ship was eventually floated off of the bottom. Of course, running such an important ship aground is a serious event that gets the attention of the Navy’s top officials. One of the explanations given in the ensuing inquiry was that unusually heavy storms over the winter had deposited silt on the bottom, reducing the depth of the bay from that of nine months prior. The Captain of Enterprise, unaware of the shifting sands, did not account for this possibility when planning his approach to the pier. By the time he realized that the water was too shallow, it was too late. The ship was too massive to quickly change course and avoid running aground. 

A lesson for the power industry 

There is a point to this story besides a little nautical history.  The electric power industry is experiencing rapidly shifting sands as a result of technology, policy, and market developments.  This creates risks and opportunities for the various players in the industry.  With so much invested in long term assets the management of America’s electric power companies and some of the companies that serve them, like the Captain of Enterprise, cannot change course easily when they see the water getting shallow, and they are therefore at risk of running aground if they don’t adequately plan ahead.   Those power companies that are prepared, and the technology suppliers to the industry that are prepared, will benefit.  On the other hand, those that don’t account for the shifting sand will find themselves high and dry, stuck on the proverbial sandbar.  

The shifting sands became plainly apparent to me at the recent International Power Generation Conference, aka Power-Gen, in Orlando.  Gone were the wind turbine suppliers (victims of a failure to extend the PCT).  The gas turbine suppliers were there, but were not as visible as in the past.  What surprised me the most was the presence of distributed generating suppliers, including photovoltaic and engine generators.  Also surprising was the large number of Korean and Chinese companies.  The activity was generally subdued among the suppliers of traditional, central station power equipment.

What is the cause of the shifting sands?  As I’ve mentioned in the past, growing supply of natural gas is one thing, but, there are several other catalysts that are also at work.  Advances in energy efficiency that have reduced demand growth, renewable and distributed generating sources that are cutting into traditional fossil and nuclear power sales, smarter ways to dispatch power and potentially store it, tightening environmental regulations on existing fossil assets and aging nuclear units are all turning the traditional power sector business model upside-down. 

The traditional power sector model of large, central-station plants producing exactly enough power to meet demand just in time when it is needed is at risk of major technology and market disruptions.  I am firmly of the belief that in 10-20 years the power industry is likely to look very different than what most of us are accustomed to.  There will be clear winners and losers in terms of equipment suppliers, fuel suppliers, and service suppliers. As recently reported in Financial Times, Lynn Good, the CEO of Duke Power, stated that the low demand growth resulting from energy efficiency measures will lead to more consolidations among America’s power companies. In fact, it is my opinion that some of the catalysts occurring the electric sector today might collectively cause a reduction in total demand from the grid and even greater reductions in generating capacity.

Proposal for a study

I’ve been giving this a lot of thought lately, and I’d like to get some feedback from you on how much interest there might be in a multi-client study to examine each of these catalysts and their impact on the electric power sector and various technologies that may be used in the sector.  In the past I’ve worked with a few of you to develop forecasts for your business or analysis of one of these issues, but I am considering a deeper and perhaps broader dive than I have in the past because there are so many issues at play. I intend to examine the various forecasts that are out there (such as from EIA as well as others) and let you know where I believe these forecasts are vulnerable and what I think could potentially happen.  I will also show where the forecasts for some equipment, such as gas turbines, will potentially differ from what is being forecast.

No one has a perfect crystal ball, but it is nevertheless important to consider all of the possibilities and know what to monitor so that adjustments can be made to business plans as information comes in.  To do the job right, it will be necessary to have an adequate number of clients to keep the cost of the program per client at a reasonable level.  And, if you have some thoughts on what is important to you, please let me know so that I can try to incorporate it into the program.

Major catalysts that I intend to examine, along with their effect:

• Shale gas – New sources of natural gas have made it the fuel of choice, not just for peak power and load following, but for new base-load power.  But, what is the outlook for gas – especially in light of planned LNG and increased domestic demand?
• Renewables – Wind and photovoltaic power have had a major impact both in terms of impact on total load and on dispatch.  New wind capacity installations have been comparable to new gas.  Although wind economics still rely heavily on incentives, photovoltaics used “behind the meter” have become economical without incentives in many markets.
• CO2 and other environmental regulations – These regulations primarily impact coal fired generation.  Future regulation of greenhouse gases will have a negative impact for coal, which has historically been the fossil fuel of choice for base-load applications.
• Nuclear Retirements – America’s nuclear fleet is aging.  Some of these aging units can have their life extended, but in an increasingly competitive power environment with low gas prices and incentives for renewables it is not economical to extend the life of many units.  Some units are retiring early because of currently unfavorable economics. 
• Energy Efficiency – The stealth catalysts are energy efficiency, distributed generation and energy storage.  Energy efficiency is contributing to lower power demand growth.
• Distributed generation – The combined effect of energy efficiency and distributed generation (especially photovoltaic) is stealing central station customers and reducing overall demand, particularly from commercial and industrial customers – the most profitable segment of the market.
• Energy Storage – This may be the most disruptive catalyst.  Energy storage technology, while still largely under development, may have the most profound effect by making intermittent sources like wind and solar much more viable and will cause the traditional model of “just-in-time” generation to disappear, dramatically changing the complexion of generating assets and the way power is delivered.
• Electric vehicles – what is the potential positive impact on demand of increased use of electric vehicles?

These are the people that I think should be interested in this report:

• Management in the electric power sector who want some outside input to what the future may hold
• Companies that supply equipment, services or consumables to this sector
• People interested in promising investment opportunities in this sector – and what to potentially avoid
• Economists and modelers of the electricity and energy markets