By David Sweet
There is a ticking time bomb in the power market that most people are either unaware of or choose to ignore. The problem (or opportunity) arises from the fact that abundant natural gas supplies have made on-site generation an economic winner for a growing number of customers. As more people figure this out some may choose to leave the system entirely. Of course the need for storage, backup and more power than thermal would increase project costs. However, if the new economics push customers to exit the legacy utility system it will drive up the cost for the remaining customers as the nominator of the rate equation increases (as a result of higher costs) and the denominator declines (as existing customers leave). The last one left can just turn off the lights.
We have seen this phenomenon in the telecom industry as competitive cellular options allow more and more people to forego the copper wire into the home. This has resulted in some staggering price increases for traditional landline service as the telecoms are faced with recovering growing system upgrade and maintenance costs from an ever-shrinking pool.
As a result of the shale revolution taking place in the US, the fundamentals never looked better for on-site natural gas fueled-power solutions. This is not just a short-term anomaly, but rather looks like a long-term trend that will make on-site power projects increasingly attractive for years ahead. The concept of on-site power, moving the source of generation closer to the point of use, is one that would seem to have many natural advantages in terms of efficiency, energy security, reliability, siting and emissions to name a few. However, for a multitude of reasons, on-site power projects face challenges and hurdles that have prevented greater levels of investment from being realized. While many of these challenges and hurdles are artificial creations of regulation and protectionism, in the past there were also fundamental challenges in markets and technology.
The fuel challenge looks like it has been addressed (at least for next 150 years) as we recognise that the abundance of shale gas is real and the productivity of these wells seems to be getting better with time as we improve our understanding of the resource base. While the current price levels do not support new drilling for shale gas, should prices begin to rise there are ample reserves that will become economic to produce.
The second driver is the changing composition of delivered power costs. In a telling article by Bill Pentland for Forbes, he notes that electrons consumed in New York City cost more for the delivery than for the generation. This looks like a trend that will not be easily reversed as aging infrastructure needs to be replaced and upgraded. According to Pentland, nearly 75% of transmission lines and transformers are 25 years or older, and 60% of circuit breakers are more than 30 years old. Electricity use increased by 58% between 1980 and 1999. During the same time period, investment in transmission infrastructure declined by nearly half.
Then layer on top of these two fundamental trends other factors, such as new generating technology that can produce highly efficient power at smaller scale, need for distributed reliability to protect against weather events of growing severity, retirement of low-cost legacy coal plants, costly investments in Smart Grid technology, and a president in the White House who has already issued a lofty challenge in the form of a 40 GW goal for distributed power by 2020, and it is easy to see that the future for on-site power is indeed bright. The grid is by no means dead, but stay tuned as these changing competitive dynamics play out over time in select markets in the US and globally.