After years of flat demand the US has returned as a key market for new capacity. PEI looks at the causes of this resurgence and how peaking units fit into the mix.
Record Peak Hits Midwest…Virginia Power to Add Peaking Units…TVA Plans to Add Peaking Power,” were some of the headlines from the summer of 1998. US power prices had skyrocketted to as much as $9999/MWh in some states. It was the first real sign that shrinking reserve margins increase the value of power at peak demand times.
According to GE two thirds of all new generation ordered in the US in 1998 was for peaking power plant, most of which will be converted to combined cycle operation in two to three years. While Siemens Westinghouse puts the split it has seen between peaking and combined cycle units at about 50:50, it agrees on the key drivers: the need to avoid being caught short during peak demand; and the advent of the deregulated market.
The power shortages and subsequent gas turbine rush were explained by vice president of Stewart & Stevenson Energy Products (SSEP) Mark Axford. SSEP is the arm of GE formed from GE`s purchase of Stewart & Stevenson Services` gas turbine division last year. SSEP is a packager of GE`s LM aeroderivative units. “Many customers had been forecasting this might happen but never had the conviction to act on it. When the shockwave hit in June last year they all acted at once,” he said.
David Miller, vice president of US sales for Siemens Westinghouse agreed: “A factor is how much their decisions are influenced by trading and power brokering. Certainly developers outside the regulated world will not want to be in the situation where they cannot cover their own needs.”
There were examples in western Canada where areas suffered outages and rolling blackouts. CU Power International in Alberta and TransAlta both ordered generation in the form of gas turbines shortly after. In the US mid-west, Illinova Power and Cinergy each ordered multiple LM6000 aeroderivatives. Indeed the mid-west is an area where Siemens Westinghouse thinks we will continue to see peaking units
Need for speed
The need for speed was part of the reason why, according to SSEP, so much of the new capacity is gas turbine simple cycle. Many gas turbines were ordered for the soonest possible shipment with a longer term plan for conversion to combined cycle operation.
Axford explained: “Put yourself in their shoes and think of what you would have done. Steam turbines have a longer cycle time. They are built one at a time according to precise steam conditions and how much power you actually want. Although it can be done, generally it is harder to standardise a steam turbine model. If someone wants an 80 MW gas turbine, they have a few to choose from. They could buy an 85 MW unit and if all they want is 80 MW, they can set the controls to stop there and keep 5 MWe up their sleeve.
“Then they will do the second phase of the project maybe a year or so later. When: (a) market conditions can prove the profitability of the plant and the need for the electricity in the first place and (b) when they can get a steam turbine delivered.”
According to SSEP, the simple cycle boom looks set to continue at least until this summer. It reports that demand continues to be robust with enquiries for units to be delivered for the end of 1999, summer of 2000 and 2001. “I think we will continue to see crisp demand until June or July of 1999. At that time we will get the first look at what some of this new capacity is doing whether it has been called into service or not,” said Axford.
Whether this year will see a repeat of last year`s boom, will partly depend on weather conditions. If there is a mild summer and the peak demands are low, there will be less gas turbine demand from buyers.
Long term planning
Short term solutions to meet acute demand in extreme circumstances is not unique to the US. The situation can occur, for example, in countries where most of the electricity is generated from hydro. Axford explained: “A country will have a severe drought and declare a state of emergency. A bidding process would then begin to install more power, then right in the middle of the bidding process it would start raining. They would then cancel procurement since the immediate problem would be solved.”
But the short term approach in the US is as much a result of market conditions. “Long term thinking is not what it used to be. The way the deregulated market is developing, people are not planning 15 or 20 years in advance. They are interested in the next two to three years. If they get the feeling that there is now a good match between supply and demand, and that the summer of `99 will be mild, they will probably slow down the buying activity a little until something else happens. Buyers are now in a reactive mode instead of an advanced planning mode.”
Whether this is good or bad is debatable. In the fully regulated market there was an electric system operating with a 15-20 per cent reserve margin. And although this was a comfortable cushion to have, it was probably reflected in the consumer`s electric bill.
Axford added: “In the open market we will have the same grid serving demand growing at 2-3 per cent a year. It will run with a reserve margin of 10-15 per cent. You could argue that this might result in more disruptions. But is this a bad thing if the result is better utilization of assets?”
The new market economics and the advent of merchant plants has meant more orders coming in the bigger gas turbine size range – even though these units take longer to deliver and install. According to GE, it quickly sold out of its 7FA (170 MW) model and also saw a host of orders for the 7EA machine.
Siemens Westinghouse also saw a number of orders for its F and G machines – many for merchant plants. “If you are looking to compete to displace someone else, you are going to use the more efficient product. With the exception of the Lakeland project, all the 501Gs are going into combined cycle operation,” said Miller.
Most major utilities see the merchant power plant economy coming into play at around 250-500 MW. Most of them are therefore planning to build plant of this size. What a utility orders depends on how aggressive it wants to be in the deregulated market.
Axford elaborated: “Every team has an offence and a defence. For example, if you are Houston Industries and you are trying to develop a wholesale power business outside of the greater Houston area, you are playing offence. You are taking capacity into someone else`s sandbox and trying to take away their customers.”
An example is a plant which Houston Industries is proposing to build in Arizona. To win customers, the utility will have to build a plant that has a lower cost basis than other plants in the region. The lower cost basis will come from getting the right gas price and the right heat rate. And this is where combined cycle technology comes in.
“Most utilities wanting to play offence will play with 250-500 MW blocks. This will mean ordering larger gas turbines to be converted to combined cycle operation. If this means going into service a year later it is no big deal.”
The other side of the coin is the team playing defence. This could be a municipal utility or investor owned utility not generating its own electricity but buying it from the pool. SSEP saw more orders for peaking units from customers playing defence.
Explaining this approach Axford noted: “If you do not have a firm contract or your contract is interruptible, last summer proved you can really get hurt. Some of the utilities with the scars of last summer are playing defence. They are trying to get generating capacity into service by the summer of `99. If not the summer of `99 then by summer 2000.”
There is a growing commodity market. In most parts of the USA you can sell forward electricity futures, with prices being weather driven. A lot of electricity is already being traded for the summer of 1999, with prices revised according to weather predictions for the summer.
“Traders will be hedging their bets and buying August electricity,” noted Axford. “If for example today`s price for August 1999 peak power at the Kansas City hub is $1/kWh; this may seem like a high price. But you don`t want to be short of a lot of electricity that could cost $6/kWh. You can`t lose more than 97¢/kWh if you`re wrong. But if you`re short you can lose five times that much. So people will not be willing to be short. The old saying among veteran commodity traders is: if you`re going to be wrong be long.”
Sounds like good advice.
Figure 1. Dwindling US reserve margins
Figure 2. Siemens Westinghouse supplied units for Whitewater
Figure 3. The Sweeney combined cycle plant
Figure 4. US generation analysis