By David Walsh, Senior Vice President, Service and Manufacturing, Mitsubishi Power Systems Americas
As the economic and banking crisis continues, far lower quantities of private sector investment will flow toward the power generation sector. The recessionary economy has meant reduced near-term electric demand, reduced investment in new generating capacity andwhere additions are occurringsmaller increments. On a year-to-year basis, reserve margins across the country appear to have risen by a marked 4.5 percent. Until financial markets recover, capital is moving away from relatively expensive and intermittent supply sources to options providing efficiently produced electricity at reasonable capital costs.
During the previous five years, unprecedented levels of public and private capital flowed to renewable generation options. The dash to wind was a byproduct of a prospering economy, government appetite to subsidize this option and numerous lenders willing to support leveraged renewable projects. Renewables continue to have a high priority in the new administration’s energy portfolio. They also provide a valuable additional resource in the national generating portfolio mix, to the extent they are technically and economically feasible.
On the other hand, despite the five year “boom”, wind supplies less than 1 pecent of U.S. electricity. What the renewables boom will inevitably influence is reduced consumption as a direct ratepayer reaction to the nominally higher costs of renewable power production. In the end this will lead to a favorable environmental impact due to decreased electricity demand.
While renewables represent an important added dimension to diversifying the national portfolio mix, during this recession they are emerging as a supplement to (but certainly not a replacement for) traditional generating options.
Investment in renewables has slowed markedly as many potential wind investors can no longer use the available tax credits. Should the laws of economic supply and demand prevail, as opposed to government fiat, we’ll remain in a “back-to-basics” investment era. Payback and internal rate of return, along with an evaluation of the real cost to ratepayers (as opposed to a one-dimensional focus on the environment) may return as investment decision drivers; an ironic statement in the world’s largest free market economy!
Obstacles facing new nuclear and coal plants persist with the change in our government and its reduced support for nuclear, made evident by the severe reduction in the new nuclear construction loan guarantee program. The recent reductions in new construction government loan guarantees will mean fewer of the proposed new nuclear plants will go forward. However, nuclear is the cleanest large-scale (and over the long run) cost effective power generation option. New nuclear plants financed by regulated utility balance sheets ultimately will be built, with little government assistance and, hopefully, little hindrance.
Coal remains a necessary and cost-effective long-term option, particularly once pre-combustion clean coal technologies such as integrated gasification combined cycle advance closer to commercial reality. The wild card with coal, of course, is how Draconian federal CO2 mandates will be, determining the ultimate economic viability of this technology.
The availability of incremental megawatts through modernizing existing coal and nuclear units will be an economically irresistible option over the next several years. As half of U.S. electricity is fueled by coal, rapidly displacing this capacity is an unaffordable and unrealistic option. Many coal units have already undergone environmental control upgrades while others will require upgrades. Concurrent with the environmental effort, turbine-generator modernization can provide considerable incremental capacity with no increase in fuel consumption andmost importantlyat a modest installed cost. Modernizations potentially represent over 50,000 MW of incremental capacity at capital costs of $900 to $1,500/kW (larger unit, hardware-only scope). This offers a compelling and easy option relative to virtually any generation technology choice.
Likewise, upgrading existing nuclear assets represents another easy and inexpensive source of new capacity on a dollars-per-kilowatt basis. The more than 40 uprates and extended uprates already approved by the Nuclear Regulatory Commission will expand nuclear steam supply system and turbine island electrical capacity by 3,000 to 4,000 MW. This incremental capacity could be available years earlier than adding new reactor capacity and at much lower and predictable capital costs.
New gas-fired combined-cycle plants should be the default new capacity choice for near- to mid-term large-scale additions due to their environmental footprint, relatively lower capital cost and fast construction times. Although gas prices are currently low, their historic volatility indicate they may not be low for a sustainable period. Consequently, new gas units must be as efficient as possible to minimize costs when gas prices are high and maximize profit when prices are low. The free market has driven the major gas turbine OEMs to push the combustion turbine technology envelope to unprecedented levels of capacity and efficiency. Regulators assisted by mandating single-digit NOX emissions. Combined cycle application of highly efficient gas turbine frames over 300 MW in size will soon feature combined cycle efficiencies in excess of 62 percent.
Existing coal and nuclear unit modernizations, plus the deployment of highly efficient new gas-fired units will be the most cost effective and practical choices, due to their relatively modest capital outlays and proven, scalable technology. Renewables remain an excellent portfolio diversifier and may see a renaissance once the economy significantly strengthens and their scalability improves.
Allowing the free market to do its magic by adding 219 GW of new gas fired capacity between 1996 to 2006 and driving a 22 percent share of the U.S. generation portfolio was, in retrospect, fraught with wisdom at present fuel costs.