Utility Generation Will Continue to Dominate Generation trends
By Bob Smock, Manager,PennWell Energy and Utility Group
Electric power generation in the United States is moving away from utilities, but there`s still a lot left in utility hands, and generation will remain a significant utility function for a long time. Utility employees engaged in power generation face a difficult challenge during this transition period.
In the early part of this century electric power generation was largely decentralized in the hands of consumers who produced their own power. By mid-century, however, utility generation had won out. Power generation was almost completely centralized based on economies of scale and the reliability of central station production and utility electric grid supply. Only a few percent of power generation capacity was in non-utility hands.
The pendulum started to swing back to non-utility power generation with the passage of the federal PURPA law in the 1970s and the growth of independent power producers in the 1980s. That trend has leveled out with non-utilities owning and operating about 10 percent of the electric power generation in the U.S.
However, the pendulum has new impetus in the non-utility direction, powered by the move to a more competitive electricity market in the U.S. More than 20,000 MW of new, non-utility owned merchant plants have been announced and an additional 20,000 MW of utility owned capacity has been sold to non-regulated companies. Some of the non-regulated companies building merchant plants or buying utility capacity are subsidiaries of electric utility holding companies, but strictly speaking the generating capacity is now non-utility. The merchant and “sold” power plants are, or soon will be, not committed to a specific utility`s customers.
The bottom line is that the non-utility share of U.S. electrical generating capacity is approaching 15 percent. The two trends that will drive that share even higher in the next few years are:
More states will move to competitive retail electric markets, which will lead more utilities to divest all or part of their generating capacity to make the competitive markets viable.
Non-utility players in competitive retail and wholesale markets will develop more merchant capacity.
How far will the trend to non-utility power generation go? The answer depends on how successful these competitive markets prove to be; or how successful they`re perceived to be.
A key development will be the success of the competitive market in California and other states that make the commitment. What will happen to real electricity prices for all classes of customers (not counting the 10 percent subsidized rate cut that has already taken effect)? What will happen to reliability of supply in this brave new world? Will customers tolerate a new barrage of dinnertime phone calls from competitors in a formerly regulated marketplace? Will the federal government force retail competition in all states?
I think success will be debatable, and that we`re headed for a hybrid system. So this trend to non-utility generation looks like another swing of the pendulum and, as we all know, the pendulum only goes so far, then it swings back. The time has come for utility domination of electricity production to stop. I don`t think we`ll go to the other extreme and see complete domination by non-utilities. I doubt the pendulum will even reach the 50 percent mark.
Utilities are going to continue to play a significant role in power production for a long time. But things are changing. Be ready for the change. p