Thomas Carbone, Wartsila North America, Inc.
As managers in today’s energy business, do we have anything left to manage? Or are we merely custodians of a broken system?
The past year has brought upon us the ugly story of Enron, the collapse of the merchant power market model and a precipitous drop in investor returns. Yet, rather than dwelling on the mess, as managers, we should be building for the future.
One of the basic building blocks for the new energy model will be the concept of dispersed generation. Defined as power plants in the size range between small, distributed generation facilities and centralized plants (10-100 MWe), dispersed generation facilities are more efficient, cleaner, have lower environmental impact and are more cost-effective than centralized power facilities. Equally important, dispersed generation will address an important public policy question by reducing long-run volatility and increasing system stability.
Today’s energy options
For a time, it seemed as if the nation’s press had fallen in love with distributed generation, touting on-site generation techniques for residential, commercial and small industrial consumers as the “energy solutions of the future.” In reality, these options (fuel cells, photovoltaics, and microturbines to name a few) often cost twice as much as other alternatives and offer significantly lower reliability. While distributed generation technologies will continue to play a significant role in the future, the options available in today’s established generation market are of a relatively larger size range.
On the larger end of the spectrum, the market has spoken by selling its shares in publicly-traded power producers. As such, options beyond the combined cycle gas turbine centralized power plant are needed to address today’s transmission constraints and resultant volatility. In today’s market, dispersed generation offers that reliability to a wide profile of users.
Volatility: the good, the bad and the ugly
One of the basic tenets on the “for” side of the deregulation debate is that short-term, managed volatility will create opportunities for innovation, increase efficiency with profitable results, and lower average prices for the consumer. This logic, however, can be double-edged-excess, unmanaged volatility is harmful to the long-term planning necessary for sustained market growth. The brand of volatility that fueled the power trader has, instead, cut the Achilles tendon of too many energy industry stakeholders and customers.
Controlling market instability, once the exclusive territory of return-driven, monolithic regulators, is now a significant challenge for policy-makers, end-users, and energy industry managers (whether we like it or not). We entered the new millennium understanding that years of insufficient investment and neglect in generation, transmission and distribution had resulted in a disruption of the energy supply/demand balance. This imbalance was aggravated on the demand side by years of growth and an expanded need for increased reliability. The combined result was uncertainty on the price and, in some cases, uncertainty even on the reliability of energy supply.
Regional responses were developed with focus on the supply side (although typically neglecting the transmission challenges), with deregulation being the most popular region-by-region response. We are now witnesses to overcapacity, at least on a regional basis. However, transmission upgrades are most often discussed in the context of future national energy policy.
The benefits of dispersed generation
Dispersed generation is one of the few methods commercially available, which makes business sense today. An aspect more difficult to capture in a proforma financial model is the added benefit of increased system reliability.
The underlying issues influencing energy volatility include fuel price instability, transmission bottlenecks, system unreliability and demand growth variability. Today’s challenge is to provide stable and competitive energy at each node, even in the face of supply shortfalls and transmission bottlenecks. At many nodes, such dispersed generation not only improves the marginal cost of transmitted energy from centralized plants, but also assures energy availability and voltage support despite system bottlenecks-which may take several years to upgrade.
Among other things, California has taught us that deregulation is like a power saw. In the hands of pragmatic professionals, the benefits are obvious. But power tools can be used for destructive rather than constructive purposes. Implemented improperly, deregulation will likely increase volatility. Unless we accept living without the lights on, this objective will be accomplished in functional and dysfunctional markets alike. In any case, as regional pockets of undercapacity emerge, dispersed generation- encouraged by deregulation-will help to stabilize energy market volatility. Let’s also remember the positive results of deregulation-Pennsylvania and the U.K. to name two very different examples.
What are today’s and tomorrow’s incentives for constructing additional transmission infrastructure? There are none to speak of. Yet, without dispersed generation, the instability of the nation’s transmission system will increase-at least until there is a consistent national energy policy in place.
Unless a solution is embraced on a national level, the marginal cost of energy at many nodes will remain relatively high, and voltage support concerns will increase. If left unchecked, volatility of price and energy availability will increase. These transmission/distribution realities further highlight the attractiveness of dispersed generation as a hedge against transmission instability and price volatility.
Carbone is president of Wartsila North America Inc. He can be reached at Thomas.carbone@ wartsila.com.