CERAWeek 2014 - The Global Power Challenge

Jone-Lin Wang, Vice President and Head of Research and Consulting, Power, Gas, Coal, Renewables-Americas, IHS, chaired a Thursday morning plenary session on "The Global Power Challenge." She was joined by Leonhard Birnbaum, Member of the Board of Management-Markets, Services, E.ON; Dawn Farrell, President and CEO, TransAlta Corporation; and Jim Hughes, Chief Executive Officer, First Solar. The panelists discussed how the utility business model can respond to challenges from renewable generation, changing government policies, and the increased risk profile of building large fossil-based generation. They agreed that market structures need to support long-term sustainability as opposed to providing short-term incentives.

Leonhard Birnbaum discussed how risk, societal desires, and customers are the three keys to developing utility strategy. Risk becomes more important as the shift to deregulated markets continues. In regulated markets, more capital invested meant more profits, whereas in deregulated markets it means more risk. Deregulation was driven by a societal desire to break up the market power of utilities, reflecting the customers preference for low electricity prices. The result is energy prices so low that additional capacity cannot be built and existing capacity is unprofitable. The result for publicly traded companies is a reduced stock price, making state-owned entities the only builders of large base-load power generation. This presents an opportunity for small, modular generation, with its lower risk profile.

Dawn Farrell said that customers want different things in different jurisdictions. For example in Alberta, customers feel coal is the best low-cost fuel source, and environmental concerns are secondary to the competitive value that coal-fired generation provides. With Canada's planned phaseout of coal-fired plants that have reached 50 years of age, Albertans are concerned about relying primarily on natural gas. Natural gas can be subject to high spot prices, as demonstrated this winter in the US Northeast. Increased installation of renewables is one way to hedge against both fuel commodity cycles and delivery issues, which is reflected in TransAlta's buildup of renewable generation. Ms. Farrell said she can also imagine some coal-fired units installing carbon capture and storage systems, thereby avoiding retirement, in order to preserve fuel diversity.

Jim Hughes said the biggest challenges for the solar industry are understanding customers, regulations, and geographies. The economics of solar generation are working in a widening envelope of circumstances, and it is important for the industry to be a good player in every sector. This means operating in a fashion that doesn't damage the classic utility business model and giving policymakers a better understanding of where different solar technologies and policies work. Mr. Hughes discussed feed-in tariff policies, which are good for developing new technologies but are not competitive. Instead, market structures should fit into the normal construction and planning process while being grid friendly. Renewables are already advantaged in that they provide a hedge against changing fuel costs and can be built and turned on in stages as they are completed, he said. Fossil-fueled plants need to finish construction before any revenue can be generated, which can take several years. He noted that the longer lead time before these plants begin producing revenue increases the risk that changes in the marketplace will make the generation uneconomic. Owing to the reduced risk profile of renewables, Mr. Hughes expects their installation to continue even without continued government support.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.