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The Electric and Gas Industries are Converging: What Does it Mean?

Fortnightly Magazine - April 1 1995

against each other for the prize: customer loyalty and consumer dollars.

Inter-industry trade between the gas and electricity industries will grow substantially during the next 10 years. A minor aspect of this increased collaboration will involve greater use of electrotechnology and electronic equipment by the gas industry as it seeks to boost its own productivity. The major part will come from refining molecules into electrons via the impressive advances just ahead in gas turbine plants. These facilities will appear in various guises (em merchant, dedicated, industrial onsite, and (nonpipeline quality) gas field onsite plants, ranging from 20 MW (niche) to 200 MW (commodity) (em will dominate new generating capacity late in this decade and well into the next.

The new gas-fired generating units (basically jet engines), especially the merchant plants, will produce electricity at dramatically lower costs than either utility peaking turbines or industrial gas cogeneration facilities could manage even three years ago. By the end of the 1990s, the gas-fired generators coming on line will be profitable at a benchmark wholesale electricity market price of 3.5 cents per kilowatt-hour (›/Kwh), FOB the high-voltage transmission network. A confluence of factors will make this possible: 1) a compressed construction cycle of 14 to 16 months compared with the current 22 to 30 months; 2) continued rapid advance in the heat rates of gas turbines; 3) manufacturing process improvements; 4) standardized engineering and construction practices; and 5) reduced O&M costs as automated operations dramatically reduce the need for labor. By 2005, the competitive benchmark price may fall below 3›/Kwh.

INDUSTRY TRANSFORMATION

Four great economies will emerge during the period of convergent evolution. Those able to capture these economies will invent both the structure of the new gas/electric industry and sources of profit for their firms.

s Economy of competence (intellectual capital): The most powerful in the merchant end of the industry, since the mass-marketing of gas, electricity, and efficiency services in an unregulated environment are substantially similar endeavors. It will lead to lateral integration of the merchant segment.

s Economy of logistics: The most influential in the local, regulated transportation of molecules and electrons. Local transportation is essentially a step-down function from high volume, high pressure, or high voltage to retail levels, combined with safety and maintenance skills and the ability to process energy routing transactions. As a result, the existing distribution structure will first be legally and financially separated from the rest of the delivery system and then reconstituted and consolidated under new ownership and regulatory regimes.

s Economy of network operations: Most apparent in running large-wire or large-pipe businesses, both of which are evolving into true network systems with many nodes and enormous connectivity. Again, this economy will dismantle and then reassemble big wire and big pipe companies.

s Economy of production: The most compelling in the large-scale production of gas and electricity. With the capitalized cost of gas as fuel amounting to about 4 to 5 times the capitalized cost of a modern combined-cycle gas turbine facility, forward integration into generation by owners of gas reserves (or backward integration into gas