Southern Company named Ronnie Labrato vice president, internal auditing. FirstEnergy’s board of directors elected Gary R. Leidich executive vice president and president...
Energy Technology: Winner Take All
benefit. So too the copper industry, as more efficient motors use more copper. Since reliability services are at a premium, uninterrupted power supply and storage suppliers would see rapid growth.
The losers are those parties that resist technological change and do not adapt to it. Incumbent distribution utilities would lose significant revenues and have a new class of stranded costs (stranded wires) if they clung to traditional regulation. Regulatory reform-decoupling revenues from kilowatt-hours sold- as practiced in California and Oregon today, would remove the disincentive for distribution utilities.
Generation companies also would suffer major losses, since the penetration of distributed resources acting as virtual peakers will significantly reduce peak power prices. Production-cost modeling of several U.S. power markets shows that just a 4 percent or greater penetration of distributed generation would effectively clip the peak, eliminating price spikes. It's obvious that these virtual peakers directly compete with gas turbine peak power plants. What's surprising is that this shift in the power markets would drop the average revenues earned from a new combined-cycle plant by 10 to 15 percent. The number of hours run decreases by 15 percent as well, and the combined effect lowers the total net free cash flow by 30 to 40 percent. Thus, the distributed generation penetration reduces the profits of new combined-cycle plants so much that they would simply not earn an adequate return on investment. Further, the profitability of utility generation assets, which typically have a mix of coal, nuclear, and gas thermal plants, would be reduced by a stunning 15 to 25 percent. 10
It is the fear of these losses that creates resistance from the incumbent players to widespread adoption of distributed power.
In sum, the financial winners and losers from the August blackout depend on which path we take as a nation. If the political consensus galvanizes around the supply-side solutions, we open the door to fundamental realignment of the production of electricity. The distributed resources solutions have the potential to create a more resilient and secure electric power system at lower costs. Political support from this path is absent because it presents disruptive risks to the incumbent players. Yet, to the extent distributed generation moves the energy system toward a more efficient frontier, society wins. Since the distributed path creates a new playing field, utilities must shift their regulatory strategy to adapt.
- A typical vertically integrated utility with 2 million customers may have sales of 40,000 GWh/year, revenues of $5.5 billion/year, but net income of only about 10 percent or $500 million/year (which translates to about $0.013/kWh). If total sales revenue is on the order of $0.10-$0.11/kWh, and fuel and purchased power costs are around 0.04/kWh, then gross margins are high-about $0.06-$0.07/kWh. Direct costs are around $0.03/kWh, indirect costs (overheads) about $0.015/kWh, depreciation and income taxes are in the vicinity of 0.01/kWh, so total costs are around $0.05-$0.06/kWh, leaving only $0.01/kWh in profit.
- Peak Load Management Alliance, "Demand Response: Principles for Regulatory Guidance," February 2002, and Eric Hirst and Brendan Kirby, "Transmission Planning for a Restructuring U.S. Electric Industry," June 2001, pp. 8-9.