Engineering, procurement and construction (EPC) contracts are evolving as utilities seek to spread risks, contain costs, and execute their business strategies. As a result, turnkey contractors are...
Building a Better Utility
Many of the obstacles and strategic issues that utilities face today are all too familiar. This time they must be solved with a different business model.
want to consume.
Until people and equipment have the information necessary to choose to use energy based on the actual cost to produce it, we have to make the best of the system we have.
So we must structure systems and operations to minimize the problems inherent in forecast error. And that means recognizing the fallacies in the assumptions that underlie them.
Let me put it in stark terms. Should a management bet the company on its ability to estimate future customer demand? We all hope not. Remember those forecasts in 2000 about how much power the United States was going to need over the next decades, and how we couldn't begin to build enough? Now look at the glut we're still trying to work off! Some regions will have overcapacity into the next decade.
What about gas price forecasts?
Or oil? Know anyone who's gotten that right? Not me. And by the way, I continue to be a contrarian here. Current natural gas prices and consensus forecasts for supply and demand remind me of the power markets from 1999 into 2001.
Will we need all the plants now on the drawing boards? Will gas prices ever see $5.00 again? And are you willing to bet your company on the answers, and then double down? The stakes are high, because you're banking that:
- Customers won't revolt at the prices needed to recover your investment;
- Politicians won't change the rules of the game yet again;
- Regulators will keep their promises; and
- Investors won't decide there are easier and less risky ways to make a buck.
A New Business Model
Before depression sets in, let me say I believe this industry has a great opportunity to do things differently, to see things differently, and to choose a business model that doesn't crash if your crystal ball develops a crack. One that doesn't depend on the grace and good humor of your regulators or on the forbearance of your investors. One that doesn't make you hide from people at cocktail parties, fearful they might ask where you work.
What could the business model look like? One that could overcome all the costs required by forces outside your control: rising environmental costs, renewable standards, and green mandates, mounting labor and pension costs, higher fuel prices, rising interest rates and inflation? Fuel and interest rates are two of the biggest costs on the income statement.
Lower Prices When Costs Are Rising?
How do you lower prices when most of your costs are going up-before investments in expensive new plant that require price increases? We can learn from history.
In the 1960s, economies of scale in generation sent prices spiraling down for a decade. In the 1990s, heat rates dropped from 10,000 Btu/kWh to 6,500 Btu/kWh. When the economics changed, so did merit order, dispatch and industry structure.
In the 1990s, the energy industry accomplished heat-rate reductions through technology, as 3-D seismic technology changed the cost structure of finding gas and oil. That's now happening with LNG, as technology lowers shipping costs.
But such innovation needs to happen