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Building the Next Generation Utility

Fundamental changes require bold strategies.

Fortnightly Magazine - January 2009

tightness in reserve margins. It is needed to support renewable energy sources such as wind and solar. And natural gas is the only politically acceptable choice.

Theme 3: While nuclear will play a greater role in our baseload portfolio, coal plants will remain critical to meeting our future energy needs and will remain a significant source of value for their owners.

Gas alone will not alleviate the baseload challenge we will face in the coming years. And even though nuclear will play an increasing role, any contribution impact will not be felt for decades. Coal plants will be an integral part of the generation solution for many years to come and remain a significant source of value for their owners. Despite increasing social and political pressures against legacy fuels and power production methods, coal is simply too cheap and readily available to ignore.

There are several reasons for this. First, starting with the first Clean Air Act in the early 1970s, the United States has grandfathered existing power plants with respect to any environmental legislation. Second, the U.S. coal generation fleet is quite young, with an average age of 35 out of a typical asset life of 50 years. Replacing these plants with more environmentally friendly technologies in a very short period, say 10 to 15 years, would be prohibitively expensive for ratepayers. Third, stripping coal out of the generation mix would push other options—nuclear and natural gas—beyond their sustainable limits. Switching completely from coal to nuclear would add 300 nuclear units to the current 104. Current projections only show plans for up to 40 new nuclear units. While this represents a major addition to our current nuclear fleet, it is a far cry from the number required to replace coal. And finally, the underlying fundamental coal to gas spread (see Figure 1) is likely to persist and possibly even increase. GHG emissions prices would need to be prohibitively high in order to reverse this fuel spread.

Thus, regardless of ultimate GHG emission standards, coal is unlikely to be eliminated, or significantly diminished, even in the case of a nuclear renaissance. We will, however, see acceleration in the development of advanced clean-coal technologies, including, but by no means limited to, carbon capture and sequestration (which is 20-plus years away).

Theme 4: Given the increasing difficulty in siting and getting environmental and regulatory approvals for infrastructure investments in generation, utilities must focus on operational excellence to extend the life of assets and extract more value. Historically, our generation fleet has exhibited significant variability in performance, but there are significant opportunities to improve operating performance. Benchmarking analyses commonly show 40-percent deviation in performance around the mean for units of identical make and similar vintage (see Figure 2) . In addition, and just as revealing, there will be 1 to 5 percent gaps in performance across the same unit when operated by different operators within an organization (normalized for weather and other conditions outside of the operator’s control). Utilities should work toward closing these gaps by adopting lean manufacturing techniques and other operational