Renewables capacity additions in 2020 reaches critical mass.
By Craig Nicholson
This month the US Energy Information Administration released their short term energy outlook, and if you either own, service or provide equipment in the natural gas generation segment, you might want to take stock.
The 2020 growth forecast for natural gas generation is at an anemic three-year low. Conversely renewable solar and wind generation growth will hit a four year high for the same time period. Nearly 50 gigawatts of renewable generation have either been added or is forecast to be added in 2019 and 2020, compared to 11.4 gigawatts of natural gas for the same time period – over 4 times the capacity addition of renewable to natural gas! Furthermore, renewables are expected to surpass coal production in 2021 with a 22% share of generation mix. We are now seeing an acceleration in the transformation from thermal to renewable generation at a shocking pace.
As we’ve discussed in our previous blog breaking the mold for your next LTSA, renewable commitments at the investor, corporate, state and municipal level will continue to increase the share of renewable energy. As a result, this will permanently change the dynamics of supply and demand, affecting all those who buy, sell, supply or service the thermal power markets. Specifically, an approximate 25% penetration of renewables into a grid creates dislocations between hourly supply and demand. The resulting ‘duck curve’ effect of intraday demand peaks and troughs from the imbalances introduced by renewable generation, materially changes the way thermal plants operate going forward.
“We are now seeing an acceleration in the transformation from thermal to renewable generation at a shocking pace.”
Natural gas technology – Renewables best friend?
Gas turbine suppliers champion the technology as the natural choice for balancing out the intermittency introduced by renewables while lowering carbon emissions, positioning the technology as a renewables partner. Gas turbines typically emit about half the emissions of an equivalent coal fire plant, are more flexible to operate and can be installed in a much faster timeframe. As a renewables “partner”, the gas turbine is subjected to more starts and greater variable, load follow operation. New gas turbines are being designed for greater turndown and high ramp rate capability, increasing the effective operating range and positioning for more part load operating hours. But the question for an asset owner operating in such an environment is, at what cost? Like a heavyweight fighter after going twelve rounds – battered and bruised.
Old commercial models in a new reality
The revenue and profit stream for an asset owner operating in an ever more cyclical and partial load operation mode will continue to see downward pressure. Reduced generation hours directly impact revenue production. Typical maintenance agreements do not factor in partial load operation creating an imbalance between revenue and cost per operating hour. This situation is particularly acute with older agreements that never anticipated the gas turbine operating in anything but near full capability. Operating assumptions, maintenance formulas and fee structure may all work against anticipated plant operation.
Is a fired hour a fired hour?
So, in today’s operating environment, is an hour still an hour? Only when you pay for it! And here’s why. Most maintenance agreements are charged by the start or by the fired hour. If, however, a plant owner primarily operates at partial loads, the hot gas path components are exposed to reduced hot gas path operating conditions and, therefore, are not subject to the same degree of thermomechanical stress and wear and tear. In other words, it’s a triple whammy; the asset owner receives reduced revenue for that hour on the grid, pays full load operation maintenance price and does not get full usage out of the hardware (parts are replaced at set intervals independent of their condition).
Commercial transformation for a bright future
Though the traditional commercial models may shelter service providers from market variability, they simply do not fit the new reality for gas turbine owners. Increasing plant digitization and data compilation capabilities allow service providers to track operation hours, ramp rates, thermal transients and mechanical stresses to a far greater degree than ever before. In an ever-increasing renewable future, progressive asset owners must partner with technology providers to tap into such information, demand new commercial models and maximize hardware capability. Such an approach will reduce exposure to fixed rate commercial agreements and stay competitive to come out of the twelfth round still standing strong.