Electric Power Generation Business Model

Electric Power Generation Business Model

In the 1990’s the trend was to break-up the electric utility monopolies into separate Generation, Transmission and Distribution businesses. The intent was to open up the electric power generation side of the business to more market oriented competition with the hope of lowering prices for electricity at the wholesale and retail level.

Two trends have evolved in the intervening years to disrupt this neat solution;

1) The increase domestic (USA) production of oil and natural gas plus other global factors has resulted in the significant reduction over the last year in the price of oil and natural gas.

2) The significant increase in solar panel electric power generation by consumers has shifted more power generation to the Distribution level.

So why is the decrease in global oil and natural gas prices not a completely good thing for everyone? Certainly, those customers that are highly dependent upon electricity generated by oil and natural gas fired generators should benefit. Customers in my family home of Hawaii where oil electric power generators predominate, should see significant savings. The issue is different in parts of the USA that are dependent upon nuclear power plants for the majority of their electric power generation base. The current merchant wholesale rates for electric power generated by nuclear power plants is at a level that makes some of these generators uneconomical. Representing a huge capital investment, requiring years to build, these plants cannot be easily or quickly be added to the power generation mix. Their importance as an electric power generator at stable and predictable rates cannot be over stated. In addition, this type of electric power generation is significantly cleaner if “greenhouse gas emissions” and global warming are a consideration.

I recently read an article which discussed the application of a nuclear power plant operator to the utility regulatory agency for financial relief. Their argument is that electric power generation mix needs a source of stable generation at predictable rates to form the base. Coal fired plants have been historically provided the foundation of electric power generation, however, their undesirable environmental impact should see the reduction in usage over time. In general, oil and natural gas generators are very appropriate for time of day and peak load requirements.

What is the appropriate mix? Each power generation option has favorable and unfavorable features. Just a few months ago when the price of oil was around US$100 per barrel, nuclear power plants look very good economically (ignoring radioactive fuel disposal). We read every day about coal as a fuel and the undesirable impact on the environment. Oil and natural gas have better environmental impact, but what if we include what it takes to get it out of the ground!? Thrown into the generation mix is the power generation at the Distribution level through solar cell installations.

Disruptive environment for both the power generation businesses and their governmental regulators.

-- Timothy Chen