Fuel cost may lead to power shortages within 5 years
Posted: 13 February 2006
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The biggest single-year fuel cost increases in history is creating a strong chance that US power markets will not be able to successfully address resource adequacy, resulting in power shortages in some areas of the country within the next five years, the Managing Director of Cambridge Energy Research Associates’ (CERA) Global Power Group, Lawrence J. Makovich, told a briefing at the firm’s CERAWeek 2006 in Houston on 9 February..
Fuel costs, which account for about one-third of total power production expenses, have increased from $68 billion in 2004 to $90 billion in the past year, Makovich noted.
Resource Adequacy Shortfalls
 The U.S. power business is at the point where plans for new supply need to be addressed. Assuming all power plants currently under construction and half of those under development are eventually completed, less than half the new capacity needed over the next ten years will come online, Makovich said.
“We saw a turning point this past summer when the average U.S. reserve margin dropped to 23% from 32% a year earlier. Because peak demand growth will likely outpace supply growth over the next few years, several regions will use up their excess capacity over the next few years,” he said. CERA anticipates Virginia and the Carolinas will need new capacity in 2007 beyond that now under construction or in development, as well as the Middle Atlantic area and California in 2008, and New York in 2009.
Multiple Options
“There is no silver bullet strategy that can hand managements the right answers for their companies on new plant construction, technologies, fuel mix, resource adequacy and other key issues,” Makovich said. “Rather, the next five years will show that successful strategies are a function of developing a good understanding of the business landscape so that leaders can see the risks and opportunities, and position their companies to take best advantage.”
Rate shocks and political backlash, fuel price volatility, supply/demand pressures and other conditions are increasing the appreciation for large, integrated, fuel-diverse, regional companies that work in both regulated and deregulated environments – an approach CERA has called the hybrid business mode.
“Hybrid companies, many of which have evolved their positioning through sound strategic analysis of their business landscape and opportunities, are the most diversified in fuels, and they own the bulk of competitive coal and nuclear power plants. Not surprisingly, hybrid companies as a group have outperformed other groups in near-term total shareholder return,” Makovich said.
Strategic Bias
“Unfortunately, we do not see a large number of companies following this sort of sound strategic process. In fact, in a recent CERA survey of top executives at more than three-dozen North American power companies, a significant number of managers acknowledged biases in their organization’s strategic planning, such as misinterpreting or ignoring information, and information overload,” Makovich reported.
“This strategic weakness, in an environment of price shocks, fuel volatility and regulatory uncertainty, is the recipe for continued boom and bust cycles in the power sector,” he said, “and most executives recognize the risks -- 83% of the survey respondents are not confident the current market structure will be able to provide adequate generation supply when needed.”
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