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Electric generators face uncertain future

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What is the future of electricity generation?

As demand stagnates, some power companies are left with excess assets. While some of those can be retrofitted to make them efficient enough to compete in the electric-generation market, capitalism dictates that some companies won't be able to compete, experts say.

“It's going to be wonderful for some,” said Jay Apt, a professor of technology and director of the Carnegie Mellon Electricity Industry Center. “It's going to be awful for others. That's how capitalism works.”

Some companies, like PPL Corp., already have responded by spinning off the generation portion of the business.

“When the recession took hold in mid-2008, we saw a very precipitous drop-off in usage,” said PPL spokesman Ryan Hill. “What we noticed as the economy has rebounded, though, we have seen some increase, but we are still are not back to above the mid-2008 peak.”

Other factors

Technology and the advance of renewable energy are also playing a part, said Mick Womersley, professor of human ecology and lead faculty of the Sustainable Energy Management Program at Unity College in Maine.

“Capitalism doesn't necessarily dictate mergers,” he said. “That's more to do with technology than markets. In the case of the emerging renewable energy technology, solar PV technology in particular allows for lots of small operators. The limiting factor is finance, and that bottleneck is beginning to widen, as the market finds ways for private finance to pay for your solar rooftop.”

However, in the short run, customers are not seeing price fluctuations, said Jennifer Kocher, state Public Utility Commission press secretary. The overall average retail price of electricity increased about 2 percent from May 2013 to May 2014, according to the most-recent data available from the U.S. Energy Information Administration.

“Of course, the PUC is always concerned about the impact on price that might come from a plant closure,” said Kocher, who noted the PUC has had no jurisdiction over electric generation since deregulation in the mid-1990s. “But with the exception of the anomaly of the polar vortex, we've seen relatively stable prices.”

That's little consolation to the power companies, which have invested a lot of capital in equipment. A recent article in the Wall Street Journal noted that electric-generation companies have to expand sales volume by at least 1 percent per year just to maintain that equipment.

Thanks to the competitive wholesale power market in Pennsylvania, power companies participate in auctions through PJM Interconnection, the regional transmission organization whose service area includes Pennsylvania and 12 other states, plus the District of Columbia.

In the capacity auction, usually held in May, companies can bid to offer capacity to the system three years out, offering a market for not-often-used generation plants, Apt said.

“When companies say, 'I have a generator. I expect to be able to make money because I expect demand to go up,'” Apt said, “but then it's not needed, so it goes to the capacity market. Then that bid might not get accepted. That generator may go out of business.”

Natural gas

A key component that's making generation companies rethink their business is natural gas. In the most recent capacity auction, about 80 percent of future electric generation will come from gas-fired plants, Hill said.

That's part of why PPL plans to spin off and merge its electric-generation business with Riverstone Holdings LLC to form the new Talen Energy Corp. PPL said last month that its regulated utilities made up 85 percent of its revenue and were much more stable.

“We do have some concerns with the transition we're seeing, concerns about putting all our eggs in one basket,” Hill said. “We're seeing an abundance of natural gas now, but prices historically can be volatile. There's a level of risk involved if the industry moves in one direction.” 

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