Fortnightly
Less is More: Why Gas Turbines Will Transform Electric Utilities
December 01, 1994
It will come as a horrible shock to most, or as a life-defining moment for others, but Miss Piggy was wrong. In power generation, small gas turbines offer less size but more advantages. They will speed up the move from regulation to competition.
Assembly-line Methods
Gas-turbine generating units at last bring Henry Ford's ideas of mass production to the electric utility industry. If the reader is not yet familiar with power generation technology, I would suggest that he or she arrange to walk through some modern, state-of-the-art, large power plants. Notice that each plant is generally one of a kind, engineered specifically for and built on its site. Now consider for a moment an airline company: Upon deciding that it needs a new airplane, it calls an architect/engineer who designs a new plane; takes bids on wings, avionics, seats, galleys, and so on; and then constructs the airplane at a major airport. Most readers will recognize this scenario as ludicrous. But isn't that how we build power plants?
Today, just as airlines purchase a 767 from Boeing, it is possible for utilities \(em and their customers and competitors \(em to call a supplier and buy a fixed-price preassembled gas-turbine power plant of up to about 150 megawatts (MW). The plant is constructed on an assembly line and transported to the site by train or truck. It requires a lead time of less than one year and sports a 90-percent-plus availability factor. Yet the cost of this unit is only about one-fourth that of a conventional unit, on a per-kilowatt (Kw) basis.
This cost differential marks one of the biggest effects of the "Henry Ford" method. One-of-a-kind conventional units cost about $2,000/Kw, while prepackaged units cost about $500-800/Kw. This difference can be explained not only by the economics of mass production, but by the different thermodynamic cycles used by the two machines. Most large units use the Rankine cycle, in which heat is converted to steam, then to mechanical energy, and ultimately to electrical energy. Gas turbines use the Brayton cycle, converting heat to mechanical and then electrical energy. With no steam cycle, the smaller units lack waterwalls, steam drums, economizers, superheaters, reheaters, condensers, condensate pumps, boiler feed pumps, main steam lines, demineralizers, and the like. The simpler design trims costs, boosts availability factors, and curtails maintenance needs.
A shorter construction cycle that cuts risk gives gas turbines another advantage. (If the reader is not already familiar with construction risk, he or she should examine any article on any nuclear plant.) Construction delays for conventional power plants generally extend for years and involve hundreds of millions of dollars. A delay in a small, packaged gas turbine usually means the train is running two days late. (In Florida, a prefab unit became stuck on the railroad tracks after it was unloaded and was hit by an oncoming train.)
The improved capacity factor, coupled with the relatively small size of gas-turbine units, can shave reserve margin requirements dramatically. Fewer megawatts need to be installed to achieve the same loss-of-load probability. And here's another advantage: gas-turbine units can be brought on line quickly in small increments, avoiding "lumpy additions," huge overcapacity disallowances, and much of the need for long-term planning.
Electric utilities claim that if others run these units on the regulated system, they should pay their fair share for voltage support, backup power, and so on \(em a view I agree with, as would most independent power producers (IPPs). But the fairness argument runs both ways. With their rapid startup capabilities, these units count as 15-minute reserves in many areas. Utilities should pass along the savings they achieve in reserve margins.
Improving on the Past
Large nuclear units built in areas with excess capacity stand as monuments to the well-meaning regulators and utilities who successfully forecasted and planned the best path for society. But plants that boast a one-year lead time and arrive in 40- to
150-MW increments won't need a fraction of the forecasting and planning effort required for 1,000-MW plants designed for 10 years out. And they accommodate midcourse corrections as circumstances change.
I disagree with those who claim competition will discourage research and development (R&D). I think R&D spending is crucial to competition and will increase rapidly, not decrease, as companies try to get a "leg up" on competitors. Just as the Public Utility Regulatory Policies Act spurred R&D on plant design, the search for fuel diversity within the IPP industry will ensure the development of efficient coal-gas process-es. I believe that even "coal plants" eventually will use these new machines, leading to large de-creases in fuel use and emissions.
In terms of overall efficiency \(em a factor gaining in importance \(em gas-turbine units routinely beat large steam-cycle plants. In the past, utilities have segregated electric generation from process-heat production, wasting energy. Today, rising fuel prices and the intense overseas competition in our national economy force utilities into partnerships with customers to gain every possible cost-effective efficiency. Small gas-turbine generating units are ideal for supplying process heat or cooling. In many applications, the 1,000 Fø exhaust can furnish all of the cooling or heat required, completely eliminating the previous fuel requirement. (Europe is much farther along in the use of waste heat than the United States. In Russia, for example, cogeneration and central heating have been common for years.)
These prefab units also offer environmental benefits. They typically produce very low nitrogen oxide emissions (<25 ppm), virtually no carbon monoxide or sulfur dioxide emissions, and since natural gas derives significant energy from burning hydrogen, much less carbon dioxide than coal. All these factors make gas turbines suitable for urban areas, where the plant operator can achieve an extra 2- to 5-percent savings in fuel and emissions by avoiding transmission losses. This cuts transmission requirments \(em avoiding or deferring construction, or freeing up existing transmission capacity. An urban plant site also greatly increases the probability that a use can be found for the waste heat, which improves system stability, and may allow the installer to qualify for tax benefits for locating within urban enterprise zones.
More benefits come from fuel efficiency. A base-load coal plant may convert 35 percent of available energy to electricity. Gas turbines already operate at simple-cycle efficiencies of above 40 percent; combined-cycle ratios approach 60 percent. Units now on the drawing board should approach 65 percent. Less fuel is used, and the fuel used burns cleaner. Efficient heat rates can help overcome higher per-Btu fuel costs.
Figure 1, Optimal Plant Size, shows how the short-run average cost (SRAC) and size of installed capacity has changed over time. In 1930, a 50-MW unit was probably cheapest to build on a $/Kw basis. Units sized below 50 MW lacked economies of scale. On the other hand, since the technology did not exist, units larger than 50 MW would have imposed higher engineering and R&D costs. By the 1950s, technology had improved and the cheapest unit produced 200 MW; by the 1970s, 500 MW. This steady march to larger capacities peaked in the 1980s with 1,000+-MW units. But in the 1980s a startling thing happened. The size of the cheapest plant dropped dramatically. Today the cheapest unit is a gas turbine in the 50- to 150-MW range. Inflation and environmental controls play a role in unit costs, of course, but the important point is that the optimum size has shifted from 500+-MW (10-year lead time) to smaller units (one-year lead time).
What transformations will these units bring to our industry? Economic theory predicts that a particular industry will shake down to three competitors if SRAC reaches a minimum at 33 percent of total market share (the automobile industry, for example \(em see Figure 2, Ideal Market Share). As market share falls, per-unit costs rise, making smaller-share firms less and less competitive until they must merge to gain market share or join the ranks of Eastern, Braniff, and their ilk in explaining what went wrong to the creditor's committee. The dry cleaning industry lies at the other end of the spectrum, where SRAC hits its low point at 1 percent of market share.
These changes in generation technology, coupled with economic theory, suggest a move away from large units built by large companies to small units built by a host of new competitors. Ten years ago, who had heard of Trigen, CRSS, AES, Destec, Tejas, and the rest? Ten years from now, the list of generating companies will hold names not yet seen.
Small, prepackaged generating units also give our customers and competitors the technical ability to run their own power plants. In the past, it took a great deal of engineering expertise to design, construct, and operate a power plant. Today, the order, connect, and run cycle is much simpler. Two barriers to entry (high cost and technical expertise) have evaporated, but the regulatory barriers still persist. The first competitors will come "inside the fence." Then, when our customers find that they cannot build these machines (being too small or lacking gas supply), they will pressure legislators for retail wheeling to achieve equality. And they will succeed. No industry and, indeed, as the former U.S.S.R. proved, no nation has stood successfully against economic reality. The airlines couldn't; AT&T couldn't; gas companies couldn't; we won't.
The Coming Shake-out
Many utilities will try to hide behind the skirts of their regulatory commissions. But it won't work. Whenever a set of laws, such as the utility regulatory framework, is based on a faulty economic premise (for example, that the generation segment of our business is still a natural monopoly), then no commission or company can cling to the past and stand against competition. Only cost-cutting, marketing, customer service, low-cost production, sweat, and tears can prevail. Some regulators and utilities may be able to keep the barriers intact longer than others. But I aver that when large segments of private industry join utilities and IPPs to pressure lawmakers to deregulate, the remaining barriers will fall. This sea change will permanently transform our business. Even if utilities become incredibly efficient in the generation market, the shift in the SRAC curve implies a constant influx of new entrants. One need look no farther than the airline industry for confirmation. We no longer need government to nurture competition in the generation segment; the market will do just fine as long as we have an open-access transmission system.
Regulators may prove wary at first because the low prices will go to large users, but R&D, spurred by a competitive market, will give us a variety of efficient plant designs. In 10 years, it will be possible for a 7-Eleven Store to install a small "black box" that brings natural gas in and produces heating, cooling, and electricity. When that happens, look out. Competition will spread throughout all rate classes.
What can we do as an industry? First, we can adapt the newest, most modern technology and cut costs. Second, we can work together with regulators to gain the ability to compete. No one can thrive in a competitive environment with a regulated mentality. Large, well-capitalized utilities probably can survive for years and gradually wither away or become distribution companies if they don't change. Smaller companies will go faster. The winners will embrace competition early and learn to compete. But in the end, the message will be the same for all \(em change or die.
I am convinced that progressive utilities can run low-cost generating units as well as anyone. If we can't compete and win in our own business, we should quit. However, I fear that one of the largest stranded assets in the coming turmoil will be utility management. I predict that 5 of the 100 largest electric utilities will fail or be forced to merge within 10 years because of their inability to recover their high fixed costs in the face of market pressure.
Lest my brethren in the utility industry think I am promoting chaos or aiding the enemy, I must state that it doesn't make much difference what I say. The market marches on, tapping out an
ever-changing beat, synthesized from thousands of changing notes and sounds. I am merely describing the music, but \(em I'll admit it \(em I sometimes like to play it. It's a catchy rhythm; one could get used to it. t
Charles E. Bayless is chairman, president, and chief executive officer of Tucson Electric Power Co. in Arizona.
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