It has been a tough year for power producers. According to the U.S. Energy Information Administration (EIA), the nation's net capacity is stagnated. So far, in 2013, there have been significant additions to the generating fleet, but there were also retirements. It turns out additions exceeded retirements by less than 0.05%. However, looking at the data, a pattern emerges that suggest higher energy prices could be on the horizon.
Admittedly, the emerging pattern relies on limited data. However, that data is consistent with the larger pattern I described in "When It Comes to Nat Gas, Consider the Landscape." The larger pattern was an historic perspective. It indicated a significant reserve capacity in natural gas, which pointed to strong disincentives for utilities to build new gas turbines.
The new data suggests utilities are paying attention. They are not developing additional capacity. Most are not seeking any change in cost leadership.
As the first chart illustrates, EIA data shows oil and nuclear capacity exited the power markets. For the last several years, few oil-fired power plants have produced meaningful amounts of power. Most remain economically useful as peak, standby or reserve capacity. Nevertheless, Duke Energy (DUK), NextEra Energy (NEE), NRG Energy (NRG) and various municipal utilities recently retired approximately 30 oilers.
Nuclear power has had a rough year. For various reasons, Edison International (EIX), Sempra Energy (SRE), Dominion Resources (D), Duke Energy and Entergy (ETR) announced early retirements of five separate nuclear power plants. While Southern (SO), SCANA (SCG) and federally owned Tennessee Valley Authority are building new nuclear units, none of those will be counted until their construction is completed and in commercial operations. Consequently, the nation's net nuclear capacity declined in 2013, albeit maybe for a short time.
Replacing oil and nuclear units were solar, wind and natural gas. So far in 2013, more than 800 megawatts of solar power entered the power markets. This is about the same amount of capacity as Duke's retired Crystal River Nuclear Power Plant. New solar capacity is more than the capacity represented by Dominion's retired Kewaunee Nuclear Power Station. In addition, the chart shows that new solar additions outpaced wind power by approximately 2-to-1.
Natural gas appears to be a surprise. So far, almost 4,000 megawatts of new gas turbines entered service in 2013.
At first blush, EIA's data seems inconsistent. It appears there is surplus capacity in natural gas. Consequently, few new natural gas plants would be built. However, EIA's new data fits nicely with the larger pattern. Let me explain
As the second chart illustrates, all is not what it appears. More than 2,100 megawatts of conventional gas boilers exited. Those exiting units were replaced by dozens of relatively inefficient gas turbines.
With one exception, all additions to the natural gas fleet are small units. Approximately 45 out of 57 new gas turbines are 100 megawatts or less. Most are relatively inefficient and consequently cannot compete in the power markets.
Missing from the inventory are efficient large-scale combined cycle gas turbines. These modern units are manufactured by General Electric (GE) and Siemens (SI). New units are typically greater than 600 megawatts. They are economically efficient, can achieve 60% fuel efficiencies and they are cost leaders.
There is one exception in EIA's new data. It is NextEra Energy. They just completed a 1,210-megawatt Cape Canaveral combined cycle gas turbine. It was manufactured by Siemens. It has an efficiency exceeding 60%. However, Cape Canaveral is a regulated asset and it does not operate in an open power market.
All the other gas turbines are relatively inefficient. It appears that the new gas units are intended to support peak, standby or reserve requirements. They produce costly power. If they are dispatched, the locational marginal price of power will be elevated.
This is good news for incumbents, particularly Calpine (CPN) and Exelon (EXC). While new competitors are entering the market, they are not cost leaders. In fact, with higher production costs, they may even help elevate market prices.
Some words of caution. First, it takes several years to design and build new power plants. Several new plants are in the queue. Not all will be built, but some will. If Southern, SCANA and TVA complete their nuclear construction, there will be a jump in new capacity. In all likelihood, that jump will appear in 2017 or later.
Second, production matters. Ignore the number of new and retiring power plants. Focus instead on the amount of power plant capacity entering and leaving the market.