Published: February 13, 2018
As the utilities industry enters its second decade of deregulation, the power market has changedconsiderably, and is still in flux. But great change brings great opportunity. Looking at the evolving shape of the industry today, I’m excited by the opportunities emerging in various sectors.
The most impactful change that deregulation has spurred is, naturally, rapid privatization of formerly state-owned utility companies. This, combined with increasing tech innovation, has opened the playing field for all kinds of actors, from private companies known as independent power producers, to even households themselves, selling power back to the grid. However, one actor more than any other is upending the industry as we know it: private equity firms.
Flush with cash, these firms are eager for new markets to invest in. Since the 2008 financial crisis, private equity firms have gone from managing $1 trillion to $4.3 trillion, according to the advisory firm Triago. The deregulated utilities industry is incredibly attractive. Over the past decade, private equity companies have been pouring money into the utilities market as they see myriad opportunities for significant returns.
Columbus, Ohio-based American Electric Power recently agreed to sell four plants generating 5,200 MW to a joint venture of Blackstone and ArcLight Capital Partners for $2.17 billion. This is just one such sale – the Blackstone Group set up a fund of $40 billion to invest mainly in infrastructure projects.
It’s easy to see why utilities markets would be an attractive investment for private equity firms. Power is a non-negotiable fact of life. Everyone needs it, from the average consumer cooking dinner every night, to large companies running data centers, to cities lighting up urban power grids.
But the last thing firms entering the utilities market can afford to be is complacent. The new competition in the business of providing power has afforded consumers an array of options to choose from. If they don’t like their provider, they now have options for new power providers they didn’t use to have. Indeed, the ability to generate power has never been more democratic.
Utilities today are engaged in a variety of ways of attracting customers, from offering competitive rates and incentives for buying energy-efficient appliances, to appealing to consumer ethics with reduced carbon emission rates. One big plus for natural gas is that emits about half as much carbon dioxide as coal, and the shale gas boom has pushed the price of gas to well below that of coal. Cleaner and cheaper will win out every time.
Above all, though, utilities are seeking to offer consumers efficiency and reliability.
At Mitsubishi Hitachi Power Systems (MHPS), combining maximum power with maximum reliability is how we approach our power generation. The MHPS J-Series gas turbines deliver the best project financials and net present value because of best-in-class reliability, output and efficiency resulting in high-capacity factors. The M501JAC combined cycle plant will have the lowest CAPEX available today with an expected capital cost payback in 4 years.
The financial value of this reliability cannot be overstated. Choosing an unreliable and unproven technology will negatively impact plant profitability – and in a worst-case scenario, outages could bankrupt a plant. Nothing will sink a utility quicker than disruptions in the production and delivery of electric power to the grid. MHPS estimates that if a 1,000 MW power plant went down for just one day it could lead to $63 million in losses.
Firms investing in utilities need to be certain their power generation won’t fail in the field and lead to expensive down time and maintenance. Understandably, clients are wary of using their own utilities to test out equipment.
Our solution to this constraint was to construct a full-scale verification power plant known as T-Point turbine facility. The facility has been in operation since 1997 and is used to verify the design and operation of their gas turbine fleet during its development. But it also dispatches electric power to a local utility under contractual expectations on high reliability and availability.
The T-Point facility is unique in the gas turbine world in that it allows both single components and whole gas turbines to be verified for extended periods of time under operational conditions on their own power plant attached to the manufacturing plant, an ability that other manufacturers do not have. Thanks to this unique facility, we put our turbines through about 8,000 hours of testing before they go into commercial use. This is about 40 times more testing time than major rivals.
It’s innovations like these that have enabled MHPS to oversee the world’s most reliable fleet of gas turbines. Because if you’re investing in a utility, and you let the lights go out, you will pay a steep price and may find your customer isn’t there when they come back on.
Koeneke is Vice President Project Engineering, Mitsubishi Hitachi Power Systems Americas, Inc.