Executive Perspective: Connecting the Physics and the Financials of Power Plant Flexibility

Anupam Narula

GE Power's Anupam Narula, with colleague Kevin Spengler, discusses varied operational flexibility priorities and the economic modeling methods needed to secure investment in today's uncertain market.

Anupam Narula leads customer value marketing at GE's Power Services business. In this role, he regularly meets with generation executives, including asset managers, power traders, general managers, and plant managers to drive the executive perspective into future product offerings and R&D efforts.

Kevin Spengler recently presented at the CEM Advanced Power Plant Flexibility Campaign in Paris, France on the topic of connecting the physics and the financials of power plants.

I admire the technological genius behind gas turbines, steam turbines, generators, and balance-of-plant assets that generate power for billions of people, but moreso, I admire plant leaders who can make the financials work in the current energy mix.

Last fall, I spoke at the Advanced Power Plant Flexibility conference—sponsored by the IEA and the Clean Energy Ministerial—about the physics and the financials of plant flexibility. I have spent significant time in Europe, Asia, and North America focused on the connection between physics and financials. In every country I have worked, the physics of the power plant have been remarkably similar. However, the financials have been very different. I believe we are all on a journey to better connect the two, and I want to reflect on that path so far, as well as the path forward.

The Varied Priorities Surrounding Flexibility

In recent months, I have spoken with generation executives at state-owned utilities, publicly owned utilities, and independent power producers, in addition to grid-operating organizations. Discussions tend to focus on the business economics and operating profile dynamics—and everything in between.

The generation leaders we work with live in a world where flexibility is top of mind. Wind capacity, solar capacity, and renewable-balancing needs are all increasing. Higher-efficiency technology is coming online, increasing capacity and reserve margins in some geographies and pressuring less-efficient units.

Additionally, there is a confluence of older asset retirements, grid and storage advances, and ever-changing regulatory environments and market designs. The market dynamic and the need for flexibility is not new. It is an immediate challenge in some markets and on the horizon for others.

It's no surprise that generation executives tell me that operational flexibility is increasingly important. However, the aspects of flexibility that matter most for customers differ. Some of these priorities include:

  • running at minimum load and getting compensation for turndown
  • reducing fuel burn at minimum load
  • the ability to run overnight to avoid a maintenance penalty
  • the ability to start up very rapidly and have spinning reserve and instant response
  • the ability to be emissions compliant with existing permits

For others, operational flexibility translates to fuel flexibility. These customers want the ability to use lower-quality coals, LNG, biomass, and much more.

Old World vs. New World

This need for flexibility is a byproduct of the new world we live in. In the old world, power plants were designed for full-load capacity and full-load efficiency. In the new world, power plants need to also be optimized for start-up time, start-up reliability, start-up emissions, ramp rates, turndown, part-load emissions, peak power, and fuel flexibility. To understand the critical connection between physics and financials, it's important to compare the business cases of the past against the business cases of today when making improvements to power plants.

In the old world, plants operated 8,000 hours with less than 15 starts annually over a 15-year time horizon. Plants had a long-term power purchase agreement, certain capacity payments, and a predictable regulatory landscape, resulting in predictable revenues and O&M costs.

In the new world, some power plants are operating less than 2,000 hours with more than 100 starts annually over a three-year time horizon. Furthermore, these plants operate with uncertain capacity payments, ancillaries, O&M costs, and energy prices in a dynamic regulatory landscape.

The Implications of These Differences Are Clear

In the old world, generators had straightforward business cases and investment decisions for power plant builds and upgrades with deterministic financial value models. In the new world, generators need probabilistic business cases with different scenarios complicating investment decisions. Furthermore, stochastic financial value models with market and regulatory uncertainty are increasingly required.

In the new world, the physics solution includes hardware, advanced controls, and optimization software, where before it was just hardware. The business case for flexibility is challenging, and it's exacerbated by disconnects between stakeholders in generating companies.

For generation and operations leaders, availability and reliability, O&M costs, and market design are top of mind. For board members and senior executives, the obligation to serve, a predictable P&L, and risk mitigation are primary considerations. For energy traders and general managers, dispatchability, operating characteristics, and market products are the areas of focus. It's remarkable how little overlap there is between these stakeholder priorities.

There Is Another Way

In the traditional power plant build or upgrade, there was a relative certainty regarding the assumptions made in the value calculation. There was also agreement on the underlying assumptions in the business case across the entire generating organization.

Today, there are disconnects over the assumptions that drive an investment decision. These disconnects emerge between generation executives, plant managers, and energy traders. Furthermore, the business case is often probabilistic, which means there's less certainty regarding revenue and margin.

Fortunately, there are stochastic techniques and tools to help stakeholders make the right investment decisions in today's economic climate. The Monte Carlo simulation and sub-hour power system modeling are two examples of this strategy. These techniques help generators make better investment decisions by understanding their current and future position in the dispatch stack and modeling uncertainty.

Even with these advanced modeling techniques, my message for grid operators, market designers, and regulators is to develop market mechanisms that clearly reward the flexibility that is critical to the resilience of the grid. My message for generators is to embrace the stochastic methods that power traders use daily to quantify the value of flexibility to the grid operator. I want to partner with you on this journey toward greater operational flexibility by connecting the physics and the financials of today's—and tomorrow's—power plants.


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