In almost every conceivable way, the world is changing profoundly in front of our eyes, and at an accelerating pace. The markets for fossil fuel power are no exception.
Intermittently available solar and wind energy are making major inroads, upending the fundamental paradigm on how electricity is generated and delivered across the grid—a paradigm founded on fossil-fired generation. The increasing penetration of energy storage and electric vehicles in the coming decades will only further disrupt owners and operators of fossil generation assets.
The Need for Scenarios
Of course, the future is never perfectly predictable. In the case of power generation, planners and forecasters have always faced considerable uncertainty about how fuel prices will affect energy prices and how demand growth will affect the need for new capacity. That said, the degrees of uncertainty are multiplying.
Beyond the wide range of outcomes possible from the rapid deployment of renewables (and storage and EVs), of particular importance is the growing ambiguity of how regional power markets will account for price capacity and ancillary services to adequately compensate generation asset owners when energy prices approach (or even go below) zero. Along with other expert observers, former FERC Commissioner Tony Clark expresses the urgent concern that electricity marketplaces must be restructured to provide appropriate pricing signals that will induce socially optimal investment decisions in new power generation capacity.
Although it's impossible to specify exactly how these tricky regulatory issues will get resolved—and it's likely that they'll get resolved differently in different regions—owners and operators of fossil power plants can cope by assessing how their assets will perform under different scenarios within the market conditions they will face.
The essence of scenario planning is to evaluate the sensitivity of a decision to alternative future circumstances: If one strategy choice results in generally good outcomes under all plausible states of the world, that choice is likely to be superior to others that can produce poor outcomes under realistic sets of possible conditions.
Given a relevant range of planning scenarios, owners and operators of fossil plants will need to determine not just how each of their assets should participate in the marketplace, but how their entire portfolio of assets should be positioned.
Note that optimizing on a plant-by-plant basis will not necessarily yield the best answer for the entire portfolio. The scenario-based analysis to help plant owners and operators identify the most valuable action for fossil generation assets must first and foremost be conducted at the portfolio level. This allows stakeholders to identify a mix of missions among the assets of the portfolio that increases value and is mutually reinforcing.
This is because the value-maximizing set of choices for the fleet may be quite different from the simple sum of the same choices for each plant. Indeed, it is eminently possible that the ideal utilization pattern for one asset and the ideal utilization pattern for another asset will conflict with one another, and that the market won't be able to support both plants performing in their most preferred roles.
Once the portfolio analysis is complete, identifying which plants should perform which missions, plant-level analysis can be undertaken to determine what specific actions should be taken at each plant to create the most value in the chosen mission. Plant owners and operators should take care to consider unconventional alternatives, such as implementation of hybrid configurations.
Given that the markets in which fossil generation assets participate are under so much dynamic stress, it is critical that power plant owners and operators undertake such a portfolio optimization assessment and implementation plan at least every two years, if not more often. If a plant hasn't conducted such an initiative recently, it should launch a strategic imperative now.
Even though the pace of change can be dizzying, and the challenges facing fossil fuel power sometimes seem daunting, owners and operators of fossil generation assets are not in a hopeless situation. It's quite the opposite. With a combination of insightful analysis backed up by operational excellence, fossil power asset valuations can be preserved or even enhanced in this more difficult operating environment.
While the days of only fossil generation are gone, the days of no fossil generation are far in the future. According to the EIA's most recent Annual Energy Outlook, released in early 2017, fossil generation is still expected to account for more than half of all electricity supply in the US through 2050. During this long transition, the current fleet of fossil power plants will provide critical grid services that other assets will find uneconomic, difficult, or impossible to offer.