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| Mon, 13th Apr 2020 13:43:00 |
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This Trend Will Reshape Power Generation In The Coming Decades |
The decarbonization of electricity production around the world today may be seen as part of a technological shift. Everyone wants electricity or its immediate benefits like cell phone charging. And until relatively recently, most consumers didn't care how it was produced as long as it was affordable and accessible. But environmental or political movements aside, we are also witnessing a technological shift. The production of electricity on a commercial or wholesale scale is moving away from big-and-complicated machines and systems to small-and-less complicated forms of production. This implies no more gigantic projects that take 10 years to complete with costs that tally into the tens of billions. What's interesting is that we seem to be witnessing a reversal of the idea of economies of scale with respect to both production of electricity as well as the optimal size of the distribution grid itself. This seems like a fairly radical departure that may shape the industry for decades.
Years ago, we had a discussion with one of the last centuries most fabled engineers. We asked, "If economies of scale really prevail was that a good reason to upsize electric power plants?" He replied that economies of scale did in fact prevail and utilities should go forward with big projects as long as they were certain about four key aspects relating to the project: 1) the ultimate completion costs; 2) duration of construction; 3) total capital costs (equity plus debt); and 4) expected market or demand for electricity at time of completion. What this asks, to borrow a phrase is, if you build it will they come—at the prices you ultimately have to charge?
Our readers know that recent nuclear new build has pretty much failed thoroughly on points one through three. And bringing it up in this context feels like piling on at this point. But this past week also saw the cancellation of a proposed gas fired base load project by a wholly reputable builder. Somehow this feels different in that perhaps we can no longer assume base load natural gas will be the bridge fuel as we transition away from fossil fuel based electricity production. With these facts in mind, we believe the concept of economies of scale for utilities might be ripe for revision. A recent study by a sextet of European and Canadian academics supported this view (Science, 3 April 2020) by examining the trade-offs of costs versus complexity concluding that in their terms granularity has advantages over lumpiness.
Read original full article
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