Aug

23

Today, the U.S. Energy Information Administration (EIA) is counting how many power plants were added in the first half of 2024 and projecting how many will be added in the last half.

It's all wonderful news. About 20.2 GW (the equivalent of about 18 nuclear power plants) were added. By the end of the year, EIA expects about 62 GW of new capacity. About 95 percent of these additions are intermittent sources (wind, solar, batteries).

Offsetting this new capacity are retirements. Utilities plan to retire 7.6 GW, all of which use coal, natural gas, and petroleum as fuel. They are likely being retired because they are uneconomic and rarely dispatched. Their levelized costs exceed revenues, and investors want to tidy up their books.

Statistics unearth a problem that counting hides. The problem is not on the supply side; it's on the demand side. Specifically, counting 24/7 demand reveals tremendous growth (e.g., baseload). It appears there's a hidden mismatch between supply and demand. While there will be hours on most days when the grid is flooded with cheap power, there will also be hours on other days when there will not be enough supply to serve all loads.

Retail prices will jump. In fact, they already have. PJM is the Regional Transmission Organization (RTO) that manages bulk power markets for the mid-Atlantic region. It's one of the largest of the nation's ten RTOs. In addition to transmission line responsibilities, PJM manages energy and capacity auctions for power plant production.

PJM conducts an auction for capacity each year. Power plant asset owners may enter the auction and offer their prices. Owners are paid a daily rate for each megawatt if their bids clear. Auction results:

2024/2025
$28.92 / MW-day

2025/2026
$269.92 / MW-day

Next year, a 1,000 MW power plant can earn $269,920 daily compared to $28,920 this year. These payments are in addition to any revenues earned from energy auctions.

While these auctions seem arcane to the average consumer, they will feel it in their pocketbooks—and not just in one part of the country—it's everywhere. All these costs will flow to the consumer, who will have only the choice of paying or reducing consumption.

Two options may become quickly viable. One is to build gas turbines as fast as possible. To attract investors, capacity payments have to be attractive. But starting new projects today may be too late.

The other option is "demand-response," where consumers are enticed to reduce demand for a price. Demand response is in place today but has yet to be aggressively implemented. It appears grid operators like PJM (not the government) will be forced to become aggressive and offer lucrative demand-response programs.

Lastly, those who invest in "behind-the-meter" assets like their own renewable energy sources, including geothermal, will avoid some of these accelerating costs. Those who have already invested will likely experience returns higher than expected.

The roots of this problem germinated decades ago. That is its own story for another time.

Kim Zussman wonders:

XLU?

Big Al observes:

XLU up 25% from Feb low.

Jeffrey Hirsch was there before us:

Our recommendation at the outset of XLU/Utes seasonal bullish March-Oct period.

Humbert H. writes:

Nuclear is clearly the real solution as the current generation of nuclear reactors are pretty much (we hope) not vulnerable to meltdowns. But as the situation stands, battery technology is likely to receive an ever-increasing amount of investment, and also reused old EV batteries will be more and more prevalent as storage banks for solar and wind. Intermittent sources = more and more need for battery capacity.

William Huggins offers:

one possible solution to transmission problems is to use rail-bound batteries.


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