By K. Keith Roe

The power industry over the last 20 years provides an intriguing example of how global technologies can change markets and how markets can drive technology. It also provides important and useful insights into how technological advances affect the way work is done, not only in the power industry, but also in many other industries. In short, the changing face of the power industry mirrors changes in many other industries all around the globe.

Historically, technology and markets have been in a constant state of push and pull, with first one leading, then the other. Sometimes it is technology that drives major market changes; sometimes markets drive technology development. Technology breakthroughs change markets, but then the market adapts, and market forces push the new technology to respond for competitive advantage.

Technology was dominant during the 1950s, '60s, and '70s, when major technological changes were driving markets. "State-of-the-art technology" became a common phrase. Markets followed as changes in technology set the pace and direction of advances. Technology—for example, the semiconductor, the copy machine, instant film, and the 707 jetliner—revealed new business opportunities and even brought about the birth of new industries. An important driver was the space program along with the multitude of products that emerged from it: new materials, computer systems, even Tang.

Today, broadly speaking, market forces are dominant. The technological foundations have been set throughout the last few decades, and now the market is responding in kind. It was globalization, itself the result of technological advances, that tipped the balance in the tug-of-war. Globalization has by now affected markets for most services and products. Markets are value driven; "faster, cheaper, better" have become the watchwords.

The focus is primarily concerned with cycle time reduction, with cost reduction, and with improving quality. As a consequence, markets are now demanding advances in technology, setting the direction, and defining the requirements to be met. Nowadays technology is focused on maximizing value added. Technology has become a critical element of business strategy and thus a true source of competitive advantage.

In the course of the last few decades, changes in technology have changed society dramatically on a global basis. A few of the more dramatic innovations have been Star Wars technology's contribution to ending the Cold War; changes in communications, personal computers, and the Internet; changes in global travel, and ultimately the globalization of markets, products, and finance.

The power industry has shown fundamental change in what drives the market, causing many adjustments.

Nowhere is the impact of technology changes more visible than in the transition the power generation industry has experienced in the last 20 years. The power industry has undergone fundamental change in what drives the market, causing adjustments in the nature of business opportunities, the technology applied to projects, how projects are done, how business is conducted, and the way the mechanical engineer works.

In the power generation business today, the top-level market driver has changed from technology to finance. The market has undergone a major shift, from being technology driven 20 to 30 years ago to being financially driven today. The market places a premium on lowest cost, speed, and reliability, because these are the factors that affect a project's ability to maximize return to investors. This new situation is changing the foundation and structure of the electric power generation industry.

What caused this top-level change? The answer is globalization, deregulation, and privatization of the industry. This change has been facilitated by underlying technology changes from the past. Deregulation and open access are key drivers of change, fundamentally altering the way business is being conducted today and will be conducted in the future.

Deregulation of power generation is occurring globally; in the United States all the states have enacted or are discussing legislation to deregulate the industry. Meanwhile, many foreign state-owned utilities are being privatized.

Open competition is becoming the norm, leading to the dispatch of plants based on generation cost. Merchant plants, which have no committed buyer for the power to be generated, are being built. They will compete as low-cost producers of power and sell into the market.

Many older plants are less economical to operate than new ones coming on line and will not be economically dispatchable in the coming market environment. Forty-five percent of them are more than 25 years old.

Electric power generation is being split off from transmission and distribution; independent power producers have firmly established themselves. In a major industry shakeout, we are seeing an unbundling of functions at utilities, involving mergers and the selling off of generation capacity. We are also seeing the emergence of integrated energy companies that include both fuel supply and power generation, even transglobal generation companies.

Why are the power industry changes so profound? The answer is that deregulation has led to real competition in power generation, and competition has truly put the primary focus on the cost of generation.

In a regulated electric power environment, the regula-tory body told the utility how much it could charge, allowing for an appropriate guaranteed profit, and then the consumers paid for the electricity consumed. Not too complicated; not too dynamic; not much competition. The wholesale electricity market of the future, on the other hand, starts with a power exchange that matches producers' offers to sell power with distributors' offers to buy, in one-hour blocks of power, one day in advance. The selected producers send the agreed-on number of kilowatt-hours to the independent system operator, which coordinates with the power distributors. The producers get paid by the distributors through the exchange. There are different models of how this will work, and it will vary, but the concepts are largely the same.

The market clearing price is determined by the variable production cost of the most expensive unit required to serve the load, but all dispatched units receive the market clearing price. A unit's variable production cost will determine how much it will operate; this can lead to sharp differences in use of different units. A unit's going- forward cost will determine how profitable it will be.

Typical curves for the variation in market clearing price have the same shape as the load demand curves, as you would expect. When the load is up, the MCP is up; when it is down, the MCP is down. Where it gets interesting and where the unusual variations occur is at the extremes.

Looking at a typical week in midwinter on the PJM Power Pool in 1998, the market clearing price varied between 1 and 2 cents per kWh. PJM is a centrally dispatched electric control area in the mid-Atlantic region; in the deregulation market, PJM is an independent system operator. But when the load goes up, as it did in a peak summer week in the PJM grid in July 1997, the situation was quite different. The peak sell price was more than 16 cents per kWh—eight times the midwinter peak price. Even more interesting than the high price was the low for the same peak week. It was during the night and the low price was zero: For four to six hours, roughly 20,000 MW of power was provided and no payment was received. This happened because producers, mostly nuclear plants, bid a price of 0 cents per kWh to be sure they would be dispatched, and too many of them bid zero.

But the summer of 1998 was even worse. Previously unheard-of fluctuations occurred in power pricing in the Midwest last summer. The maximum price spiked at $7.50 per kWh for a 50 MW transaction on June 25. Clearly, these prices represent a dramatic change from the predictable, relatively calm utility environment of the 1960s and 1970s. This financially driven power generation industry is a very different industry from that of 20 years ago.

The primary drivers of the financially oriented market are changing the face of the power generation industry. Faster equals a shorter construction cycle; cheaper, lower capital and life cycle costs; better, higher efficiency and reliability. Of course, the power generation market is also influenced by other significant market forces, such as environmental concerns, fuel supply and availability, and significant growth in demand globally, which amounts to 4 to 8 percent per year.

Growth is fueling demand in general, though it is affected by regional economic changes. Meanwhile, environmental demands on the power industry are continuing to escalate. The primary issues are SOx, NOx, greenhouse gases (CO₂ and others), and particulate matter, but other liquid, solid, and gaseous emissions are also a problem. Another issue is the cleanup and restoration of power plants. These environmental changes are the result of increasing pressures imposed by state and federal regulations, such as those promulgated by the Environmental Protection Agency, by international agreements such as that concluded at the Kyoto Conference, and by the World Bank and other financing organizations.

At the same time, the choices of fuel are changing. Natural gas is essentially abundant worldwide. In the United States and Canada total reserves should last about 80 years at current rates of use. Substantial pipeline additions in this country are improving access, and only moderate price increases are projected through 2020.

Coal is also available worldwide, but environmental issues pose concerns. In the United States, coal is readily available, especially Western coal, and price reductions for this fuel are projected through 2020. On the other hand, hydroelectric sites and renewable energy are either largely developed or possess limited market penetration, and some hydroelectric sites are also being challenged on the basis of their environmental impact.

These market forces have demanded a response from the industry and there has been significant change, starting with the nature of opportunities in the marketplace. Previously, when a utility built a power plant, it selected the plant size and features after a study of feasibility and technology. Now, this exercise is viewed as a financial deal. The essential nature of the transaction is to deliver a quantity of electric power for a set price; for example, a gas turbine manufacturer talks about selling a 250 MWe block of power, not selling a gas turbine. The company that negotiated the deal now looks to place an engineer-procure-construct contract with another company to supply the power plant.

One place where there has been a major change in project opportunities is the top-level technology choice. Coal-fired power plants, mostly pulverized coal but also including circulating fluidized bed, supercritical cycle, and integrated gasification combined cycle technologies, are still the workhorses of the industry, but times are changing. Environmental concerns are producing long lead times and higher costs for new coal plants, making them more difficult to finance.

Nuclear power plants are currently too costly and are not popular with the U.S. public, although they are a possibility elsewhere. Other technologies, such as hydro, resource recovery, and renewables, are mainly useful for special applications. It is the natural-gas-fired power plant, which may use a simple or combined cycle, that is emerging as the new industry workhorse.

The bottom-line reason that the technology of choice has changed to gas turbine combined cycle plants is that they are very financeable, much more so than any of the other options. These plants are faster to build, with a short construction duration of 18 to 22 months (versus roughly twice that for coal plants). They are cheaper, with a capital cost of $350 to $400 a kilowatt in a typical U.S. application (about one-half that of coal plants) and, at nearly 60 percent in combined cycle configuration, highly efficient compared with a top performance of roughly 40 percent for coal. And they are better, offering high reliability (95 percent) and availability (90 percent) along with lower emissions, which make it easier to meet environmental regulations. What's more, natural gas is abundant, easily transported, clean burning, and requires no on-site storage.

Technology is having a second level of impact, on the choice of basic hardware technology for power plants. Within the gas turbine world, research and development are focusing on materials to allow a move to higher temperatures. With everyone striving for competitive advantage, technology has changed the preferred option and has moved on to pushing the limits for top performance.

Businesses today are going global; it's no longer just an option. They need global vision, capabilities, and reach to take advantage of the international opportunities that result from international competition. Competing globally, of course, requires knowledge of local regulations, standards, practices, and customs. An understanding of international standards and practices is crucial. ASME is working to achieve unification of technical standards internationally, which should make this less of a problem.

Real competition in power generation has put a much greater focus on the cost of generation.

Businesses need a new way to work, with a premium placed on being faster, cheaper, better—shorter cycle times; lower capital, operating, and life-cycle costs; and higher efficiency, reliability, and availability. They need to improve their internal processes for speed and efficiency, and to compete in a commodity-like business, which requires a shift to an industrial, commercial work paradigm. It is also important to build strategic relationships, through alliances, joint ventures, virtual organizations, partnering, or mergers and acquisitions.

Working in an environment of continuous, rapid change requires businesses to foster creativity, innovation, and breakthroughs as a foundation for long-term competitiveness and survival. The Construction Industry Institute has established a Breakthrough Strategy Committee, co-chaired by the author, to nurture breakthrough ideas for the engineering and construction industries. (A website has been established at www.cii-breakthrough.org.) Part of the committee's definition of a breakthrough idea is that it has a higher risk profile than incremental change but also promises dramatic change leading to major performance improvement.

Mechanical engineers are expected to adapt and support the unrelenting efforts of their organizations to achieve competitive advantage. What that means is that they need to focus on building their companies' competitive edge and on maintaining their personal competitive advantage. It means learning to recognize and apply new technologies and processes, adapting skills, and managing careers, but it also means taking advantage of the exciting times that will come along with change.

The changing work environment brings with it the need for flexibility, adaptability, agility, and mobility. Jobs are built around products and services, not disciplines. The changing business conditions and office culture are producing an increased emphasis on accountability with rewards for results, not effort. The ability to work with other cultures will be increasingly important, in view of the growing global nature of industry. This will result in increased opportunities, or demands, for travel and field assignments. Keep your passports ready.

A key issue in meeting competitive challenges for both the organization and the engineer will be to keep up with changing skill requirements: to develop management and communications skills, maintain a sharp technical competence and awareness, and develop business sense so that decisions are made in terms of their economic impact and the competitive issues at hand.

Changing technology requires continuing personal development and lifelong learning. Engineers need to accept new challenges to build their technical competence and maintain the currency of their knowledge, as well as to augment their technical capabilities with strong skills in business, management, and finance. Associated skills that may need to be developed include computer literacy, communications skills, innovation and creativity, and the management of virtual teams and organizations.

Learning skills is not enough. Managing career and development in a broader sense requires seeking out challenge and opportunity, not only to demonstrate skills but also to make them grow further.

Employment today is less certain than in the past, tied as it increasingly is to the duration of a project as opposed to the duration of a career. Engineers have to take charge of their career paths and personal development, take personal responsibility for economic and personal success, and seek out challenging projects and international assignments. Many ASME continuing education opportunities offer help to the mechanical engineer who is determined to make these efforts, and the ASME Foundation will financially support many of these developing programs.

This article is adapted from the keynote address at ASME's 1998 International Mechanical Engineering Congress and Exhibition in Anaheim, Calif., last November.


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