Friday, November 2, 2007

Energy Lecture Series: Mark McVay from PowerAdvocate - TONS of energy infrastructure investment on the way, SUPPLY CHAIN very difficult...

Mark McVay, Senior VP of Sales & Marketing at PowerAdvocate, delivered a very compelling lecture in the MIT Energy Lecture Series last night. The lecture was so interesting that the Q&A session started about 20 minutes in and never stopped until the final bell!

From what I gathered, PowerAdvocate is a consulting firm that helps big electric power firms with supply chain, procurement, pricing et al. They are MAJORLY in demand these days as everyone and their mom is looking to build capacity, and in many cases, capacity in technologies with which they have no prior experience (i.e. wind). The huge capacity buildup is resulting in major supply chain problems, with gas turbines, wind turbines, and other essential power plant components having lead times as long as 3 years.

A few random thoughts/notes that I took are here, would love to hear other people's thoughts about the points raised in this great lecture:

GREEN SUPPLY CHAIN: An interesting thing brought up was that some utilities are working to have a "green" supply chain. This presents a very complex task and was a great opportunity for a firm like PowerAdvocate to provide help. This will probably be a very interesting space for some company to fill on the consumer side, i.e. Walmart....

WE NEED NEW BLOOD: The average age of people working in the electric power industry is 55. There are going to be a ton of new opportunities for younger folks to get into this industry and rise fast. Such a large amount of turnover may have a profound effect on the philosophy of the industry....

NO WIND TURBINES AVAILABLE: Mark pointed out that wind turbine suppliers are unable to promise availability of turbines for sale until 2011, and even for 2011 delivery are unwilling to quote a price.

MASSIVE CAPEX ON THE WAY IN UTILITY INDUSTRY: Utility capital expenditures in the fourth quarter of 2006 was $60B. Jim McFarland pointed out that there was a big overbuild of capacity in the 1970's, which has led utilities to underinvest for a number of years. We are seeing a huge boom of new capacity being planned to make up for this. Capex is: 30% generation, 30% distribution, 11% transmission, ...

CHINA: Going out to 2030, it is projected that China will add 800+ GW of electric capacity, slightly higher than expected for North America.

EFFECTS OF THE BOOM: Costs and lead times for projects are skyrocketing due to the poor state of the supply chain after years without many new projects being built.... the specialty fans requred for SO2 scrubbers have a lead time of 2 years currently. Commodity prices have risen 35%/year as well in recent years. This means that change in the sector will only come slowly and that electricity prices will inevitably rise in the short to mid term.

Jim Rodgers, CEO of Duke Energy and a keynote speaker at this year's MIT Energy Conference, predicts that the electric power industry will need to invest $900B in the next 15 years.

But how will this much capital be attracted unless the returns on investment are sufficiently high. I think this points to an inevitable need for significant electric power price increases going forward, regardless of what PUC's might hope for. Otherwise, the investment just won't come.

If prices go up to much, I am concerned that popular support for climate legislation may die on the vine.

How do we avoid such a situation??

Demand management was proposed as a possible solution that could come on much more rapidly potentially...... Other ideas???

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