General Electric's power unit fights for growth as wind, solar gain

NEW YORK - 24 May 2018: Vistra Energy Corp and Dominion Energy Inc – which serve about 5.5 million electricity customers in more than a dozen U.S. states – both say they are done building combined-cycle natural gas-fired power plants.

Instead, they are building large solar plants, which offer plentiful and inexpensive electricity.

This bearish view of fossil-fuel energy, reflective of a growing acceptance by utilities of renewable power sources, poses a hurdle to John Flannery’s plan to turn around General Electric Co’s $35 billion-a-year power unit.

GE’s chief executive spelled out the difficulty on Wednesday. Power profits will be flat this year after falling 53 percent in 2017, he said, and GE is planning that demand for heavy-duty natural gas power plants will be less than half what it forecast just over a year ago, and will stay at that level through 2020.

New plant sales are “going to be tough,” Flannery said at an investor conference on Wednesday. “This is not going to be a quick fix, but there is, at the end of the day, long-life assets here with intrinsic economic value. We’re going to make the most of what we have there.”

In the long run, Flannery and Russell Stokes, the head of GE Power, have said demand for electricity and natural gas power generators will grow about 2 percent a year - in line with global forecasts - as utilities make a gradual transition to renewable power.

Following a strategy he laid out in November, Flannery is cutting 12,000 jobs and $2.5 billion in costs at the unit. On Wednesday, he said GE has tripled some sales incentives in the power division and is competing aggressively for new contracts to maintain plants and to get the call when utilities need parts or repairs during an unexpected outage, something of which GE had lost sight.

But some analysts and investors are sceptical about the long-term prospects of a business devoted to natural gas and coal power plants that are falling out of favour with utilities.

The competition from solar and wind, along with abundant low-priced gas produced by fracking, is curbing orders for new plants and forcing the closure of old ones. Some utilities are even filing for bankruptcy.

“That means companies are going to have trouble selling new fossil-fuel plants,” said Mark Dyson, a principal at the Rocky Mountain Institute, an organisation that researches the power industry.

Over 126 years, GE has weathered ups and downs in power market before, and has legions of sales and service people around the world. Last year it booked 26 orders for its newest gas turbines in Mexico, Bangladesh and elsewhere. It is investing in its separate, $10 billion-a-year renewables unit focused on wind and hydro, which saw revenue fall 6 percent last year. GE also sells battery storage, software and smart-grid technology to work with wind and solar systems.

GE power equipment orders - an indicator of future sales - fell 41 percent in the first quarter, accelerating from a 17 percent drop last year, according to GE’s earnings reports.

GE’s performance reflects the broader trend of utilities shifting to renewables from fossil fuels.

Global sales of large natural gas power plants have fallen by half since 2013, according to McCoy Power Reports. Coal and gas-fired plants accounted for just 38 percent of new electricity capacity financed globally last year, down from 71 percent a decade ago, according to Thomson Reuters data. Solar and wind now draw 53 percent of such investment, up from 22 percent, a Reuters analysis shows.

Rivals Siemens AG and Mitsubishi Heavy Industries are cautious about the scope for growth.

“We see a structural change,” Lisa Davis, the chief executive officer of Siemens Corp, the U.S. unit, said in an interview. “There are fewer large units being sold globally than there were five years ago. I don’t see that changing dramatically going forward.”

Siemens is cutting 6,100 power and gas jobs to adjust.

Many utilities share the view that the shift is permanent because it is driven by economics rather than government policy and climate-change concerns. While conventional power plants will continue to be built, sales may never reach the levels seen just two years ago, industry experts said.

With electricity prices trending downward, utilities are increasingly unwilling to risk capital on a new plant unless then can lock in a long-term price, executives said.

“Building new large, combined-cycle gas plants is challenging without the stability of a long-term power contract,” said Timothy Menzie, chief executive officer of InterGen, an international power generation company.

POWER PLAYER

GE faces a further challenge: long-term erosion of the large base of plants it services. After acquiring the Alstom power business in 2015, GE has a base of customers that produces one-third of the world’s electricity. Long-term contracts to service those plants bring GE billions of dollars in annual revenue.

But as utilities close older coal and gas-fired plants, the revenue growth from services is under pressure.

Wind and solar can cost as little as $18 a megawatt hour, compared with $40 for a large gas plant, said Mikael Backman, North America regional director at Wartsila Energy Solutions, part of the Finnish company that makes quick-start natural gas-fired generators.

Across much of the United States, some utilities now buy all the cheap renewable power they can on electricity markets and use quick-start gas engines to fill in when wind and sun falter.

In California, regulators have put on hold a project that planned to buy one of GE’s large natural-gas turbines while Southern California Edison, which planned to buy the power, studies using wind and solar instead.

The shift from fossil fuels stretches beyond states like California, which is aggressively switching to renewable power.

In oil-rich Texas, wind and solar now provide 21 percent of the state’s electricity. Utilities there are shutting down the equivalent of about 20 average-sized coal plants this year, according a Reuters analysis of data from power system operator ERCOT. Out of 183 power-generation projects on the drawing boards, only four would run on fossil fuels, ERCOT said. The rest are wind and solar.

ExGen Texas Power, an affiliate of Exelon Corp, filed for bankruptcy protection in November for five natural-gas plants, the second such bankruptcy in Texas last year attributed to low power prices. GE supplied parts and service to several of the plants, according to the bankruptcy filings. Reuters could not determine whether the contracts will remain in effect.

In Virginia, Dominion Energy ended several maintenance contracts it had with GE this year when it mothballed a large gas-fired plant built by companies GE later acquired and idled seven other coal and natural gas units in the state.

Dominion aims to build 4,720 megawatts of solar by 2033, the equivalent of about five large combined-cycle power plants.

It is opening a new combined-cycle natural-gas plant in Virginia this year, built with GE and Mitsubishi equipment. It said it has no current plans to build more such plants.

“Solar is very cheap,” spokesman Dan Genest said. “These units were just not cutting it.”