Report: Challenges faced in Europe hold lessons for US generators
A report from Boston Consulting Group (BCG) highlights how conventional power generators in Europe are finding ways to address problems that U.S. generators also face.
European generators have been struggling with competitive forces and overcapacity that has resulted in lower demand and, thus, fewer kilowatt hours produced and for lower wholesale power prices.
The report says that a conventional cost cutting approach to the problem do not provide a long-term solution and generators should combine those strategies with lean management systems and new digital technologies.
Conventional power generators in many U.S. markets, particularly in California and Texas, are feeling the squeeze from slack demand and competition from low cost generation sources such as cheap natural gas and renewable energy sources.
Conventional generators in Europe are also feeling a squeeze, not so much from cheap gas, but from an even bigger build-out of renewable energy and low demand.
Annual revenue potential per gigawatt of installed conventional capacity for Europe’s 10 largest generators has declined by more than 40% in real terms since 2005, according to BCG. That has resulted in underperforming stock prices and lower credit ratings.
The BCG report says these problems are not cyclical, but the initial manifestation of a sweeping transformation of the industry. “Over the next decade, we expect to see unprofitable power plants culled from the ranks of competitors by mergers and plant shutdowns,” the report’s authors say.
BCG says those generators have sought short-term relief with aggressive cost-cutting plans and by pursuing opportunities in the capacity or reserve markets. Some, like some U.S. nuclear generators, have also asked governments to set up payments to compensate them for installed capacity. Instead, the report says, those generators should complement rapid cost-reduction programs with comprehensive lean management systems and digital technologies
The authors say manufacturers in other industries have dealt with similar competitive pressure and succeeded by using strategies that go beyond cost cutting and consolidation. Instead, they have embraced continual improvements to operational efficiency.
Those improvements, the report says, can bring operational improvements of 2% to 3% a year, even after aggressive cost cutting of up to 35%.
- Boston Consulting Group New Paths to Productivity in Power Generation
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