General Electric is cutting 12,000 jobs from its power division in another sign of the market weakness for conventional generation equipment, such as steam and gas turbines.
The cuts follow a recent, wider announcement by GE that it will make $3.5 billion in “structural cost reductions” in an effort to realign the company.
- GE said the softness in traditional power markets is being driven by overcapacity, lower utilization rates, fewer outages, an increase in steam plant retirements, particularly those fired by coal, and the proliferation of renewable energy resources.
Despite political efforts to bolster conventional generation, such as the efforts underway at the Federal Energy Regulatory Commission to come up with a way to compensate baseload generation, market forces continue to work against those efforts. Wholesale power prices are low as a result of low natural gas prices and flat demand.
“I interpret GE’s restructuring as reflective of over-supplied wholesale power markets in Europe and North America,” Hugh Wynne, an analyst at investment research firm SSR, said in an email. Those market conditions are going to get worse, he said, as more state-mandated and federally subsidized renewable generation comes online at the same time that capacity markets and zero emission credits are introduced to prevent old generation capacity from being retired.
In that environment, General Electric’s new CEO, John Flannery, last month announced a strategic plan for the company that included an emphasis on GE’s power division as one of three core businesses, along with healthcare and aviation.
Flannery called for a $3.5 billion reduction in overall structure costs in 2017 and 2018, along with plans to divest as much as $20 billion in assets.
GE Power is cutting 12,000 jobs, which represent about 18% of its workforce.Those cuts, along with previous actions taken by the division, are expected to contribute $1 billion to the $3.5 billion cost reduction goal.
GE’s wind turbine business is not part of GE Power.
“The magnitude of the announced headcount reduction illustrates the severity of the challenges that GE faces in its power segment, and the imperative to align its operations with the current demand environment for gas- and coal-fired power plant equipment and services,” Rene Lipsch, vice president and senior credit officer at Moody’s Investors Service, said in an email.
Lipsch said he is monitoring the extent to which the measures taken by GE and its competitors like Siemens “allay our concerns about overcapacity in the market, which would help to ease pressure on pricing for GE’s products and services.”
Last month, Siemens, one of GE’s top rivals in the power vendor business, also said it would cut 6,900 jobs in its power and fossil fuel division.
Moves like GE’s and Siemens' could ease oversupply in the market by raising equipment costs and making it more expensive to add new capacity. But that effect would be felt gradually and would likely be insufficient to re-balance the power markets, Wynne said. “What is needed is more major capacity retirements, such as we’ve seen from Vistra Energy,” he said.
Vistra plans to close its 1,800 MW Monticello plant as well its 1,100 MW Sandow and 1,200 MW Big Brown coal plants.
Nevertheless, it remains to be seen if GE Power’s cuts will be enough to effectively realign the business. They are “just one part of our efforts to fulfill the $1 billion [cost reduction] commitment,” GE Power spokeswoman Katie Jackson told Utility Dive.