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Today in Energy

March 18, 2016

Demand trends, prices, and policies drive recent electric generation capacity additions

graph of electric generation capacity additions by technology, as explained in the article text
Source: U.S. Energy Information Administration, Monthly Electric Generator Inventory, and Platts Electric Capacity Database

The combination of slower electricity demand growth, low natural gas prices, and policies that encourage renewables-sourced electricity generation is changing the type and the amount of generating capacity added each year.

Capacity additions since 2000 are being made under market conditions that differ significantly from those that existed for much of the 20th century. In the last half of the 20th century, additions to new generation capacity could serve growing electricity demand, and plant operators could reliably count on electricity sales to increase as demand for electricity-consuming appliances and equipment grew. For this reason, new capacity added during that time had only a limited effect on the utilization rates of existing generation capacity.

On a net basis, the United States added an average of 18.3 gigawatts of additional capacity each year from 1950 to 2015. Two time periods of above-average additions occurred during the oil price crisis of the 1970s and the natural gas-fired capacity buildout of the early 2000s.

graph of annual change in retail electricity sales by sector, as explained in the article text
Source: U.S. Energy Information Administration, Monthly Energy Review

As electricity demand growth slowed, new capacity additions also slowed. In recent years, new capacity additions often compete with existing generators. The increase in renewable energy sources such as wind and solar, which are often encouraged by federal tax credits and state-level mandates to increase generation using renewable resources, has also affected the amount of new capacity.

In general, renewable sources such as wind and solar tend to have lower capacity factors than dispatchable generation technologies fueled by coal, natural gas, oil, or nuclear energy. Capacity factors reflect a generator's output compared with its capacity, and they reflect how often a generator is actually used. This calculation is important when considering different types of new capacity. For instance, over the course of a year, a 10 megawatt (MW) generator operating at 20% capacity will provide about the same amount of electricity as a 3 MW generator operating at 67%. Nuclear generators, for instance, operated at 92% average capacity factor in 2015. Natural gas combined-cycle units (the most common natural gas generation technology) and coal units operated at average capacity factors of 56% and 55%, respectively. Average capacity factors for wind and solar are lower, at 33% for wind, 29% for solar photovoltaic, and 23% for solar thermal generators.

graph of capacity factors of selected electricity generating technologies, as explained in the article text
Source: U.S. Energy Information Administration, Electric Power Monthly

In regions of the country with competitive wholesale power markets, slower demand growth, high levels of renewable generation capacity additions, and low natural gas prices tend to lower the wholesale prices available to traditional baseload generation technologies, such as coal-fired and nuclear power plants. In some instances, especially in regions of the country with significant amounts of wind generation, electricity prices may be low or even negative during off-peak periods because wind has no fuel cost, and wind generator owners receive tax credits for each kilowatthour of electricity sold. These factors make it profitable for wind generators to bid their units into the market at extremely low or even negative prices to ensure that they are selected for dispatch.

With increasing amounts of surplus generation, competitively determined capacity payments in regions that have instituted capacity auctions may be reduced. Operators of some existing coal and nuclear power plants face growing challenges in covering their fixed costs, a situation that is exacerbated when their plants require new investment under such circumstances in order to continue operation.

Principal contributor: Thad Huetteman