The gas turbine crunch

Latitude Media covering the new. The energy transition. I'm Shail Khan, and this is Catalyst. What's your outlook on timelines? Do you think that the lead times just get longer and longer and longer? Are we at the peak there? Is it gonna get worse? Do we know? A good question. I I actually don't think they're gonna get much worse. I think uh all of the OEMs are working like crazy. to try and shorten up their lead times or at least make sure they don't get worse.

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So it's a good time to be in the gas turbine business. Between the relaxation of emissions constraints and the rapid load growth that we've discussed innumerable times on this podcast before, perhaps the biggest winners are the companies like Mitsubishi, Siemens, and GE Vernova who make turbines.

Of course, one result of that is that they're pretty well sold out and they have a lot of pricing power. So it's an interesting moment where momentum is clearly flowing toward natural gas power generation. But it's also actually pretty difficult to build any more of it, especially in the near term. Anyway, it's a really interesting market and one we haven't really talked about here. So let's fix that.

To rectify the situation, I brought on Tony Bruff. Tony is the president of Dora Partners, which is an energy and gas consultancy specializing in what's going on with the gas turbine industry. Here's Tony. Tony, welcome. Thank you. Glad to be here. I wanna start by you giving me a little bit of a a recent history lesson on the the gas turbine market. Um, how has it been developing over the past, I don't know, you tell me what the relevant time frame is, but a couple of decades.

Oh that's a good question. I mean there's been a lot of dynamic change over the last few decades. It I mean it used to be in the seventies and eighties there were pretty much just two major OEMs. you know, uh General Electric and even Westinghouse at the time, now owned by Siemens. But really the the number of l OEMs have have been have gravitated towards three major OEMs. Uh

uh M H. I Mitsubishi Heavy Industries, Siemens, and General Electric, or now now it's G. E. Vernova. There are other strong players in the market, for example solar gas turbines, a division of caterpillar, is a significant player in the small gas turbine market. So how's it changed? So how's it changed? It's really evolved not just in terms of the OEMs, but

But also there's been, you know, several, I'll call them bubble periods. You know, there was a big bubble period in 1998, 1999 through 2001, and then the market basically fell off a cliff. And it slowly built back up to a a really good set of years back in twenty twelve. And then it kind of fell off again. And uh now we're kind of at another peak, but I would call today's peak more of a a real market-driven, realistic. set of scenarios that's driving the market today.

That's interesting that you say that. I mean,'cause I I knew I knew it was characterized historically by these sort of boom and bust cycles. And I think we've seen this in other sectors in the electricity market as well. We've we've talked before on this podcast about transformers, for example, where you have these

Very long lead times. And one of the reasons that there are still such long lead times is that Transformer manufacturers have gotten burned in the past by building out more capacity and o being oversupplied into a market that turned out to bust. And and I had a sense that there's kind of a similar dynamic in the turbine world. But it sounds like you're saying this one seems like it's different. What what drove those

bubbles that then burst in in recent history in the market. Was it over exuberance about new gas generation build that just didn't come to fruition or something else? No, I actually there's uh actually several different dynamics and that's a really good question. If you go back to that first big bubble back in ninety eight through two thousand and one, that was really being driven by an artificial demand created by ENRA.

I mean they clearly were sending artificial signals to the marketplace that we're driving up. um uh the cost of electricity significantly in several regions of the country, California, Texas, and other areas. And that was also right around the same time that deregulation was coming into play. So th those two factors created a lot of panic in the marketplace. And keep in mind the large utilities in the sixties and seventies, they everything was regulated. So they were pretty much just

They they only built when they could get the republic utility regulators to approve investment. But as deregulation came into play deregulation came into play. Everybody was just basically learning, okay, how do we how do we make money now that there's regulated, deregulated, and semi-regulated markets? to deal with across the country and in even to a degree in areas outside the country, in Europe and Asia, for example. So and then the Enron thing just created a significant

I would say artificial signal to the marketplace. So those two factors really drove a bubble in the market and and a a little bit of it was unreal. I would say at least half of the volume was Artificial. Maybe to put a finer point on that then, because this ties to both the deregulation and Enron, which obviously are tied to each other, but um

Is what was happening there a lot of speculative development of what would be merchant gas projects that never came to fruition? I I want to draw that distinction because What's interesting about today's moment is that like, you know, you I don't know. I don't think there is a lot of new merchant gas being developed. Mostly what's happening is it's either utilities saying we need it.

for cause we need more capacity, or it's data centers and they'll be the long term offtake on the project. So you're actually not like subject to the merchant risk. You are subject to the will this data center ever get built risk, which is kind of a different thing. Well, that's true. Uh but but but most of that activity was not merchant uh well, there were IPPs. There were a lot of IPPs, uh independent power producers that were speculating for without a doubt. Um but

There were a lot of orders that were canceled even by large regulated and semi-regulated utilities like Southern Electric. You know, there were they had a huge or set of orders and a lot of that stuff had to get either canceled or bought and then resold on the marketplace. It was it was a real disaster for everybody uh when the bubble burst.

So we'll get into the market today in a little bit more detail, but it do you think that there is given that history, given that there is some boom and bust and some cycles that the market has gone through?

Does that lead to a more conservative approach from, as you said, basically the three big OEMs that control what, seventy percent of the market or something like that to expand capacity? Or do you think that they share the view that you express, which is actually this one's real? I'm not too worried about being

overextended. If I expand capacity now, I'm sold out through whatever it is, 2029, 2030. And so I should just build as much as I possibly can. Like where do you think they are on the spectrum? Yeah. Well I think there there's guarded optimism. Very guarded optimism. I mean Certainly all of the OEMs are investing in the future for new production capabilities, particularly Siemens and General Electric, or G E Air, uh GE Vernova, I should say. The other thing to keep in mind is

About half of the gas turbines that's ordered in the marketplace aren't even for the electric power utility market. They're for the oil and gas market. And so the all of the supply chain that's feeding The those three OEMs and others are also competing for supply chain resources going into the oil and gas market.

And some of those OEMs are also delivering into the oil and gas market. So there there is a lot of interesting dynamics uh going on and it's important to look beyond just the the power generation or the utility sector when you think about um what's happening in the marketplace.

Yeah, can you say more about that? I think that's one thing people don't always appreciate on the outside. Wha what is that supply chain look like and what are the big categories of sort of end markets that these products get sold into? Right. Well, uh that's a great question. I I have um basically I describe the supply chain for the gas turbine industry in four different levels. I call level zero is raw material.

So I mean you know, you talked about transformers. Well, copper is clearly a big raw material when it comes to transformers. But for gas turbines, it's the super alloys, nickel, nickel based alloys, chromium, all those other uh expensive key ingredients, titanium, all those things that are involved in the the raw materials for gas turbines. That's what I call level zero. Uh level zero level one is actually

manufacturing the um the the raw pieces of m uh of product. For example, blades and veins and things of that nature that are being cast or forged. Uh level two is where they're actually manufacturing the gas turbine from all those components that were developed on level one. Um so that's that's where the OEMs are producing a you know, what I call flange to flange gas turbine. And then level three, which is the fourth level.

is where it all gets to put together into a final package and delivered to an operator site, installed, commissioned, aftermarket activities, all that sort of thing. So uh so all of those and then when you Keep in mind, levels zero and level one are also being impacted by the aerospace industry. You know, there's something like forty thousand aircraft uh in backlog right now in the in the world.

Well guess what? All of the same level zero material suppliers and all the level one forgers and and casting shops and things of that nature in level what I call level one They're all supporting the aerospace industry at the same time.

So these you can't look in isolation at The electric power utility market for gas turbines uh in isolation because you have to consider what's happening in the aerospace industry and what's happening in the power and the oil and gas industry because as I said, Fifty percent of the industrial gas turbines that are delivered in any given year, approximately, aren't even for the electric power utility sector, they're for the oil and gas sector.

And in terms of the market dynamics today, I guess, obviously we have this

booming demand for gas turbines in the electric sector, whether on grid or off grid. Some people are doing gas turbines for bridge power for data centers or whatever, but let's call that all in the electric sector ultimately. Is the demand, I mean, oil and oil and gas prices are low right now. Does that mean that there's low investment on that side? And so most of the demand is shifting to electric power generation, or is that not sort of how the cycle works on the oil and gas side?

Well uh uh th you know, that's a great question, Shaylin. Uh the and the good the good news is for the oil for those that are involved in oil and gas industry is by and large, most of the large oil and gas players have long term thinking in mind. So they're they're making five, ten seven and ten year.

strategy developments for strategy. Now, well in any one year they might reduce their order activity because the oil and g oil and gas prices are down. Absolutely that's correct. But in the long run Oil and gas companies basically stick to a strategy that an investment strategy that that keeps them investing. And typically what we see are what I call seven-year cycles. in the oil and gas industry. It'll go up

peak at about year seven and then come back down, slowly come back down and then go back up again uh on another seven year cycle. And it's all driven by upstream activity for development of oil and gas, midstream for um transmission and then downstream where you have a lot of LNG refinery activity, all that sort of stuff. And all those things are somewhat independent of each other. So the it does level out the market for the oil and gas industry a little bit. Which means The investment stays.

And uh when you look at the midstream oil and gas market, most of the players midstream, they're making their money not on the price of oil and gas, but on transmission of oil and gas. So they're very much Um also I won't I don't like to use the word immune, but the sensitivity to the price of oil and gas is really low. They're still gonna make money.

'Cause everybody's still using the oil and gas, albeit maybe at a lower price, but their taxing fee for moving the oil and the gas through the pipelines is still pretty robust and they're making their money. So they're investing.

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Did it deliver? Easy enrollment creates momentum, proven performance builds trust. That's why more than 170 utilities rely on EnergyHub to manage over 2.5 million devices, delivering 3.4 gigawatts of flexible capacity. See what that looks like at energyhub.com. I want to talk about I guess two primary things with gas turbines in the market, particularly for electricity generation, which is where I spend a lot of time right now. One is um timeline and the other is price.

Right. And so, you know, we hear a lot r right now in the news about both of those things. On the timeline side, you know, we hear about folks like G Vernova being sold out through twenty twenty nine with an order book behind that that sort of as you know, they can they can sell as much as they can build, at least at the moment it seems.

Um, and then on price, there I you know, I don't have visibility into actual market pricing, but um but one interesting data point that you might have seen recently was I think it was John Ketchum or somebody from Nextera said, you know, a decade ago I could have built a new natural gas.

Project. for like seven hundred fifty bucks a kilowatt. I think I'm gonna get the numbers close, but not exactly right. And today it would cost me twenty five hundred bucks a kilowatt. I don't know how much of that is the turbine itself, but I'm interested in the the relationship between how long it takes to get new turbines and how expensive they are becoming. Yeah.

Yeah, good question. And that that seven fifty was for a combined cycle plant. Um and I think the two twenty five hundred is a bit aggressive. It's but it's definitely up around thirty to thirty-five percent over the last five years. Uh the price is definitely up. I track all of that very very closely. Um And is it purely a supply demand thing? Uh Yes and no. I mean again raw materials at level zero. Raw materials are up everywhere.

Um even before all of the tariffs come into place, you were seeing demand on aluminum, uh uh uh met nickel-based alloys, titanium, all of these things are all interrelated. Again, I'm coming back. to the aerospace industry. When you've got, you know, the aerospace industry, you know, ordering forty thousand aircraft, that's at least eighty thousand gas turbines. So uh you know, and they're all they're all drinking from the same supply chain. So for the most part.

supply and demand. It's it's also being driven from Well it's of course supply and demand is related to the cost of raw materials, so I don't wanna discount that. But but certainly raw materials is a big part of it. And uh if you look at uh some of the uh fet uh you know US government's tracking of uh producer price indices on all of these different elements, you'll see a pretty significant bump in the last three years that is very indicative of what you and I are just talking about.

What's your outlook on timelines? Do you think that the lead times just get longer and longer and longer for a while? Where are we in the cycle of like the lead times have been getting longer? Are we at the peak there? Is it gonna turn back the other direction? Is it gonna get worse? Do we know? The good question. I I actually don't think they're gonna get much worse. I think I think uh all of the OEMs are in fact I know all of the OEMs are working like crazy to try and

uh shorten up their lead times or at least make sure they don't get worse. And part of the reason why is the they're I mean customers are eventually just they're gonna get weary and say, okay, we're just gonna put things off. Uh because they're, you know, as it is, they're putting down fifteen, twenty, twenty five percent non refundable deposits. I mean, all of those things.

are very painful for customers. And these OEMs have been living through these things, these busts and booms before. And they don't want to upset their customers too much. So they're all working hard to at least flatten out the timeline and if not improve it. And I'm seeing signs of that across the board. Today's timelines are in the or sorry, lead times are in the like four to five year range. Do I have that about right?

I would I would say between thirty-six and forty-eight months. Uh I suppose there are some OEMs that are claiming up to sixty months, but f I would say on average it's around the forty eight month period. Got it. The other thing I'm curious about is uh size.

Right. There's obviously, you know, it's not a monolithic market. Even within power generation, there's different products that serve different use cases and at different scales. And I think the scale question is sort of an interesting one because Uh the question is sort of is what's getting built or what is being designed to get built um large scale generation, gigawatt scale type of stuff?

Is the the fact that data center is driving a lot of this changing the desired scale of the end customer and what does that mean for the products in the supply chain? Good question. Well I I actually look at the market drivers. Um I think there's at least five major market drivers, and in each one of those market drivers Small less than twenty megawatt gas turbines, turbines twenty to a hundred megawatt.

are are seeing a different set of dynamics and then what I call jumbo sized units, which are you know 150, 250 megawatts and above, those I call jumbo units, they're all being affected differently. Driven by the different market drivers. And I I say there's at least five market drivers in the marketplace. One is grid scale battery storage. Number two, coal plant retirement. Number three, grid scale renewable energy expansion.

Number four, the development of rapid development of data centers and artificial intelligence exploitation or expansion. And then just the availability of of natural gas and its affordability is I'd say the fifth driver. And if you look at each one of those different drivers, those three sized units are all being affected differently. And if you want I could actually walk through each of the different drivers and then explain how each one of those three different markets are being affected.

Yeah, I mean it's interesting that you described that, right? Some of those drivers I would think would be a suppressant on demand. So I agree. Grid scale energy storage is sort of a gas peaker replacement product on the grid, right? Predominantly. So I would presume that suppresses the market to some degree, but maybe are you saying it it results in smaller units being developed on the grid? Yeah. Or what's the dynamic of that?

You're you're a great lead in uh shell b actually you would think uh And generically you think off your head, oh well grid scale battery storage that's gotta drive down the demand for gas turbines. Actually, in some cases y the answer is exactly right, but not in all cases. So I mean if you if you actually look at the market and what's happened uh with grid scale, I would say large jumbo sized units. Absolutely, they are being it's a negative it's a negative dynamic.

Um if you look at gas turbines, say 40 to 100 megawatts, actually it's a uh it's an opportunity because There are several of the developers are counting on gas turbines to recharge or develop what I call hybrid systems that use gas as a when its cost is low to spin up the gas turbine and recharge their grid scale battery storage. So they're not just relying on renewable energy to recharge their batteries.

Uh and then when you look at the real small gas turbines, generally they're not being quite as affected by the grid scale battery storage. uh segment. But clearly, as you correct correctly pointed out, or you felt intuitively, yeah, large power plants, jumbo units, it's a negative. But for gas turbines forty to one hundred megawatts, it's actually a little bit of a positive influence.

And then I imagine, right, coal plant retirements, big projects coming offline presumably get replaced with big assets, at least if you're trying to do one for one. So I assume it's. That that is all things equal a a positive signal for larger scale turbines. Yeah. For for coal plant retirements, uh it's really for all three segments, the the less than 20 megawatts, the 40 to 100, and the large jumbo, it's a positive influence, but mostly for the large jumbo unit.

But interestingly enough, you see a lot of mobile power and peaking units being installed as support for the grid where coal coal plant retirements are occurring. Well, you see that in the context of some of your other drivers, right? Like I know of some projects that are coal plant is retiring, we're gonna replace it with like a big solar plus battery installation, and then we probably need some smaller scale peaking gas to supplement that. Yeah. Right. It's like that kind of thing.

L uh yeah, if you look at uh if you look at grid scale renewable energy, I mean the the the amount of a of grid scale activity is going up just explosively. It's expected to double uh in the next five years and the cost of a levelized cost of electricity for for solar power is is way, way down. But Uh so that has a negative impact on the large utility uh uh jumbo sized gas turbines? But but definitely it has a positive influence.

on mobile units, uh peaking gas turbines, uh just because uh when the when the sun goes down and the wind stops blowing, you know, you've got to have backup power. And those units I would say from about fifteen megawatts up to a hundred megawatts are actually Very good investments for I call it renewable offset.

Mm-hmm. And when you you mentioned the mobile thing, I mean those types of installations, you don't necessarily you're not looking for mobile generators. I think of the mobile generators as being a good fit for either Like an off-grid type application. You see a lot of this in the oil and gas world, or for bridge power type situations where you're looking to this is what you see now where.

Look, we need we need power now because we're building a data center and the grid connection is gonna take three to five years. So we need a bridge, but we don't need it forever. Am I wrong to think that that's where the mobile power segment ends up Well you're not wrong, but you're not a hundred percent right either, because uh clearly when it comes to data centers and artificial intelligence.

uh mobile power and even uh uh permanent onsite power is uh as as a backup to the and supporting the the demand for data centers is a very strong influence on both mobile power and uh permanent on-site units. But believe it or not, there's a lot of utilities who will buy mobile units. They'll put and they'll locate'em in a what they call a grid sensitive area.

And over the course of five to ten years they'll improve their infrastructure and then they'll move those mobile units to another sensitive grid grid sensitive area. And so the the mobile power has just been a fantastic Opportunity for basically three companies. Solar gas turbines, the division of caterpillar. G Vernova for their renew uh mobile units and for MHI Aero Power for their mobile units. Those three players have done extremely well with mobile powered units.

Um for a variety of reasons, even in oil and gas, but but for the reasons that you and I have just discussed for in the last ten minutes, absolutely. And I don't see that market going away at all. Yeah. If anything it's getting supercharged by additional use cases, as we've Absolutely. Which gets to that. Yeah, which gets to that sort of the one that seems to be the the biggest net new thing that's happening right now, but like is is a huge deal, is all the gas.

turbines being developed for data centers, whether mobile or stationary, right? But you see like, you know, there's that partnership between Chevron and Engine Number One, where they've they've secured gigawatts worth of GE Vernova turbines. They're going to go use those to develop a bunch of data centers.

Uh, and then I'm not sure whether those are actually intended to be permanent or just bridge power. But like that's one example amongst many. And it seems to me is the uh is the factor that's kind of tipping this market over the edge from just being A generally tight market to like a historically tight market. Yeah, well you you you you're making a good point. I mean if you look at data centers, there's like eleven thousand data centers.

serving the digital commerce and artificial intelligence community already around the world. And and because they many of them have been around, the average electrical loads around four megawatts. But there's like fourteen hundred uh new data centers planned in the United States alone and uh and over a thousand of those are all large scale uh they're gonna need a lot more than four megawatts. I mean some of those data centers their electrical load is more than the community around them.

Yeah there's uh There's like a electric co-op. I think it's Susquehanna. co op or something like that in Virginia that like uh I remember seeing some some filing, some regulatory filing where they were projecting their load growth to like more than double uh based on purely a couple of data centers that are coming into the territory. Yeah.

In fact, you you made you just touched on a good point. That whole region around Virginia, Washington, DC, that whole area, there's more data centers in that area than anywhere else in the world. Right. It's just a m a mecca of data centers. But but these dynamics are really interesting around data centers and I don't think it's going away. I think it's uh uh you see people using artificial intelligence more. D digital commerce is just booming and it's not going away.

To me, two things can be true at the same time. I think it can be true that this is the demand from the gas turbine OEM perspective, the demand is real. The market will buy. uh an enormous volume of new gas turbines to serve these markets. And that's also true by the way of like utilities who are trying to manage interconnection requests and so on. Like it can be true that that is real. And also that we are in a speculative bubble.

On the development side, because there will not be, I mean, you as you correctly said, there are a thousand large-scale data centers in development in the United States. And I will state categorically, I don't think there will be a thousand new hyperscale data centers in the United States anytime soon. I don't think there's actually that much demand for it. So like both things are true. There's all these, there are cowboys out there trying to take advantage of the moment.

So the challenge, of course, then if you are on the supply side, whether it's a utility or you're a gas turbine OEM, is how do I make sure that the buyers I'm signing up with are real? And that gets to your point of like these big non refundable deposits. If you have all the market power, that's sort of how you take advantage of it. So it seems like they're doing the right thing in that regard at least. Yeah. Well and the other dynamic to keep in mind, Shell, not only that is

It's not just one of these market drivers that's making things happen. It's all five of these market drivers that I've mentioned, including the price of natural gas, which is very affordable in the United States. So when you combine all of these dri what I call market drivers. It it creates a situation where these OEMs are relatively comfortable building out a uh a supply chain strategy to support the market because they're not just relying on one dynamic.

Back when I was uh, you know, executive at one of these large OEMs, you know, 20 years ago, you know, we were basically counting on only one of those market drivers to happen, and one of them didn't happen. And so it hurt our strategy. But now you have a situation where you have three to five key market drivers that are all paying the market. And it's so it's it creates a little bit of I would call risk comfort.

for the OEMs because they know it's not just one thing they're counting on to make the market move.

Okay, final question for you, I guess, is on the technology side. Is there any signi I mean, these are pretty mature technologies, is there any significant innovation that either we have seen recently or that you expect to see in the next few years? Like Will will the market change as a result of technological innovation or is this just a, you know, rinse and repeat and stamp them out as much as we can kind of a situation?

Yeah. Good good question. I I I would touch on two areas. First off All of the OEMs have spent an enormous amount of money Trying to get, and they've been very successful in slowly increasing the efficiency of their combined cycle plan. I mean it used to be combicycle plants average efficiency was about 55% and they slowly crept it up to 60 and then they kind of hit a a dead spot and they couldn't figure out how to get above 60.

And that then they started evolv developing their I'll call it a very holistic strategy to the power plant. So it wasn't just the gas turbine, it was the H R S G. It was a whole uh all sorts of different Technol technical factors that they were levers that they were pulling to try and squeeze more efficiency out of their power plant.

And and they crept it up to sixty. Then they got to sixty and a half, sixty one, sixty point three. I mean, they're they're starting to push sixty-two percent efficiency and more. And I don't think they're gonna quit because If you look at the if you look at the levelized cost of electricity for and that's a big factor that these utilities are using in div assessing which OEM they're gonna use.

Fuel is a big, big element in the c levelized cost of electricity. So the more efficient and the more efficient, uh the more effective that the OEM is in convincing that customer that they have a more efficient unit and even guaranteeing it. the better for them. They'll be more competitive. So efficiency is uh it's not coming up by leaps and bounds, but it's a gradual increase over time that

been quite remarkable to be honest with you. You gotta hand it to all three of the l major OEMs that they've been able to make some t very significant improvements in efficiency, albeit very difficult. The second big area of the technology development is is converting their combustion systems over to using Hydrogen. Now, I put all of that into a big big set of quotes.

Because while they're all working on hydrogen and they can and they've all demonstrated to a degree some capability of operating hydrogen, the biggest problem is where are they going to get it? Uh the amount of hydrogen that you need to run one of these large jumbo-sized units, it's just an enormous amount of gas. And where are you going to get it from? So while they're all spending a lot of money and their engineers are working very diligently and doing some fantastic development.

I have some doubts as to where whether the market will actually see a significant increase in purchases of gas turbines that actually are using hydrogen. But clearly they're all working on it. Yeah, it's a it's a you know, the bet is if we build it, they will come. If we build hydrogen ready gas turbines, then the market will show up for them and the hydrogen will be there. And of course it's a

It's a dynamic market for hydrogen at the moment. So we'll we'll find out whether that plays out well for them. But good point on efficiency. It's like a steady grind, but it it adds up a lot over time. Tony, this was awesome. Really appreciate the time. Thanks so much for joining. Thank you. Tony Bruff is the president of Dora Partners and Energy and Gas Consultancy.

This show is a production of Latitude Media. You can head over to latitudmedia.com for links to today's topics. Latitude is supported by Prelude Ventures. Prelude backs visionaries accelerating climate innovation that will reshape the global economy for the betterment of people and planet. Learn more at PreludeVentures.com. This episode is produced by Daniel Waldorf, mixing and theme song by Sean Marquand. Stephen Lacy is our executive editor. I'm Shale Khan, and this is Catalyst.