The U.S. Gas Rebound

Kennedy Maize and Dr. Robert Peltier, PE

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Little Will Be Built in 2010

As we enter the second decade of the 21st century and a second year of avoiding an economic collapse, the U.S. business climate seems to have become more positive. A growing sense of cautious optimism is appearing. A mid-October survey by the National Association for Business Economics concluded that the largest recession since the 1930s Great Depression is over, and economic growth is likely for the U.S. economy in 2010. The government announced that third-quarter 2009 economic growth hit 3.5%, the first positive growth in five quarters, suggesting an end to the recession (Figure 4).

4. Electricity growth resumes in 2010. After a two-year contracting market, total electricity consumption in the U.S. in 2010 is expected to increase. Source: EIA, November 2009 Short-Term Energy Outlook

The implications for electric generation are mixed. What gets built depends on a complex stew of credit markets, regulatory responses, economic growth, technology, and national politics. Some of those are leading economic indicators, some lagging, some not clear at all.

Advocates of renewable generation appear not to have made a convincing economic case in the market. But they have politically. Coal and nuclear continue to take a political battering at the hands of the renewables advocates. The politics of energy appear not to have factored in to the new implications of natural gas. The political and regulatory landscape is a dog’s dinner (a Britishism for an undigested mess).

The need for new generation to supply load appears less urgent than in previous years. According to the EIA, demand for electricity has fallen since the economy tanked in 2008. The demand down-tick is the first since the EIA has accumulated these statistics, when it was created in 1977.

Facing a sluggish economy, consumers have lowered thermostats, cut off air conditioning, and dialed down appliances, leading to the decline in electricity demand. A cool 2009 summer in most of the U.S. helped to reduce air conditioning load. Net electric generation dropped 6.8% from June 2008 to June 2009. That was the 11th consecutive month that electric generation slid downward, compared to the same month in the prior year.

Analysts say they expect the declining demand trend to reverse when economic growth shows up at the beginning of 2010 or thereabouts. But they have been wrong before and may be wrong again. The EIA, the U.S. Department of Energy’s statistical agency, says it suspects the decline in demand will continue into early 2010, despite what appears to be a bottoming-out of the recession.

Many electric power company long-term capital spending plans have been built on the dire forecasts of the past decade, particularly from NERC. For years, the conventional wisdom in the generating industry was that the U.S. was running out of generating capacity. Year after year NERC had the same message: It’s time to build baseload, particularly nuclear and coal, and make major investments in high-voltage transmission.

Maybe not. Intermediate-load and peaking units, suggesting new gas plants, may be the ways to hedge big investment bets on future baseload units. A recent Washington Post article quoted anonymous sources as saying that new nuclear plants aren’t economical until natural gas prices are above $7/mmBtu. That’s more than double the current price.

The urgency for long-distance, high-voltage electric transmission investment, premised on optimistic estimates of growth in demand, also seems to have declined. Capital requirements for the big transmission projects, along with the political risks, have scared off investors, including conventional utilities and free-standing investment companies. Those who want to build large transmission systems linking areas of surplus power generation (West Virginia, for example) to big markets in New Jersey and New York are facing not only citizen opposition but also indifference from Wall Street investors, who don’t see an acceptable market return on investment (Figure 5).

5. New transmission is key in future years. The North American Electric Reliability Corp. predicts that expanding critical transmission capacity will be a national priority over the next five years. Source: NERC

The bullish generating market in late 2008 — despite signals of a worldwide economic crisis — turned into a financial quagmire. Today, lenders are unwilling to pony up cash for new generation and transmission without guaranteed returns, regulators are reluctant to bless projects without iron-clad promises of stable prices, and customers are unwilling to support new projects that threaten rate hikes and environmental impairment. Governments at the federal and state level are demonstrating distinct ambiguity about generation and transmission projects.

Where does that land us? Overall, the generating market has slowed. Raising credit has become difficult for major projects of any kind, from new nuclear reactors to petroleum refineries to coal mines. Money wasn’t a problem a decade ago. Today, it’s a big problem. Tomorrow, meaning 2010 and beyond, that may change. But don’t bet the company. It’s a jungle out there.

The Political Environment for Power

After a year with a new political crew in Washington — Democrats in the White House and controlling both the House and Senate — how has the political landscape for electric generation changed? It’s not clear. Democrats have said they want substantial reforms in the way the nation addresses energy, including the alleged specter of climate change. The party, including the Obama administration, is pushing legislation in Congress that appears unlikely to be enacted this year.

Complicating the administration’s policy agenda, the political clock has already started ticking toward the 2010 mid-term elections, when all of the U.S. House and a third of the Senate seats are up for election. Traditionally, the party in power loses seats in off-year elections. The Obama administration likely will take heroic steps to prevent that outcome, particularly to ward off losing the Democrats’ 60-40 margin in the Senate, where it takes 60 votes to avoid a filibuster. Ducking a filibuster is a prerequisite for passing Senate legislation in these days of total partisan warfare.

In that context, what has changed since 2009 when it comes to energy legislation and the economic prospects for energy development? Paradoxically, very little. The administration promised new directions in energy, with an emphasis on controlling greenhouse gas emissions and increasing energy efficiency, without much in the way of specifics. The Obama administration attempted to create a dramatic picture of how it differed from the Bush administration. The optics succeeded, but the reality is far less than meets the eye.

The Obama administration’s position on energy legislation is not very different from that of its predecessor. Both offered generalities and platitudes but not much practical red meat. The current administration has largely stayed away from the legislative details of climate legislation (as it has done with health care). The House passed a cap-and-trade bill (Waxman-Markey) that takes the approach that if the policy causes you any pain, we will pay to make you feel better. Republicans correctly call the House bill "pork" but have had nothing to offer in response.

The Senate Environment and Public Works Committee bill is not much different than the House-passed measure and leaves many details to be fleshed out in markup in the committee, chaired by California Democrat Barbara Boxer, an enthusiast for measures to control greenhouse gas emissions. Republicans have indicated that they will be unanimous in attempting to block the bill. The GOP may be able to pick a few Democrats to oppose the Boxer bill, dooming the legislation. In November, the Democrats reported out the committee bill, without Republican participation, as the GOP boycotted the committee markup session. That does not bode well for legislation anytime soon.

The Senate Energy and Natural Resources Committee, chaired by New Mexico Democrat Jeff Bingaman will also have a powerful legislative and political oar to dip into energy policy waters. Bingaman’s state is a major producer of coal, natural gas, and uranium, but it is a minor state when it comes to electricity production. How he will approach the greenhouse gas issues is not clear.

Four more Senate committees will have a say in the final legislation. Energy politics tend to be regional, not ideological, as both parties are prepared to spend taxpayer dollars for fuels and technologies that touch their constituents.

The legislative fight could carry deep into 2010 without resolution.

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