Fuel Diversity Is Critical in Industry Transition

Success in life and business is all about seizing the right opportunities at the right time. Opportunities abound today in the electric utility business. Our industry is in the midst of an extraordinary period of transformation and investment that will affect how we produce and deliver electricity—and what customers pay for it—for decades.

By 2020, electric utilities will spend an estimated $300 billion to comply with new U.S. Environmental Protection Agency (EPA) regulations affecting coal-fueled power plants. By 2030, the industry needs to invest an estimated $2 trillion to upgrade, replace, and expand our power production and delivery infrastructure. If managed correctly, this transition can help support a U.S. manufacturing renaissance, grow jobs, and help bolster the U.S. economy. But, if we barrel ahead without ensuring that we can maintain fuel diversity for electricity generation, we may do more harm than good for our energy future.

Natural Gas’s New Dominance

Utilities are making decisions today about power plants that have 50-year lives, and these decisions are being shaped by circumstances that favor just one fuel—natural gas. Low natural gas prices combined with a surplus of supply are lowering power prices and making other fuels less competitive. Well-funded anti-coal campaigns and the EPA’s aggressive regulatory stance have essentially killed the prospect of any new coal plants. The recession, high costs, and the Solyndra fallout are dampening support for renewables. And the Fukushima accident has largely taken new nuclear off the table. Licenses for four new nuclear units in Georgia and South Carolina have been approved, but no additional units are on the horizon in the U.S.

New EPA regulations will shutter at least 20% of our nation’s existing coal-fueled power plants by mid-2015. According to the U.S. Energy Information Administration’s (EIA) projections, coal’s share of our nation’s electricity production will fall from 45% today to 39% by 2025. That coal will be replaced largely with natural gas and some renewables. Renewables are expected to increase by more than 50% by 2025 but still will remain only a small percentage of overall power generation.

Directional drilling and fracking may be the game-changers that everyone predicts, and our nation may be flush with domestic natural gas for decades. The EIA forecasts natural gas wellhead prices below $5 per thousand cubic feet through 2023. If that long-term price holds, it will mean significantly more dependence on natural gas to generate electricity. Absent a national energy policy that supports fuel diversity, it will be difficult for utilities to propose any other type of electricity generation.

The Risk of Overdependence on Natural Gas

Betting on just one fuel to power our energy future isn’t smart. Natural gas has a volatile price history. Six short years ago, spot natural gas prices hit a high above $15 per thousand cubic feet. Just four years earlier, the price had been below $2. Shale gas may temper future volatility, but growth in demand could exceed the availability of pipeline infrastructure and push up prices. Environmentalists and others may successfully slow or stop shale oil and gas production until they are satisfied that fracking is environmentally safe and geologically sound. Higher gasoline prices may convert natural gas to a transportation fuel. And surplus U.S. supply could mean natural gas exports. All of these scenarios could cause the same price swings that we have seen with natural gas in the past.

The electric and natural gas markets also are not sufficiently aligned, and issues like infrastructure investment, pricing, and capacity and scheduling protocols need to be coordinated to prevent reliability concerns. The Federal Energy Regulatory Commission has recognized the need to address this coordination issue and has opened a docket on electric and gas coordination. As we depend more on natural gas to generate electricity, the reliability of the electric grid becomes only as good as the natural gas grid that supports it.

Absent comprehensive energy policy, it will be challenging, if not impossible, to get beyond the near-term price appeal of natural gas and advocate successfully for fuel diversity, especially if it costs more. We must work to keep clean coal, natural gas, and nuclear fuel in the mix for electricity generation while supporting expanded renewable development and energy efficiency.

As an industry, we also must embrace wider use of performance benchmarking and share best practices to continually improve the cost and reliability of energy production and delivery. As our industry makes huge infrastructure investments and moves to different competitive market modes, we run the risk of becoming more insular and missing opportunities to enhance how we generate and deliver power. Robust participation in utility-led associations, such as EUCG Inc., the Edison Electric Institute, the American Gas Association, and the American Wind Energy Association, will help us continually improve and demonstrate the benefits that fuel diversity affords the U.S. economy.

Overdependence on one fuel for electricity production will put our future economy at risk. Energy costs have long been a key component of U.S. competitiveness. We must make the most of this unique time in our industry to remain competitive and to ensure that we continue to have access to affordable electricity to power our economy.

George W. Sharp (www.eucg.org) is president of EUCG Inc., a global association of utility professionals and member companies.