Coal: Still a necessary evil
Will cheap Btus trump expensive CO2? That's what appears to be driving power plant decisions on coal as a fuel for future generation. Differing guesses about the timing of CO2 controls appear to be what differentiates gencos planning to build a new generation of pulverized coal (PC)-fired plants (all of which seem to be supercritical designs) from those that advocate integrated gasification combined-cycle (IGCC) plants.
There's no doubt that coal plants will dominate new baseload generation for many years to come. The DOE's National Energy Technology Laboratory says U.S. gencos plan to build 154 GW of new coal plants during the next 24 years, and 50 GW of that over the next five. During the past five years, 6 GW of new coal capacity came on-line.
To PC, or not to PC? It all boils down to what you need and when you need it. If you need lots of new baseload capacity fairly soon but presume that CO2 controls are still several years away, you'll opt for PC generation and hope to break ground on the new plants so they can be grandfathered in before the new rules take effect. If your planning horizon is farther out and you want to take advantage of some hefty subsidies in the 2005 Energy Policy Act, IGCC may be a better way to go.
Title XVII of EPAct establishes a DOE loan guarantee program (which means that if you default, the taxpayers eat it) to cover 85% of "eligible" projects at a favorable interest rate (another subsidy). So far, the DOE is being cautious, largely driven by the White House Office of Management and Budget. The DOE has capped its exposure in the loan program at $2 billion. This could set off a dispute with the 110th Congress, which is likely to push for accelerated IGCC projects as a greenhouse gas–curbing initiative.
My bet for 2007 is PC coal, even if that's not politically correct. Conventional coal plants will begin construction, and others will get quickly into the pipeline.
I base my wager on TXU's stunning November 2006 announcement that it is investing a whopping $10 billion in 11 new supercritical PC plants that will add 9 GW in Texas alone by 2010. Some have called it "environmental brinksmanship." Hedging its bets, TXU said its reference design for the plants would include "ductwork to provide ample access for the addition of a future system" to capture carbon. The giant Texas utility also said its new plants will provide opportunities for storing CO2 and injecting it into wells to enhance oil recovery. That makes a lot of sense because Texas has a lot of elderly oil wells whose life could be economically extended by CO2 flooding.
TXU's forecasts are even more bullish than the DOE's. In a November 2006 press release, TXU said it believes that "consumer needs for reliable, secure, affordable, and environmentally-superior power supplies will drive the construction of almost 300 GW of advanced coal power generation facilities across the U.S. over the next 15 years."
To that end, Dallas-based TXU is also looking to develop new coal-fired generation across the country. It starts in the PJM market, with prospects for others to come.
TXU says the "first pillar" of its business plan is "a profitable entry strategy outside Texas." The company sees three major opportunities: 45 GW of "new advanced coal" to displace existing gas-fired generation, "taking advantage of the advanced coal-gas spread and the more efficient TXU development and construction model." Next, says TXU, is "a 78-GW opportunity" to displace old coal plants with new ones (although many old coal-fired plants never die—they just get retrofitted). Finally, says TXU, there is 160 GW of demand for new generation.
At the practical level, Texas is booming, with growth in demand forecast at 25% over the next decade. Nationally, the projection is 19%. The Lone Star State's peak jumped 5% in the summer of 2006. But we are also hearing proposals for new capacity in the Midwest (from Peabody Energy) and in the Middle Atlantic region.
Grandfather Time. TXU's plans are more than bullish. Several web sites have been established solely to take the utility to task for its decision. To defend itself, the company explains that its baseload supply needs are so urgent that it had no choice but to reject IGCC as too unproven in favor of supercritical PC technology.
Environmentalists aren't buying that. They believe the company just wants to avoid paying the coming carbon tax by having its new plants come in under the wire. The more realistic environmentalists—those who understand one tenet of TXU's argument: that clean wind and sun won't keep everyone's air conditioners running full-blast in July—are skeptical of TXU's gambit. One of those realists, Ralph Cavanagh of the Natural Resources Defense Council, said of TXU's announcement, "Either it is plain old denial, or they think they can be grandfathered."
That's the crux of the politics of coal power. Both the industry and the greens are aware of what happened in the various iterations of the Clean Air Act, beginning in 1970 and concluding in 1990. The greens assumed from passage of the law that—eventually—the big, old dirties (FirstEnergy's Eastlake plant, for example) would be shut down and replaced by newer plants. So they allowed older plants to be exempted from rules for new units unless they were upgraded significantly.
That didn't happen. From the standpoint of the greens, it was the worst air pollution decision they ever made, and they were unable to repair the damage in the 1977 and 1990 rewrites. The old dirties got upgraded again and again (just short of the magic capacity-increase level) and still were grandfathered from the most stringent elements of the Clean Air Act.
Now the grandfathering issue is alive again, in the contest of carbon dioxide regulation. TXU denies this, of course. Mike McCall, the planner of the company's construction campaign, told The New York Times, "There's not some game theory here around carbon."
I think there is, and so do others with experience in the industry. For example, Granger Morgan, head of the engineering and public policy department at Carnegie Mellon University, recently argued in Science magazine against the grandfathering of new coal plants from future carbon regulations. He wrote that any federal carbon laws should stipulate "that when CO2 controls are imposed, no plant built after 2006 will be exempted from coverage (that is, grandfathered), no matter what form future controls on emissions may take. Such a law would not prevent the construction of new coal plants but would strongly encourage builders of conventional plants to design them so as to achieve amine-based CO2 'scrubbers' to be added later. It would also provide an incentive for those building new plants to adopt advanced 'clean coal' technology such as [IGCC] or oxyfuel plants that can capture and sequester CO2 in deep geological formations."
Change will be a long time coming. Clearly, carbon regulation will be a driver at both the state and federal levels. It looks unlikely that Congress will do anything on this matter before 2009 at the earliest, and probably for years after that. The body is built for comfort, not speed. Case in point: The 1974 Clean Air Act amendments to the 1970 organic law weren't approved in the House until 1977 due to bipartisan wrangling led by Rep. John Dingell (D-Mich.), an auto industry champion. The 1977 update took until 1990, again because of Dingell, who is now chairman of the House Energy and Commerce Committee.
Because Dingell will again chair the committee in the 110th Congress, CO2 legislation—which must include cars to be serious—seems unlikely for a while. To my mind, that means near-term bets on PC coal, however un-PC, are going to clear the table.
As for coal gasification, I've been hearing that song since the mid-1980s, when American Electric Power led the push for pressurized fluidized-bed combustion (PFBC), IGCC's forerunner. The DOE has put a lot of money into precommercial plants over the past 25 years with few positive results. IGCC may be technically elegant, but can it be a reliable baseload workhorse and make money for its practitioners? As long as PC plants can be grandfathered from carbon caps, and cost 15% to 20% less than IGCC plants, I have my doubts about the latter.
Natural gas: Under the thumb of the invisible hand
For understanding natural gas in 2007, a refresher course in Economics 101 might not be a bad idea. No generation fuel so completely reflects the vagaries of market economics. When they hear the term "price volatility," most plant fuel buyers these days immediately think of gas.
Over the past 18 months or so, the price of natural gas has yo-yoed from under $5/mmBtu, to $9, to around $7 today. The EIA says it expects natural gas prices—at least the Henry Hub spot price—to average about $7.80 this year. A review of the history of U.S. gas regulation and prices helps explain where we are today.
In the past 30 years, gas has escaped heavy-handed federal regulation and become a commodity whose price is set by a free-wheeling, intense futures market. Unlike coal, most gas for fueling generation is bought on a short-term basis on a national market, where it also is in demand from local gas distribution utilities serving the home heating market and large industrial consumers. It's a jungle out there.
Controlling gas. Prior to 1978, the Federal Energy Regulatory Commission (FERC), which was then known as the Federal Power Commission, regulated both gas production and gas pipeline prices. This arrangement was an artifact of the 1930s, when Congress and the executive branch were crafting laws governing energy supply—including the 1936 Public Utilities Holding Company Act and the 1938 Natural Gas Act—based on the assumption that gas and electricity were natural monopolies that required heavy government regulation to protect consumers from price gouging.
For the next 40 years, interstate gas prices were regulated, but intrastate prices were not. Nobody paid much attention. Then several extremely cold winters in the 1970s (some of the same scientists who now warn of global warming were then warning of global cooling) resulted in shortages of gas for home heating in the interstate market, where prices were regulated. At the same time, gas flowed freely to the intrastate market, where prices rose and fell to reflect the balance of supply and demand.
Congress reacted with typically contradictory approaches. The 1978 Powerplant and Industrial Fuel Use Act (PIFUA) essentially banned the burning of gas in new utility generating plants. As a result, nuclear plants were built in the middle of gas-rich areas such as Texas, Oklahoma, and Louisiana, and construction of coal plants was encouraged nationwide. The notion behind this, articulated by environmental guru Amory Lovins, was that gas was too important to be allowed to generate electricity.
Loosening control. But at the same time, Congress passed the 1978 Natural Gas Policy Act, which decontrolled some categories of gas and began a policy movement toward complete decontrol. As some gas became subject to market prices, and other supplies did not, a "gas bubble"—a large amount of gas supply in excess of demand—developed.
When Congress and FERC in the mid-1980s completed the decontrol of natural gas prices (Congress killed PIFUA in 1987), a blossoming of gas-to-electric plants ensued. Gas plants are much less capital-intensive than coal or nuclear plants, they're better at following load, and their modularity makes them more flexible for service reconfiguration. And (this wasn't as big a deal back then as it is today) gas is inherently less polluting than coal. In short, gas is a marvelous fuel—as long as the price is right.
By the 1990s and early 2000s, gas was the flavor of the month for new generation. Last year, according to EIA figures, natural gas fired nearly 19% of U.S. generating capacity, behind nuclear (but not by much) and coal. How things changed from 30 years prior, when gas was too valuable to homes to be burned in a power plant.
Market correction. But by the middle of this decade, the consequences of deregulation and capitalism came home to roost. The boom in gas-fired generation soaked up the excess gas, prices rose, and gas-fired projects not well under way got scrapped. The bubble burst.
High prices reduce demand, and EIA predictions reflect that. The DOE's current short-term energy outlook pegs 2007 gas demand for electric generation at 5.95 trillion cubic feet, down from an estimated 6.22 tcf in 2006.
In theory, and almost always in practice, free markets are self-correcting. Sustained high gas prices should increase supplies from fields previously considered uneconomic. And with the federal government's backing, high prices make it more likely that a gas pipeline will be built to bring Alaska's large gas reserves to the lower 48. Much of that gas is now flared, although some is liquefied and sent by tankers to world markets.
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