January 15, 2007

Investment in generation is heavy, but important needs remain

Kennedy Maize

Renewables: Strong, steady performance

How do you make major increases in market share year after year? The trick is to start small, which is the route that renewable generation has been taking and is likely to continue taking in 2007. As the EIA says in its most recent Annual Energy Outlook, "The expected rapid growth in the use of biofuels and other non-hydropower renewable energy sources begins from a very low current share of total energy use; hydroelectric power production, which accounts for the bulk of current renewable electricity supply, is nearly stagnant."

According to the EIA, nonhydro renewables accounted for only 2.3% of U.S. electric generation in 2005. Hydro had a 6.5% market share. With hydro out of the picture, that largely leaves wind, solar, geothermal, and biomass. Each has certain inherent geographic limits: solar needs sunshine (utility-scale solar is still largely a pipe dream); wind seems to be strongest and most reliable in remote spots, such as mountain ridges and offshore; geothermal requires access to geologic steam or hot rocks; biomass—almost entirely wood waste—depends on killing trees.

Wind is soaring. Most of the buzz in recent years has been around wind, with many major energy companies, such as FPL and BP, making large investments in utility-scale wind projects. According to the American Wind Energy Association, 2006 probably closed out with over 2,700 MW of new capacity, a new annual record. Total U.S. wind capacity now likely exceeds 11,000 MW.

AWEA estimates that new capacity in 2007 will be in the 3,000 MW to 3,500 MW range. But remember that the wind trade group estimated early last year that 2006 would see 3,000 MW of new capacity, and additions fell short. The group now says that "it is now clear that a few projects originally slated for completion in 2006 will not be finalized until 2007 because of various delays." That's a veiled reference to the shortage of wind turbines; blade manufacturers can't keep up with demand.

Since 1992 the wind boom has been driven by production tax credits, which now amount to 1.9 cents per kWh. Without these tax incentives, investment in new wind projects would quickly stall. The tax credits, which Congress has repeatedly renewed, run out at the end of 2008, so the industry will be lobbying heavily this year for another extension.

One development in early December may have portents for wind. Goldman Sachs, which 18 months earlier bought Zilkha Renewable Energy for an undisclosed sum and renamed it Horizon Wind Energy, has put the wind business on the market. According to Sparkspread.com, Goldman Sachs could get $1.5 billion from the sale. A Sparkspread editor said, "Lots of bankers look at Goldman Sachs as the weathercock of the energy industry and so many are assuming that it is now calling the top of the market." A HypoVereinsbank banker in New York told The Times of London, "There is a large amount of uncertainty surrounding the industry . . . and this is causing a good deal of concern among its leading players."

Geothermal joins the funded club. When Congress extended the production tax credit in EPAct, it added new geothermal facilities to its list of qualifiers. The result, says the Geothermal Energy Association (GEA), is "the U.S. geothermal industry's most dramatic wave of expansion since the 1980s." The GEA says some 58 new geothermal energy projects are now under development, with up to 2,250 MW of capacity. This would nearly double U.S. installed geothermal capacity to over 5,000 MW.

"The good news," said Karl Gawell, GEA's executive director, "is that federal and state incentives to promote geothermal energy are paying off. We are seeing a geothermal power renaissance in the U.S. The bad news is that some projects are already being put on hold because of the impending deadline for the federal production tax credit." He noted that large plants running in baseload—geothermal's best service mode—take several years to build. "The deadline urgently needs to be extended."
 

LNG: The other gas

There were Halle Berry, Pierce Brosnan, and Cindy Crawford on the beach in Malibu last October. Offshore on a pink surfboard was Daryl Hannah. They were all part of a protest, organized by Brosnan, calling on California Governor Arnold Schwarzenegger to reject a liquefied natural gas (LNG) terminal planned for 14 miles off the Malibu coast. Australian energy company BHP Billiton wants to build the regasification plant to help supply the region's hefty appetite for gas. Four other LNG terminals are planned for various locations in the state. All have proven very unpopular.

The key to the future of LNG is NIMBY (Not In My Back Yard), NOPE (Not On Planet Earth), LULU (Locally Undesirable Land Use), and BANANA (Build Absolutely Nothing Anywhere Near Anything). Opponents of LNG projects trot out a litany of fears: explosions, fires, terrorism, and pollution. All are overstated, but all have a basis in fact, and that makes persuading the populace to support the projects very difficult.

Growing interest. Given sustained high domestic natural gas prices, LNG could become a solid niche business in the U.S., particularly in cases where the owner of the gas can play the spark spread between gas and electricity prices. In 2004, Cambridge Energy Research Associates (CERA) predicted that the global LNG industry would grow in the eight years to 2012 "by the same amount as in the first 40 years of its history." By last summer, that prediction looked gloomy. Still, CERA predicts that LNG will become a $65 billion market meeting 15% of the world's gas demand by 2012.

Most of the attention is on one country and one site: Ras Laffan in Qatar. CERA said, "The combined capacity of Qatari LNG investments focused just on the United States is broadly equivalent to the proposed capacity of the Alaskan pipeline." The analysis adds that once the capital costs of an LNG project are sunk—and they are heavy—"the variable costs are minimal, at less than $2 per mmBtu."

LNG projects face a relatively benign regulatory environment at the federal level, although that is generally not the case at the state or local level. FERC regulates on-shore facilities. The U.S. Maritime Administration regulates offshore terminals. Neither has ever denied an application. A project also must also get Coastal Zone Management Act, Section 404 water quality certification and Section 404 dredging permits.

Today, six LNG terminals operate in the U.S. (Figure 3): in Everett, Mass.; Cove Point, Md.; Elba Island, Ga.; Lake Charles, La.; Peñuelas, Puerto Rico; and Kenai, Alaska. FERC says there are about 40 project proposals before the commission or being discussed in the industry.

 

 

The commission notes, "The market ultimately determines whether an approved LNG terminal is ever built. Even if an LNG terminal project receives all of the federal and state approvals, it still must meet complicated global issues surrounding financing, gas supply and market conditions. Many industry analysts predict that only 12 of the 40 LNG terminals being considered will ever be built."

 

But it's not only the business market that will decide the fate of these projects. It's the larger marketplace of ideas, including the politics of energy project siting.

Fears may foil approvals. That's where the scare tactics come in. Richard Clarke, former Clinton and Bush administration antiterrorism chief, noted in a recent book, Against All Enemies, that two terrorists got into the U.S. from an Algerian LNG tanker unloading in Boston. In January 2004, an Algerian gas compressing plant exploded, killing 27 workers.

 

A Sandia National Laboratory safety report published in December 2004 said that a major accident on a tanker could cause a fire that would melt steel half a mile away. Three lawyers for the Washington law firm of Sutherland, Asbill and Brennen, writing in LNG Observer, said that "all governmental and private stakeholders in the LNG debate quickly realized that the Sandia study changed the landscape for evaluating public safety issues surrounding LNG terminals."

What will we see with LNG in 2007? FERC will approve some of the projects now before it, including the proposed expansion of the storage and sendout capacities of the Elba Island facility, near Savannah. But it's reasonable to suggest that more projects will be cancelled than approved.

And if we get to see more of Halle Berry on the beach at Malibu, well, that's not a bad thing.

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