The power industry will be challenged in the coming year to chart its strategic direction and meet investor expectations, although business conditions should take a turn for the better going into 2010.
The Obama administration is likely to provide many opportunities for the industry in 2009: economic stimulation, better definition of carbon law, the promotion of clean energy through tax incentives, and infrastructure development. However, these initiatives may not produce the intended benefits by the end of the year because they are linked to huge and complex problems. Many details will no doubt still be in draft form as we turn the calendar to 2010.
What to Build?
In the meantime, the power industry is faced with some tough challenges. First and foremost is deciding what kind of generation to build, when to build it, and where. Although the North American Electric Reliability Corp. (NERC) in its "2008 Long-Term Reliability Assessment, 2008 – 2017" report says that it sees a 4.2% improvement in capacity margins over its assessment in the previous year’s report, new resources are still critically required in some areas (Figure 1).
1. Scraping by. Acceptable electricity capacity levels will be available in most NERC regions of the U.S. for the next few years. The dates shown represent the date when net capacity resources drop below the NERC reference margin level with existing resources and when they are adjusted based on potential resources. Source: NERC
Net capacity resources are forecast to drop below NERC reference margins in 2010 in Arizona, New Mexico, and southern Nevada — a one-year reprieve over the prior forecast. Other areas in the U.S. are expected to hit capacity margin limits by 2013. Furthermore, critical transmission links are required to interconnect new sources of power with the loads, especially with respect to the major renewable resources: wind, geothermal, and solar. This, on top of the need to replace aging, less-efficient and less – environmentally clean older plants, will create considerable pressure for utilities to build... well, something.
The technology of last resort tends to be gas turbines — in combined cycle for intermediate and even baseload deployment. In some respects, this shuts out potentially more economic clean coal generation in the longer term and further increases the concentration of gas-fired generation in the nation’s fuel mix.
In fact, in recent years, new gas-fired generation has outstripped any other kind of new capacity because its upfront capital costs are low, siting and construction times are short, and gas is environmentally favored. Additionally, its optionality value is high, because it can serve flexibly in peak, intermediate, and occasionally base modes, although not always economically. It is also the most acceptable fall-back position for regulators and most likely for development as merchant generation.
In fact, in 2008 new capacity commitments for natural gas far outstripped those for wind. As of September, of the 42,058 MW in committed new resources, 32% was gas (13,458 MW) and 21% was wind (8,808 MW). Though nearly 59,000 MW of coal-fired capacity was on the drawing boards, only 17,000 MW were under construction.
Of course, the risk here is that increased use of natural gas for generation not only reduces the benefits of fuel diversity but also holds the potential to drive natural gas prices up. As we have witnessed in recent years, gas prices are highly responsive to demand, can be extremely volatile, and can run up to exceptionally high levels.
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