The boom-bust history of the U.S. electric power industry seems destined to repeat itself, with planned capacity additions for 2006 bottoming out at 17,756 MW—the lowest level in five years. In 2002 the plant building boom peaked when 77,100 MW were brought on-line, producing significant overcapacity in many areas. Capacity additions drifted downward in subsequent years: 50,678 MW in 2003; 27,033 MW in 2004; and 20,003 MW last year.
The 2006 additions come as reserve margins in 8 of the 10 North American Electric Reliability Council (NERC) regions are expected to sharply decline (see table). The confluence of the two trends is likely to exaggerate pockets of oversupply and undersupply in certain areas of the country, particularly the Northeast and Central regions.
Source: Platts
2005/2006 capacity additions by NERC region
The real surprise is the composition of the expected 2006 capacity additions—almost one-half (8,427 MW) is new wind generation scheduled to be commissioned during the year—the single highest annual total ever. Compare that to the 2006 capacity additions represented by natural gas–fired projects (largely combined-cycle plants): 8,440 MW. The remainder is accounted for by coal (496 MW) and small renewables projects, mostly wood and geothermal. In 2005 capacity additions featured a completely different mix: 16,556 MW were natural gas–fired and 2,758 MW were "fueled" by wind. What a difference a year makes (Figure 1).
Source: Platts
1. Roller-coaster ride. Annual capacity additions since 1950.
Gas prices rose, then sank
Coal still may be king of generation, but natural gas is getting plenty of attention, with prices fluctuating like a blip on a heart monitor. Developers of gas-fired plants are reeling from a sharp 2005 run-up of gas prices, which peaked in mid-December at almost $15.50/mmBtu (Henry Hub spot price) but then dropped to less than $8/mmBtu by the end of January. Many analysts believe average annual gas prices for 2006 will stabilize at a new average price of around $7/mmBtu—almost triple the $2.50 that combined-cycle plants enjoyed at the beginning of 2000.
Other analysts are betting that longer-term natural gas prices will dip to a new norm of between $5 and $8/mmBtu until enough liquefied natural gas (LNG) is imported to offset declining domestic production. In its December short-term energy outlook, the U.S. Energy Information Administration (EIA) raised its average spot gas price projection for this year at the Henry Hub by 3.3%, from $9.00 to $9.30 (Figure 2).
Source: EIA
2. Higher baseline. Natural gas spot prices at the Henry Hub.
Gas production is expected to be flat in 2006 and, over the next few years, to hover at around 18 to 19 trillion cubic feet (Tcf) annually. Since 2003 the count of active natural gas rigs has risen more than 30%, according to a November research note by consultancy Raymond James Financial Inc. The industry is now using almost every onshore natural gas drilling rig available. What's more, gains in drilling efficiency have grown over the past two years. The net effect of all this activity, however, has been to maintain production growth essentially at zero, despite the 15% drop in Gulf production caused by Hurricane Ivan in 2004 and Hurricanes Katrina, Rita, and Wilma in 2005.
A complicating factor will be LNG imports. One analyst suggests that average prices could fall as low as $3.50/mmBtu once LNG becomes a more substantial ingredient of the U.S. gas supply mix. Now there's an optimist, considering the regulatory hurdles and NIMBY chaff being thrown at developers of new LNG terminals such as the Long Beach project. The EIA predicted in an early release of its 2006 Annual Energy Outlook that, of the dozens of announced LNG terminal projects, only four will be built to serve U.S. markets—one on the Gulf Coast, one in Baja California, and two in eastern Canada.
The EIA went on to note that, although LNG (all imported) accounts for about 2% of current U.S. gas supply, plans are for the fuel to meet much of the country's increased gas demand, expected to reach 22 Tcf in 2025. The Alaska natural gas pipeline, scheduled to break ground soon and be completed in 2015, will make another 1.8 Tcf available.
The issue for LNG is price. As LNG becomes a global commodity, many of the same supply/demand rules that apply to oil will come to govern its price. The gasoline price hikes of last fall in the wakes of Katrina and Rita should give us all reason to pause. Will we soon be dealing with a cousin of OPEC—OLNGEC?—on the world market?
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