In 2010, U.S. wind power development has slowed, coal-fired power development remained stalled, and the much-awaited renaissance of nuclear power took a few tentative steps forward. That left natural gas power development as the last man standing.
U.S. natural gas power development continued at a healthy pace during the first half of 2010: Industrial Info Resources was tracking a total of nearly 9,000 MW of new gas-fired generating capacity that had a scheduled 2010 kickoff date. That sum includes about 3,800 MW that was actually under construction as of July, another 2,700 MW that was in the engineering phase, and about 2,400 MW that was planned. In addition, 5,369 MW of new capacity became operational during the first seven months of 2010 (see figure).
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| U.S. natural gas development by construction kickoff year. Nearly 9,000 MW of new gas-fired generation capacity is scheduled to begin construction in 2010. That’s about even with 2009 levels and less than 2008 but significantly ahead of 2005 and 2006 levels. Source: Industrial Info Resources |
Moreover, during 2010 construction continued on more than 13,000 MW of U.S. gas-fired generation that had broken ground during 2007–2009. We expect that construction will finish on several hundred megawatts of those projects during the second half of this year. By contrast, for all of 2009 dirt was turned on roughly 8,000 MW of gas-fired generation in the U.S., and another 8,480 MW became operational.
Although 2010 is not expected to be a banner year for the construction of gas-fired generating capacity in the U.S., this year does compare favorably with gas power construction starts in 2005, 2006, and 2007. And given the historic surge in gas-fired construction that took place at the start of this decade, the kick-off of nearly 9,000 MW of gas-fired generation projects should be regarded as a respectable year.
Why Gas Held Ground
Several factors drove this year’s continued dash to gas. Natural gas for electricity generation continues to be reasonably priced—in the $3 to $4 per million Btu price range for much of the past 12 months. Lower capital costs and faster construction times continued to work to the benefit of gas-fired power developers. Each installed kilowatt of gas-fired generating capacity costs about $750 to $1,000. Wind power, by contrast, costs about twice that, and coal is at least three times that. On average, siting and building a new combined-cycle gas generator takes 18 to 24 months; siting and constructing a new coal-fired generator, by contrast, takes a minimum of three to four years and requires an extremely high tolerance for the risks associated with pending environmental legislation.
Siting issues are another important reason behind this year’s continued gas buildout. Gas-fired generators could be easily sited on existing power plant footprints or located close to existing transmission lines, thus obviating the need to site and construct transmission lines to connect generators to the grid. Baseload coal generation or wind farms, by contrast, require large footprints and often require the construction of transmission lines to get power to the grid.
Development of gas-fired generation in the U.S. also benefited from increased regulatory and legislative efforts to limit emissions of carbon dioxide, mercury, and oxides of sulfur and nitrogen. Several energy and climate change bills were introduced in Congress this year. Although they took different approaches and included different timelines, none of the proposed bills was good news for the coal industry and developers of coal-fired power. In many cases, the only unresolved questions in these draft bills were: How many older, less-efficient, high-emitting coal-fired generators would have to be retired, and over what time frame, to meet increasingly stringent U.S. environmental standards?
The lower risk profile offered by gas-fired generation has been particularly important during 2010, because rate-based assets made a significant comeback. The majority of the capacity being built in 2010 is being developed by utilities or developers for the purpose of placing those assets in a utility’s ratebase so the utility can earn a guaranteed rate of return on the new assets. As rate-regulated assets, utilities had a strong incentive to choose generation options carrying the lowest risk profile. By contrast, in previous years, the majority of new capacity consisted of merchant power plants built so that their owners could sell the output at market prices.
Facing rising environmental risks and soft near-term demand growth for electricity, electric utilities increasingly pushed the button marked “natural gas,” which continued to increase gas’s share of the market.
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