September 1, 2010

U.S. Gas-Fired Power Development: Last Man Standing

By Britt Burt and Shane Mullins, Industrial Info Resources

The Future Favors Gas

Beyond 2010, there is a healthy book of gas-fired generation construction slated for kick-off over the next few years. Industrial Info is tracking 44,500 MW of U.S. gas-fired power plant construction scheduled to begin between 2011 and 2015. Not all of these projects will move forward, of course, but the sheer volume of planned power projects is another sign that gas-fired power development has a bright future.

In recent years a number of coal-burning utilities—including Progress Energy, Duke Energy, Exelon, and Portland General Electric—have announced that they will close more than 4,500 MW of operating coal-fired plants and replace at least some of the shuttered output with new gas-fired generation. Most, if not all, of their utility brethren are said to be running complex financial, operational, and environmental calculations to determine which of their coal plants will be closed and how that shuttered capacity will be replaced.

We see little on the horizon that would reduce the positive outlook for gas-fired generation compared to other fuels, for these reasons:

• If Congress fails to enact comprehensive energy and climate change legislation this year, the administrator of the U.S. Environmental Protection Agency (EPA) has vowed to enact limits on greenhouse gas emissions under the agency’s authority in the Clean Air Act.
• The EPA issued its proposed Clean Air Transport Rule in mid-July and is scheduled to release a draft Clean Air Mercury Rule in early 2011, both of which are expected to push up the price of electricity generated from coal due to the required installation of environmental retrofits. The Clean Air Transport Rule replaces the rejected Clean Air Interstate Rule.
• The aforementioned expected congressional and EPA actions likely will force the closure of dozens, if not hundreds, of older, less-efficient, and higher-emitting coal-fired power plants, located mainly in Midwestern states.
• The recent surge in construction of renewable generation such as wind and solar has led to a corresponding increase in the use of gas-fired power and, occasionally, the construction of new gas-fired capacity to back up these intermittent resources and provide grid stability.
• Carbon capture and sequestration projects continue to demonstrate that the technical ability to remove and store carbon dioxide from a coal-fired generator’s flue gas stream exists. But these processes are enormously expensive. In addition, the underground injection of carbon dioxide raises significant legal and policy issues.
• U.S. natural gas discoveries and reserves continue to grow, helping to limit price increases. Notably, large gas discoveries from unconventional sources, such as shales, continue to be brought online. Gas from the Barnett Shale, which lies under Dallas–Fort Worth and the surrounding area, provides nearly 10% of U.S. natural gas demand. Even larger shale formations, such as Haynesville and Marcellus, contribute to a positive resource outlook that keeps gas prices low.
• Opinion leaders and elected officials increasingly view natural gas as an environmentally preferred fuel—a bridge to a clean-energy future, in the words of a recent assessment of the future of natural gas from the Massachusetts Institute of Technology.
• Nuclear power remains a “bet the company” proposition, despite the availability of billions of dollars of federal construction loan guarantees.

As we write this in July, the U.S. economy appears to be slowly emerging from the recession that began in December 2007. It has been the longest economic downturn in 75 years, resulting in two years of reduced demand for electricity, which in turn has allowed utilities to defer the start of construction on new generation. We expect that the U.S. economy will continue to gain strength during the remainder of 2010 and into 2011, which will have a positive effect on power plant development for all fuels.

There is a tremendous amount of financial, intellectual, and operational capital sitting on the sidelines now, waiting for strategic changes in the industry to unfold. We expect the power industry to continue to be highly dynamic, particularly as the 2010 mid-term election cycle heats up. Although the BP oil spill in the Gulf of Mexico has nothing to do with electric power generation, more than a few analysts believe that the BP spill will eventually seep into—and possibly foul—the nation’s electoral and regulatory treatment of the power industry.