January 1, 2010

The U.S. Gas Rebound

Kennedy Maize and Dr. Robert Peltier, PE

Unexpected Trend: Fuel Switching

When the Acid Rain Program under the Clean Air Act took effect in 1995, utilities searched for ways to avoid installing expensive flue gas desulfurization systems. One approach much favored by plants in the eastern U.S. was to perform a boiler fuel switch from high-sulfur eastern bituminous coal to low-sulfur Powder River Basin coal. A side benefit was that the coal was significantly less expensive to purchase, even if the delivery charges were much higher given where the coal is mined. Today, with the nation expected to be awash in natural gas, several utilities have announced plans to, in essence, fuel switch from coal to natural gas.

A good example is Progress Energy Carolinas’ August announcement of its plans to permanently shut down three coal-fired power plants near Goldsboro and, in exchange, construct a new, high-efficiency, gas-fired 950-MW combined-cycle power plant. The business case for the fuel switch is compelling. The utility gets bragging rights, not to mention emissions credits, for shuttering three coal plants totaling almost 400 MW at the H.F. Lee Plant in Wayne County. The utility makes a compelling case that its plan will reduce overall emissions (including those of CO₂, should carbon controls eventually become law), increase the efficiency of electricity production in its system, and, if natural gas prices remain low, lower the cost of electricity production. The cost of the new intermediate-load plant, expected to be in service by 2013, is estimated to be around $900 million.

A final advantage to Progress Energy: Adding a natural gas – fired plant will broaden the company’s fuel resource base away from coal and nuclear. As a side benefit, shuttering the older three plants sidesteps the requirements of North Carolina’s Clean Smokestacks Act, which established very aggressive emission-reduction targets in 2013. Instead of cleaning up the old plant, Progress Energy decided it was wiser to invest the money in a new plant.

"This is an important milestone for our company and for our state," said Lloyd Yates, president and CEO of Progress Energy Carolinas. "The Lee Plant has been producing electricity reliably and cost-effectively for our customers for more than 50 years, but as emission targets continue to change, and as legislation to reduce carbon emissions appears likely, we believe in this case, it’s in the best interest of our customers to invest in advanced-design, cleaner-burning generation for the future."

Yates went on to say, "Our objective is to maintain the right balance of resources — nuclear, natural gas, coal, hydroelectric, solar, biomass, and energy efficiency — to make our company and state more energy independent and to minimize the risk of customer price spikes due to volatility in cost or supply of any single fuel source."

The economic advantage to Progress Energy is apparent, but in an unusual display of hegemony, North Carolina regulators have disarmed all the explosives in the usual regulatory minefield encountered when permitting a new gas plant. The North Carolina General Assembly recently approved legislation to fast-track a fuel or technology replacement project as Progress Energy has proposed. Senate Bill 1004 established a streamlined certificate process (45 days versus the standard six months or more) to enable Progress Energy to shut down the coal units and replace them with natural gas – fueled technology. The shorter certification period was needed to enable the company to replace the coal-fired plants by 2013, when the stricter statewide emission targets come into effect.

Expect additional state legislatures to quickly open an express lane for permitting gas-fired combined-cycle plants that replace older, less-efficient ones. Utilities will respond to this economic carrot much faster than to a swing of the regulatory stick.

The second emerging fuel-switching trend is retooling a coal plant to burn other fuels in order to help meet state renewable portfolio standards and to avoid costly emissions equipment retrofits.

The most interesting project in this genre of plant makeovers is FirstEnergy Corp.’s plan, announced in April, to repower two units at its R.E. Burger coal-fired power plant to burn biomass. Those two coal-fired units, totaling 312 MW, would become the largest biomass power plants in the U.S.

Burger Units 4 and 5 were targeted by the Environmental Protection Agency for alleged violations of the Clean Air Act’s New Source Review provisions. A consent decree signed in 2005 settled those charges but gave FirstEnergy until midnight March 31 to decide whether to shut down the units or agree to retrofit with expensive air emission control equipment estimated to cost $330 million. Instead, the utility decided to invest $200 million to convert the two units to burn biomass. The fuel switch also furthers FirstEnergy progress toward meeting Ohio’s standard that requires utilities to obtain 25% of their power from renewable resources — at least half of which must be generated within Ohio.

According to First Energy, the two Burger units will use wood wastes and other biomass to fuel the facility. FirstEnergy’s goal, however, is to operate the plant as a "closed loop" or carbon-neutral biomass plant, which means it will use fuel derived from trees grown to serve as feedstock for the biomass plant. The energy crop trees would act as a carbon sink, storing carbon in the trees’ tissues and roots. When harvested and burned, the stored carbon would be released, but the net carbon footprint would be zero. Fast-growing, bioengineered cottonwood trees and grasses grown in Ohio will be harvested and pressed into cubes before delivery to the plant. The plant will then pulverize and blow the biomass fuel into the boiler in much the same way as coal plants burn pulverized coal.

A number of other utilities have announced similar plans to retrofit fossil-fueled plants to burn biomass fuels. Over the past three years, Southern Co., Northeast Utilities, Dynegy, Xcel Energy, and DTE Energy have either converted plants or are in the process of doing so.

The Bottom Line: What You See Is What You Get

Where does all that leave generating markets in 2010? Looking not very different than they did in 2009, with the exception that natural gas has jumped onto the fuel stage in a big way. Coal perks along, with new plants under construction and some likely to come online. New nukes are ephemeral. Renewables can nicely fill generating niches but won’t dent the big generating market. They will make money but won’t change the U.S. generating mix.

Only gas looks likes a game-changer, given the emphasis on drilling in shale in the U.S. and elsewhere. The new exploration and production technologies and new gas reserves in shale probably won’t make a big impact in 2010, given lead times. They might in 2011. If they do, gas could alter the way the world looks at energy and electric generation. Stay on board for what could be a wild ride.