Gas Is King
The first tip-off regarding gas came in McMahon’s opening address. Of the six “game-changers” he presented, the first was an explanation of the industry’s capex hurdles. The second was the role of unconventional natural gas, which McMahon labeled a “huge game-changer,” noting that it “overtakes LNG” [liquefied natural gas] as a new source of this premium fuel.
Electricity is the key driver for unconventional gas, he continued. Unconventional gas sources (a designation that implies this natural gas is more difficult to extract) represented 1% of the market in year 2000, represents 20% today, and McMahon thinks it could be 50% by 2035, as long as potential environmental issues are worked out. The ecological disaster unfolding in the Gulf of Mexico as I write probably makes this point loom larger than usual. The fact that unconventional gas reserves are a domestic resource and are so vast, however, could keep a lid on price volatility as well.
The upshot of these remarks, along with much other evidence in the industry, is that we may be in for another “gas bubble” not unlike the one that affected the industry from 1986 through the late 1990s.
The second indication was when Adams observed that Calpine (which has almost exclusively gas-fired power assets plus a few geothermal units) “sold more power in 2009” than in 2008, as well as in the first quarter of 2010, an unusual claim from the depths of the economic recession. This was in response to a question about the impact of declining electricity sales posed by Dr. Robert Peltier, POWER’ s editor-in-chief, who presided over the panel. Adams credited low heat rates and low natural gas prices, which combined to push many of his plants first in the dispatch queue. Kormos noted that “older coal plants operated at a loss” and that load declines make PJM nervous.
In a historical context, this is an interesting comment by Adams. More than 10 years ago, during the heyday of merchant generation and competition, Calpine’s executives predicted that their plants would knock inefficient, dirty fossil capacity out of the market even for baseload service. It may have taken a decade, but that prediction is now apparently coming true, probably for vastly different reasons. It’s like I tell my kids: Wait long enough and any prediction will come true. Indeed, Keith Trent, executive VP, Commercial Business, Duke Energy, said that his company will likely retire more older coal plants to avoid running the “environmental gauntlet.”
Later, Adams made the gut-check observation that you can build 10 gas-fired plants for the price of one nuclear plant. Trent told the audience to consider gas and wind as an integrated unit.
Finally, when Peltier asked what resources were coming online, four out of the five executives mentioned gas-fired assets.
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