July 1, 2010

Industry Pivots on Natural Gas, Hails Cap and Trade

By Jason Makansi, Pearl Street Inc.

Renewables Dominate Today

Although wind energy faces its own challenges, including the collapse of tax-benefit financing by Wall Street firms and the general effects of the recession, it remains the darling of the political class and, as a result, appears to be the one option that can run the gauntlet. The electricity industry—as it has done several times in recent history with supercritical coal, nuclear, and gas-fired combined cycles—has converged on this option to expand capacity. Want evidence? Just consider an eye-popping slide McMahon put up (see table), which showed that wind (or renewable energy) represents from 60% to 90% of the interconnection queue in three independent system operators (ISOs) (CAISO, MISO, and NY-ISO) and one RTO (Southwest Power Pool).

The new reign of renewables. Currently, wind, solar, and other renewable resources dominate the interconnection queues, particularly in the Midwestern and Western regions and New York. Source: Edison Electric Institute

Consider now that Kormos, in responding to a question regarding wind energy and grid stability, said that the 3,000 MW of wind on PJM’s 140,000+ MW system gets credit for only 13% of its capacity value during peak periods. Given that figure, and the fact that wind farms typically achieve an overall annual capacity factor of 30%, guess which type of plant is going to fill in over the long term to match the daily, weekly, and seasonal load demand curves with supply? Not nuclear units, because they aren’t allowed to cycle. Not coal, because running the environmental gauntlet is probably going to force more and more of those plants off the grid. That leaves gas, especially under the new forward price and supply regime implied by the growing unconventional reserves.

One option that could compete with gas-fired assets for this duty, however, is energy storage. McMahon called storage a “step factor” that “enables” more and more renewable energy. Kormos called storage a “big innovative thing that is coming.” He added that compressed air energy storage is being considered along with new pumped hydroelectric storage, and battery facilities that are under test in PJM’s system.

All Hail Cap and Trade

Rarely does unanimity strike a power industry panel, but the APA and its “conservative” cap and trade provisions, according to Connaughton, received a resounding vote of approval from the panel. Connaughton called it a major step forward and said that it “adds creative thinking from the power sector.” Murphy said his firm was pushing for cap and trade and that it has to happen sooner rather than later. Trent supported the legislation and noted that the EPA will regulate carbon without it. Adams was favorable toward the bill because it nicely positions efficient gas-fired capacity. The slightest waver came from Kormos, who said he was supportive of any legislation at this point just for the certainty of it.

The conclusion, perhaps, is not so much support for cap and trade but that anything is better than the EPA regulating carbon.