New Natural Gas–Fired Projects on an Upswing

Over the past decade, the development of new natural gas – fired generating assets has been similar to an amusement park roller coaster ride — very high peaks and the lowest of lows, with fast and stomach-churning movement between. Expect the ride to continue into the near future.

The power industry is experiencing a growth period for new natural gas – fired generating capacity. Since the bottom fell out of this market in 2005, new construction activity for gas capacity has grown at a pace of 20+% per year, and though we do not expect new construction activity in 2009 to surpass last year’s, the number of projects under development continues to grow. In early summer, projects currently on the books for kick-off by the end of this year could represent a 52% increase in construction kickoffs over last year.

Declining Gas Price Gives Projects a Push

Although the spotlight continues to shine most brightly on renewable energy, natural gas has once again become an attractive fuel choice for new generating assets. For the past few months, natural gas prices have been on a downward trend across the nation. The electric power price for natural gas has declined nearly $3/million Btu since November 2008.

One of the key factors behind lower prices is an overall decrease in demand for the fuel. Total natural gas consumption is projected to decline by 2.3% in 2009, which includes an 8.2% drop among industrial users this year. Lower demand has led to increased reserves in storage, also contributing to lower prices. For the week ending July 10, 2009, reserves were at 2.89 trillion cubic feet, which is 19% above the five-year average of 2.43 trillion cubic feet. Lower demand for natural gas, coupled with increased reserves, creates an environment for price stability, which leads to natural gas becoming an attractive fuel for developers of new generating assets.

There are currently 155 simple-cycle and combined-cycle units, representing more than 20,000 MW of gas-fired capacity, under construction in the U.S. All of these units are part of projects that are scheduled to begin commercial operation between 2009 and 2012. These projects represent almost 17,000 MW of installed capacity from combined-cycle units and over $12 billion in capital investment, while the simple-cycle projects represent total spending of $1.75 billion.

These projects include the 600-MW Bear Garden project in Virginia being built by Dominion Energy, which is scheduled for completion in 2011, and the first 1,100-MW phase of the 3,300-MW West County Energy Center in Florida being built by Florida Power & Light Co., which is scheduled for start-up later this summer.

So far this year, 47 gas-fired units, representing almost 6,000 MW, are under construction. These projects represent a total investment of more than $4 billion. For the balance of the year, there remain 95 units and 9,000 MW that have a construction kickoff date scheduled (Figure 1). Of these, total projects set to supply 1,700 MW are in the advanced development stages, meaning that permits and financing are in place. The remaining projects are still in development and could fall prey to permitting delays or lack of financing.

1. Explosive growth. Active natural gas–fired projects have increased in all regions of the U.S., especially in the Southwest and on the West Coast. Data shown in the graph are based on precommissioned projects in the planning, engineering, or construction stages of development. Source: Industrial Info Resources

More Gas Projects in the Queue

Beyond 2009, Industrial Info is so far tracking 423 units and 53,000 MW of gas-fired generating capacity that is in the development stages. This total capacity includes 74 projects valued at more than $20 billion and scheduled for construction kickoff during 2010. As a component of these projects, 238 combined-cycle and simple-cycle units are being proposed, which would result in the addition of 25,000 MW of total capacity.

The vast majority of these projects are being developed as power projects, meaning that their primary purpose is power generation. But there are greenfield plants and plant expansions in industries such as petroleum refining, petrochemical processing, and others that include a power unit. One of the projects scheduled for kickoff next year is JEA’s $430 million Greenland Energy Center, a power plant that’s been proposed for off Phillips Highway in Jacksonville, Fla. Construction is anticipated to begin in early 2010, with simple-cycle operation expected in the summer of 2011. There are future plans to convert the plant to a combined-cycle facility.

At this juncture, it appears that the development of new gas-fired generating units will continue for the foreseeable future. Construction starts for over 17,000 MW are planned for 2011, and 8,000 MW are on the books for construction kickoff in 2012. As those start dates get closer, it is expected that even more projects will be identified that have construction activity planned to begin during this same time period.

Number of Gas Projects Accelerates

Overall, the outlook for development of new gas-fired generating assets appears to be promising. For the near term we are seeing a downturn in electricity demand, as retail sales of electricity in the industrial sector fell 12% during the first quarter of 2009 compared to 2008. Total consumption of electricity is expected to fall 2% for the entire year of 2009 and then increase almost 1% during 2010. However, there is anticipation in the industry that beyond 2010 the U.S. will be in a position in which an additional 15,000 MW or more will need to start commercial operation each year in order to meet increased demand for power. This new capacity will be needed not only to meet future demand but also to replace capacity lost from older units scheduled for retirement.

Another key issue driving the necessity for new gas-fired generating capacity is the fact that development of new coal-fired assets is in limbo. Though it is true that a significant amount of new coal-fired capacity is under construction, the future of this sector of the power industry is uncertain. During the past two to three years, there have been multiple cancellations and delays for new coal-fired power projects. They have been caused in large part by the increased capital costs of building new units as well as uncertainty over environmental mandates regarding carbon dioxide emissions. This uncertainty, coupled with the idea that any new capacity from new nuclear plants is five to seven years away, opens the door for gas-fired generation to bridge a major gap.

Although the volume on new gas-fired units has not reached the crescendo of the early 2000s, we are entering another period of growth for this sector of the industry. Could it spell déjà vu all over again?

Britt Burt ([email protected]) is vice president, power industry for Industrial Info Resources. IIR (www is a leading provider of global market intelligence specializing in the industrial process, heavy manufacturing, and energy-related markets.

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