U.S. power sales have plunged in the past six months on the back of an unprecedented demand decline that was caused by sharp contractions in the economy, and recovery is not anticipated until the 2010 to 2015 period, an analysis from Edinburgh-based Wood Mackenzie shows.
“The power industry is headed into the ‘Perfect Storm’ low-price operating environment, which will likely get worse before it gets better,” George Given, head of Global Power for Wood Mackenzie, told reporters last week. “The market is experiencing unexpectedly strong, negative load growth and weak recovery, along with very low fuel prices, which are compressing margins.”
Given said that the situation was compounded by some 30,000 MW of new capacity—much of it coal—that is scheduled to come online now through 2013. These projects will sustain the “overbuild” and delay the rebound, he said. The drop in demand has also plumped up reserve margins, making many new or planned projects unnecessary. With financing difficulties expected to stress balance sheets, as well as to adjust the demand-supply balance, it is likely that utilities will mothball or retire plants in the near term, Givens added.
The unregulated sector—particularly merchant generators and asset owners—will be most affected by the downturn. Renewable energy, too, will be affected in the short term, absent government endorsement and support. Wood Mackenzie anticipates that summer will bring a “thaw in the credit freeze,” however.
“Although carbon regulations and more renewable generation have caught the public’s attention, the reality of realizing these goals seems out of synch with the current market environment and the near-term outlook,” Given said. “In fact, in many markets, but not all, the slower-than-expected recovery could very well impede the implementation of these new regulations, as well as the build-out of new power generation capacity, including renewable energy.”
The decline in demand and increased “high-efficiency” coal capacity will sharply reduce power demand for natural gas, said Jen Snyder, North America natural gas principal analyst for Wood Mackenzie. “Contrary to conventional thinking, even as the economy recovers around 2010, Wood Mackenzie forecasts that demand for natural gas will lag, largely due to the displacement of gas from new coal capacity,” she said. “It isn’t until the wave of new coal capacity ends around 2013 that we see gas picking up where the additional coal capacity comes off.”
Wood Mackenzie’s short- to mid-term forecast was shadowed by an annual summer reliability report (PDF) from the North American Electric Reliability Corp. (NERC)., which said that peak electricity demand would drop 1.8% this summer in the U.S. and Canada as a result of the economic downturn, dropping by more than 30 TWh to around 2006 levels. The U.S. alone will see a 2.3% decline in peak demand this summer, NERC projected.
Wind generation capacity, meanwhile, has increased 45% to 9,250 MW, and programs to curtail power use at times of peak demand have increased 8% (more than 2,200 MW), NERC said. Fuel supplies are also robust: Coal stockpiles are almost 50% above average, and natural gas storage is 23% above average.
But the quasi-public agency warned that a drop in power demand from year to year is common, stressing that it was important to continue projects to upgrade or expand the nation’s electricity infrastructure.
On Friday, the Federal Energy Regulatory Commission (FERC) staff also released its annual Summer Energy Market Reliability Assessment (PDF). Like NERC and Wood Mackenzie, the agency foresaw reduced demand this summer, attributing it to the economic downturn. But more so than NERC, FERC highlighted the drastic decrease in power and fuel prices—prices which have “dropped to levels not seen in years.”
Summertime forward prices were 40% to 54% less than last year, while fossil fuel prices—across the board—had plunged 50% to 80% lower than last May, it said. “Last year at this time, we saw market participants paying high prices to secure supplies for the summer. This year the market has stepped back,” the report said.
“In fact, in most regions, forward power prices now are far below where they’ve been in years. We haven’t seen prices this low in New York and PJM since 2004. The last time forward prices were this low in the West, at SP-15, Mid Columbia and Palo Verde, was 2002.”
Sources: Wood Mackenzie, NERC, FERC