By Brian Schimmoller, Contributing Editor
Any number of energy experts will tell you that the United States will have to import significant quantities of natural gas -15 to 20 percent or more over the next few decades - to satisfy demand. Coupled with substantially elevated prices in recent years and concerns about long-term natural gas availability in the United States, one might think natural gas is entering a death spiral as an electricity generation source. To paraphrase Mark Twain, however, “News of the death of natural gas has been greatly exaggerated.”
Make no mistake, natural gas-fired generation is not going to enjoy a repeat of the boom cycle witnessed in the years bracketing the turn of the millennium. For a variety of reasons, however, natural gas is seeing a surprising resurgence, particularly when one considers the thousands of megawatts of gas-fired capacity that sat idle a few short years ago. Gas turbine manufacturers are ramping up production lines to capitalize on the surge. North American customers booked 7.2 GW of gas turbine orders in North America in 2006, up 75 percent from 2005. Siemens Power Generation expects a futher market increase of about 11 GW of new turbine orders in 2007.
Opposition to the wave of coal-fired power plant announcements is partially responsible for the gas rehash. California’s landmark legislation limiting out-of-state power purchases to sources whose carbon emissions are no higher than those from a gas-fired power plant has unleashed a string of copycat legislation out West. Similar emissions performance standards enacted in the state of Washington recently contributed to an Avista Utilities’ decision to remove coal from its long-term resource plan in favor of gas and renewables.
Rising costs associated with development and cost of coal-fired power plants are also pushing the electricity sector back to gas. Facing a doubling of capital costs for a planned 450 MW clean coal plant (to $3.6 billion), SaskPower in Saskatchewan scrapped development and instead will invest $500 million in 400 MW of gas-fired peaking plants and 180 MW of renewables by 2012. “Plant construction costs have risen by 40 percent over the last two years,” said Randy Zwirn, president and CEO of Siemens Power Generation Inc. “These increases impact gas plants less so than capital-intensive coal and nuclear plants.” Simply put, natural gas-fired generation presents a lower investment risk to developers than coal or nuclear, price risk can be passed on to consumers and political risks such as carbon constraints are substantially lower.
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Timing is also on the gas side of the ledger. Reserve margins are on the decline in several key regions, often coinciding with regions less supportive of coal-fired generation. “When evaluating reserve margins in light of required lead times for various generation options, gas comes to the fore,” said Zwirn. As shown in the accompanying figure, reserve margins in several NERC regions are expected to drop below the 12 to 15 percent target range in the next few years. To arrest these declines, gas-fired generation provides the surest answer, even with gas prices at $6-7/MMBtu. The figure also shows when four types of generating capacity could be expected to come online, should construction begin right away.
Evolving forward capacity markets also facilitate development of gas turbine capacity. Such capacity markets typically require defined blocks of capacity to be available at specific points in time to ensure stable grid and market operation. ISO New England, for example, is in the process of qualifying resources for the first forward capacity auction in February 2008. Since the initial “show of interest” application period, several projects have dropped out, leaving approximately 70 applications totaling 10,000 MW of new power plants. “The majority of these applications are for natural gas-fired units,” said Ellen Foley, ISO New England spokesperson. “We anticipated that the initial amount of applications would decrease as the qualification process progressed since there are many business decisions a resource owner must consider, including project and application costs, siting and construction time and overall feasibility of the project itself.”
While elevated concern over the availability of domestic gas resources has militated against a resurgence in U.S. gas-fired generation in recent years, even that issue may be moderating. With U.S. gas demand for electricity generation increasing more than 50 percent over the past decade, domestic production has struggled to keep pace. Declining production from aging gas fields has pushed more production into nonconventional resource fields and has initiated a treadmill effect in which substantial effort is needed for new gas reserves just to keep pace with annual production. In a stunning and refreshing departure from the treadmill, however, the Potential Gas Committee (PGC) - a volunteer group of gas industry experts - estimated the total U.S. natural gas resource base at 1,525 trillion cubic feet (Tcf) as of year-end 2006, more than 16 percent higher than in 2004. The PGC pointed to shale-based resources in the Mid-Continent region as the largest contributor to the increase. While the boost in reserves represents less than 10 years of U.S. natural gas consumption, the increase may ease concerns about gas availability in the mid-term and potentially reduce the risks of new gas-fired generation.
In truth, while gas is now back in the equation, it never really went away, in much the same way small-town Samuel Clemens never truly went away after Mark Twain adopted his pen name in the mid-1800s. Natural gas remains a factor, but has metamorphosed from being a low-cost, dime-a-dozen, “dash for gas” bully into an opportunistic, nimble, “gas rehash” specialist.