By David Wagman, Chief Editor
If the gas-fired sector of the power generation industry was competing in a NASCAR event, then the National Economy car’s spectacular wreck has the yellow caution flags flying and the race slowed to a crawl until the debris can be pulled off the track.
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Just a few years ago, Team Gas was burning up the very same track, setting records given what was then strong demand for natural gas-fueled power generation. Delivery times for big pieces of equipment were a problem and supply chains were strained.
Much has changed since the economy hit the wall and the emergency equipment rolled. Some gas-fired projects continue to move forward although others have been marking time under the yellow-flag conditions for almost 12 months. Work continues to secure necessary project permits. And some power producers are asking for additional information on their requests for proposals, said John Wilson, who heads up sales for Siemens’ fossil power generation products division. Prospects are “slowly translating into orders,” he said. “We’re hopeful.”
Orders for new natural gas-fired generation may be off by 20 to 30 percent since the recession began, said David Walls, director of energy for Navigant Consulting. Just before hard times hit the power generation industry seemed poised for a new round of construction aimed at meeting environmental requirements and replacing aging units. One question is how strongly that market returns. “Are we going to see lower growth and orders for an extended period or will orders recover to the level of 2007?,” Walls asked. Answering his own question, he said “I think that remains to be seen.”
The firm’s analysis suggests a “real chance” exists that new unit orders will remain low for some time. “With investments in smart grid technology, renewable, energy efficiency measures and so on, many utilities and generators are reevaluating their capacity needs,” Walls said. What’s more, many parts of North America could see an extended period of flat demand growth. This, too, would suggest continued slow order growth.
“Gas is not as robust as it was a couple of years ago,” said David Eppinger, vice president of sales, marketing and strategic planning for Fluor’s power group. He said he sees “modest to good growth” in the future, but said overall the market has “reset to a lower level.”
Stability and Reasonable Prices
However, reasons for optimism may exist in the natural gas-fired sector. The fossil fuel continues to enjoy favorable attention as an “environmentally friendly” fuel, given that its carbon dioxide emissions are roughly two-third those of coal. What’s more, plant construction times are roughly half those of coal-fired power plants. And at least one forecast suggests that long-term natural gas supplies will be stable and reasonably priced.
The combination of a natural gas supply surge along with the expected economic recovery mean the era of sub-$4 natural gas prices is unlikely to be a long-term trend, said Robert Ineson, senior director of North American natural gas with Cambridge Energy Research Associates. At the same time, technology applied to develop and exploit shale gas formations also suggest an end to the era of $7 to $9 gas.
“The technology impact on shale has opened more supply potential at reasonable prices than a few years ago,” he said. Volumes from new discoveries are larger, which has a positive effect of keeping capital costs relatively low. So although the dollars-per-well investment has remained steady, unit costs have declined as initial production rates improve, he said. Based on that analysis, CERA’s forecast for conventional gas production on the margin is “somewhere on the high side of $6,” Ineson said.
That leaves power generators looking at natural gas almost as favorably as they did in the boom years of the 1990s. Ineson said one concern is that long-term decisions may be made based on an assumption that natural gas supplies will remain abundant, inexpensive and limitless.
“With political pressures, gas gives a more favorable outlook” than other fossil fuels, Ineson said.
Improved Delivery Times
Gentry Brann, director of corporate communications for Shaw Group, said he’s seen renewed interest in advancing several new combustion turbine combined cycle (CTCC) projects, as well as inquiries for still other projects.
“While I haven’t seen the ‘dash for gas’ as in some of the past boom years, I wouldn’t be surprised to see a steady increase in new CTCC projects,” he said.
Brann said the longest lead time equipment on a CTCC is the steam turbine generator. Last summer, the lead times for this piece of equipment stretched to 24 to 30 months. More recent lead times are 20 to 26 months. Other long lead time equipment—including combustion turbine generators, the heat recovery steam generators, transformers and alloy piping—have also shown reduced lead times.
“I expect the reduced electric power demand and the ongoing tight credit market will continue to support some further reduction in equipment lead times,” he said.
Gas turbines remain in fairly high demand, said Fluor’s David Eppinger. Following the 1990s’ gas boom, manufacturers scaled down to meet smaller market demand. “We are still seeing some opportunities for simple cycle units,” he said, although the project list is smaller than a year ago, largely due to a drop in electricity demand. Demand for new generating capacity may remain light through 2010.
“Generally, financing is still limited and challenging to obtain,” Eppinger said. For independent power producers a long-term purchased power agreement is almost a must. “There isn’t as much confidence of their going forward as for an investor-owned utility,” he said. Utilities with access to balance sheet financing options are better able to move ahead on projects, especially as regulators allow project cost recovery through rate base. However, utilities still must justify their investment based on what remains an uncertain outlook for power generation.
Rare Discussions
Discussions involving merchant power development are rare under current market conditions, said Siemens’ John Wilson. Independent power producers need long-term offtake contracts, stronger equity coverage and debt covenants due to the credit market conditions, he said. “Tighter credit is constraining the market.”
Given the tight credit markets, environmental compliance mandates and retirements involving older, less efficient units are no better than secondary market movers in many instances. The decision to retrofit or replace with new gas turbines becomes more urgent given the focus on environmental compliance, Wilson said. That means consumer demand growth is running behind environmental externalities and system optimization needs in terms of market influence.
At the same time, many power generation firms are focusing on unit flexibility, Wilson said. In response, manufacturers are working to make their products more responsive to ramp rates, reducing emissions and start-up rates, among other considerations.
Another significant market consideration is pending federal climate change legislation and its potential effect on natural gas.
“CTCC without carbon capture and storage—along with renewables—is the beneficial near-term interim opportunity for new electric power generation,” said Shaw Group’s Gentry Brann. In the intermediate and longer term, nuclear and coal with carbon capture and sequestration technologies may comprise the majority of new baseload power generation projects. “Gas-fired combustion turbine projects using current technology should be considered in the mix of cost-effective and environmentally reliable power generation alternatives,” he said.
To their advantage, advanced combustion turbine equipment is technologically mature and capable of providing generation efficiencies close to 60 percent in combined cycle applications. Then, too, natural gas-fired combustion turbine-based projects have a reputation for being both cost- and schedule-effective and are considered to be clean compared to coal-fired power plants.
“Natural gas will continue to be the preferred fuel and forecasts are calling for gas prices to remain with more reserves coming online in the eastern part of the country,” said Navigant Consulting’s David Walls. These factors—along with the prospects for carbon regulation—will help drive demand for gas-fired capacity. Even so, Walls does not foresee significant growth. That’s largely because carbon regulation will boost support for conservation, renewable energy and smart grid investments. These tend to dampen capacity requirements, he said.
The prospect of extending carbon capture requirements to natural gas-fired generation is not yet on many people’s radar screens because of the smaller carbon footprint, said Siemens’ John Wilson. Should it become mandatory for natural gas plants, carbon capture may present a major technical challenge. That’s because post-combustion carbon capture is easier with a concentrated flue stream, as in coal-fired generation. If the carbon is captured pre-combustion, then hydrogen becomes the primary combustion fuel, reducing the fuel’s energy value somewhat.
Eppinger said that if gas plants are forced to install carbon capture equipment then the fuel’s advantage over coal could be adversely affected. Of course, there “hasn’t been a drive to put carbon capture and storage technology on the back of gas plants,” he said.
Uncertainty—whether involving credit markets, environmental rules or recovery from the smash-up that wrecked the economy and brought out the yellow caution flags—all are causing a slow and cautious pace that is proving to be aggravating to drivers and spectators alike.