Coal, New Projects

Baseload Beckons

Issue 3 and Volume 108.

By Brian K. Schimmoller,
Managing Editor

In the midst of an overbuilt power generation market that has seen wholesale power prices plummet, merchant power company valuations crater, and gas turbine manufacturer order volumes crumble, it might be difficult to spot a growing demand for baseload power. Yet that is what is happening — or more precisely, what will happen in the not-too-distant future. Hidden behind the excess capacity currently prevalent in the U.S. is a looming shortage of baseload capacity in the 2008-2012 time period. To prepare for this pending shortfall, utilities must begin planning now. And stung by volatile natural gas prices in recent years, many will be turning to coal-fueled power plants for new generation needs.

The North American Electric Reliability Council (NERC) released its annual long-term reliability assessment in late 2003, with supply and demand projections covering the 2003-2012 time period. A cursory examination of the supply situation provides little indication that baseload capacity will be needed in the near future. Capacity margins in most of the NERC regions are above 20% currently, with some in the 40%+ range. These reserve margins will begin to decline after peaking in the next year or so, but, for the most part, they aren’t projected to fall back below 15% until after 2010.

In confronting this surplus capacity, why should anyone be concerned about a baseload deficit around 2010? The cause for concern can be traced to where baseload energy will be needed and how much consumers will be willing to pay. Two constraints hamper the value of excess capacity on the market. First, transmission bottlenecks limit the ability to wheel excess baseload energy from surplus regions to possible deficit regions. Second, much of this excess energy would have to come from gas-fired peaking plants. While it would certainly be possible to run simple-cycle gas plants 4,000-5,000 hours per year to satisfy baseload demand, it’s unlikely customers or state public utility commissions would stomach the higher costs.

Consider the Southwest Power Pool (SPP) and the Electric Reliability Council of Texas (ERCOT). Both report sufficient excess capacity to satisfy demand over the near term, at least through 2007. But potential problems lurk beyond that time frame. At a roundtable seminar Burns & McDonnell hosted for financial analysts in late January, Kiah Harris, Principal, described the economic peril which threatens regions that are becoming overly dependent on gas-fired generation. By superimposing a region’s projected load duration curve on a plot of available baseload capacity, one can get a quick visual impression of what type of generation will be setting the marginal price. In both SPP and ERCOT, the baseload workhorses — coal and nuclear — cannot satisfy required baseload demand requirements by 2010, putting more expensive gas-fired generation on the margin. The Northeast and Florida face similar scenarios in the out years.

Into the void, then, steps coal. When natural gas prices first spiked in 2000, the stars seemed to be aligning for a significant amount of new baseload coal capacity. In late 2000, in fact, Energy Ventures Analysis was tracking on the order of 40,000 MW of coal projects. Economic recession, coupled with financial stress in the industry, destroyed the momentum, and most projects were either cancelled or put on the back burner.

This time around, as gas prices spiked, they’ve remained higher, and the prospects for putting steel in the ground for new coal plants are much better. A number of municipalities are renegotiating power supply contract renewals with utilities and coming to realize that the rates being quoted for delivery in 2009-2012 reflect production costs from higher-priced gas-fired assets. To guarantee lower-priced baseload energy for their customers, therefore, many municipalities and coops — including Tri-State G&T (Colo.), City of Springfield (Mo.), City Public Service (San Antonio), and Omaha Public Power District (Nebraska) — are actively pursuing new coal plants. Greg Gould, General Manager of Burns & McDonnell’s Energy Division, believes there will be 20,000 MW of new coal-fired capacity in active development by 2010, primarily in the middle third of the U.S. Notably, engineering work on these coal power plants will represent the majority of Burns & McDonnell’s energy-related man-hours within one or two years.

The steel for the new coal plants won’t come cheap, of course. There’s a common (mis)conception that coal plants should be available for about $1,000/kW. Such a number is based on old data from the late 1970s and early 1980s, and ignores subsequent price increases for labor, pipe, steel and other materials. Capital costs today for a 600 MW coal plant are in the $1,300/kW range. But even the $1,300/kW figure is too low because it only represents construction costs; owners’ costs must be factored in as well, which can add another 25-35%. Owners’ costs include various elements outside of the EPC scope, such as financing fees, transmission interconnect costs, permitting, interest during construction, water, spare parts, and initial fuel.

Coal plant developers ultimately will have to convince the financial community that a given plant will represent a profitable investment when it comes on-line in 5-7 years. That’s not an easy sell today. Still, a compelling case is developing favoring coal-fueled generation. Coal prices are expected to remain low and stable, coal-fueled power plant efficiencies are rising, and emissions control (other than for mercury) is proven and effective. Most importantly, baseload demand will exist, bringing the long-term power contracts that financial analysts thirst for closer to reality.

One of the financial analysts at the Burns & McDonnell seminar offered an opinion that the addition of new coal plants could push more gas plants to the margin, potentially harming the credit ratings of those plants’ owners. Only time will tell of this scenario comes to pass, but it’s an interesting supposition. In the meantime, the financial community is warming to the stability coal provides, warts and all.

This really shouldn’t come as a surprise. When baseload beckons, coal responds.