By David C. Wagman, Managing Editor
The electric power industry and its customers find themselves standing at a bridge trying to decide whether or not to cross. The perils of hesitating appear far greater than getting on with it. If we don’t cross, it appears likely that our nation’s energy situation will grow far worse within the next decade. Let me explain.
Recent announcements by TXU and NRG to build new capacity, progress on the FutureGen process and plans to build new nuclear capacity offer strong signals that a new capacity addition cycle is beginning. This cycle looks a lot different than the last.
One striking difference is the relative lack of talk about new natural gas capacity. More than a few business models were blown away by the fuel’s price volatility. That led, in part, to major setbacks for several independent power producers. Also worth noting is the reemergence of utilities in their traditional role of capacity builder, supplanting merchant generators.
Then there’s the renewed interest in coal-fired generation and its various incarnations, which range from super critical to ultra super critical to integrated gasification combined cycle (IGCC). Improved SCR, SNCR and FGD scrubbing technology make these plants more environmentally friendly than ever before. Beyond that, however, the push to add low-cost baseload capacity seems clear. The option that best fits the bill is coal.
The other big news is nuclear’s apparent resurgence and the growing sense that new nuclear construction is all but inevitable. That’s vastly different than the last cycle.
Jone-Lin Wang, senior director at Cambridge Energy Research Associates (CERA), figures that around 220 GW of new generating capacity was added in the late 1990s. Around 95 percent of that capacity was gas-fired. And of that, around two-thirds of the plants were combined cycle. The other one-third was simple cycle.
The idea in the late 1990s, of course, was that low-cost natural gas would displace older coal-fired power plants. By and large that failed to happen.
“At $6 gas you are not going to push coal out,” Wang tells me. “You need $4 (per MMBtu) to $4.50 gas to begin to threaten coal.”
What happened instead was that high efficiency gas plants replaced low efficiency gas plants. Power plants with a 7,000 (Btu/kWh) heat rate displaced plants with, say, an 11,000 heat rate. As a result, gas consumption fell even as load increased. This left total gas consumption for electricity generation essentially flat for several years. Gas growth for power generation is likely to begin growing again, Wang says. That’s because with the next build cycle still in its early days demand growth will need to be met by natural gas. CERA forecasts that through 2012, electric power’s use of natural gas as a generation fuel will rise by 5.5 percent a year.
“We see mostly gas growth until the turn of the decade,” she says. After that, 5 to 10 GW of non-gas capacity will begin to come online, displacing gas.
Pace Global Energy Services put out a white paper in August entitled “Avoiding the Next Capacity Crisis: The Challenges of Building New Generation.” In it, the consultancy posed four questions: (1) is there a generation capacity crisis looming?, (2) how will new capacity be supported financially?, (3) how vulnerable are major urban centers to shortages up to 2010?, and (4) are electricity price increases inevitable?
Answering the final three questions, the report’s authors said that longer lead times and more predictable payments will foster capacity contracts that offer a firm footing for finance. Capital markets appear ready for new energy asset investment. And bank financing also appears available for credit-worthy off-take agreements or financial hedges.
The risk of urban shortages depends largely on the adequacy of transmission, the report said. Near-term shortages could harrass places like New York City, Baltimore/Washington, California and peninsular Florida. The Federal Energy Regulatory Commission has raised concern over southern California, southwest Connecticut, Ontario and Long Island.
The report also anticipated near-term electric price increases. Natural gas (and coal) prices both have gone up. And, although the emerging build cycle favors fuels with lower price volatility, factors such as environmental controls and even steel prices will keep pressure on prices.
As to the potential for a generation capacity crisis, the Pace report pointed to an expected need for 130 GW of new generation in the U.S. over the next decade. By 2030, some 350 GW or more of new generation could be required. On average, that equals an annual capacity addition of 15 GW a year over the next 25 years.
New additions have simply failed to keep up. The report pointed out that the North American Reliability Council found that North American generation resources rose 1.4 percent over last year even as weather-normal demand was expected to grow 2.2 percent. More worrying, high temperatures in late July forced a 10 percent spike in peak demand over 2005 in the PJM, the equivalent, newspaper reports said, of adding Baltimore-sized demand in the space of a single year.
The Pace report stops short of concluding that the country faces an immediate generation crisis. But it rightly points out that with lead times for coal at six years and nuclear at 10 years we have reached the proverbial bridge, which now must be crossed.