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ICF Consulting Says Gas Will Survive Coal-Fired Generation Challenge

Power generation has been the engine of natural gas demand growth since before the turn of the century. Now that gas price and supply worries have sparked talk of new-build coal-fired generation, some gas fans may fret that the industry's heyday is coming to an end.

They needn't worry, according to at least one consultant. Judah Rose, ICF Consulting managing director, outlined the firm's analysis of the "threat" to gas posed by coal generation. While the gas market of late has been acting like a spoiled and capricious child, it's not likely to get a very hard spanking from coal-fired generation development.

"Not only did 2005 have the highest gas price in history, it also had the highest gas generation in history as well," Rose told attendees at an Infocast gas storage conference in Houston this week. Last year saw 19% of the nation's electric generation come from gas-fired plants, an all-time record, Rose said. Go back to 1990 and gas only accounted for 13% of the generation mix. Over the last 15 years gas-fired generation has doubled. And, according to Rose, it's quite likely the next 15 years could see another doubling.

Working in the favor of gas is the overbuild of gas-fired combined-cycle plants. ICF forecasts that the capacity factor of these plants is going to be only 33% this year, which leaves plenty of room for gas demand growth. "While gas generation has risen, it hasn't risen in lock-step with the amount of capacity that's been added," Rose said. "Since 1998 we added about 225,000 MW of gas-fired power plants on a grid that has peak demand of only 725,000 MW." Gas plants account for about 37% of generation capacity. "There's a lot of potential for increasing the utilization of the gas combined cycles."

Electricity demand growth is all but unstoppable. PJM saw an increase of 11% last summer, Rose pointed out. Still, capacity margins are declining in most regions around the country. The current average is 22%, which isn't far above the 17% where worry sets in. While many in the industry have recognized it's time to build more generation, the dilemma is exactly what to build: more gas, coal, nuclear? Rose said that 70 GW of new coal capacity has been announced but only 4 GW of that figure is under construction. While not long ago coal was a non starter, gas isn't out of the picture for new generation. About 15 gas-fired plants are under construction now, another 14 have been announced, and 48 plants are on hold, according to Rose.

"We expect electricity demand to continue to grow," Rose said. "We don't think coal is going to blow gas out of the water, and part of the reason is coal plants are very expensive to build, and they're difficult to build. It's not uncommon for a new coal plant to be two to three times more expensive than a gas plant."

The stronghold of coal-fired generation is in the interior, near coal supply, noted Rose. On the coasts, coal-fired generation is an "anathema" to many. Another factor working in the favor of gas-fired generation is CO2. "Obviously, it's a very controversial topic. I do know that EIA [Energy Information Administration] is prohibited from considering CO2 as part of its base case for political reasons, and my environmental team tells me that it's coming one way or the other. So that becomes an important dynamic."

So important, in fact, that a CO2-constrained environment could mean the difference between a decent future for gas demand and a great one, with potential for another doubling of gas-fired generation over the next 15 years. "When you take into account CO2 I think that really tips it and you end up resuming your historical growth rate in spite of the higher gas prices."

While Rose said ICF doesn't regard the prospect for new nuclear generation as "a major issue," Anthony Damiano, Wood Mackenzie manager of North American power research, has more faith in atomic energy, particularly in a carbon-constrained environment. Damiano presented his thoughts for the future of new power generation to Houston energy reporters last week.

By Damiano's math, the life-cycle cost of new capacity is roughly equivalent for coal-fired steam plants, gas-fired combined cycle, with the cost of integrated gasification combined cycle (IGCC) plants slightly higher -- if one excludes the cost of CO2 mitigation. Factoring in carbon, gas-fired combined cycle wins on cost. However, nuclear has an edge over gas in either case at $5/MMBtu for gas and 75 cents/MMBtu for nuclear fuel. And, "nuclear is the clear winner in a carbon-constrained world," Damiano said.

The wild card for new generation is capital cost. While the industry is pretty confident that gas-fired combined cycle plants can be built for about $575/kW, capital costs for coal and nuclear generation are much more uncertain as there has been little to no recent experience building these plants. Damiano said the capital cost for a new coal plant could range from $1,250 to $2,000 per kW. His model puts it at $1,500/kW, and he estimates about $1,800/kW for nuclear and IGCC.

"There is no silver bullet or there is no clear choice about what type of new supply to build," Damiano said. And that makes for an uncertain world for generation developers. "They're forced to make long-term decisions right now in a very difficult environment."

With all the gas-fired generation on the ground, and all remaining capacity at these plants, plus high and uncertain capital costs for new coal plants, Rose said he doesn't see a scenario where gas-fired generation gets wiped out by a massive build of coal plants.

"You have to have really high gas prices, a la last year, on a a sustained basis. And that seems to us to be unsustainable, even if you could have it on an episodic basis. It is possible you could have lower gas prices and an even better trajectory [for gas demand]. We think the odds are slightly more in favor of that than something like a sustained Henry Hub price at $8.37, particularly over a multi-year period."

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