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Analysts: Gas-Fired Generation Boom Is Over

Modest power demand growth, the rise of renewable energy, particularly wind, and a slug of new coal-fired capacity hitting the market over the next couple of years will pressure gas-fired generation, according to analysts.

But while the boom decade is over for gas plants, climate change legislation and the need for conventional generation to backstop intermittent renewables will create opportunities for gas. And the longer-term outlook for coal plants is seen as uncertain, given their high capital costs and work needed to develop carbon capture and sequestration.

Driven largely by deregulating power markets, over the last decade developers scurried to construct gas-fired power plants. Gas projects were favored for a number of reasons, particularly their lower construction costs and ease of siting and permitting relative to coal-fired plants. However, a weaker economic outlook and the proliferation of renewable portfolio standards (RPS) in numerous states as well as the potential for federal renewable energy and efficiency mandates have changed the outlook for gas-fired power generation.

"Regardless of one's GDP [gross domestic product] outlook and renewable assumptions, the growth rate of gas-fired output is likely to be lower than the rate experienced this decade," analysts at Barclays Capital wrote last week. "Only retirements of coal-fired plants at a significant scale, or the rapid growth rate of power demand (e.g., from electric vehicles), could swing enough share to gas-fired plants to equal the output from earlier this decade."

From 2000 to 2007 gas-fired power plant output grew 6.7% per year on a gigawatt hour basis, according to the Barclays analysts. "But the future is not as assured," they wrote. "Power demand growth has stalled with the recession, and a host of utilities, ISOs, RTOs [independent system operators, regional transmission organizations] and the EIA [Energy Information Administration] have revised downward their outlook for power demand growth rates beyond the current recessionary period."

The recession has greatly slackened demand for power and expanded reserve margins, more so in some regions than others, Wood Mackenzie's George Given, head of global power research, told NGI. "I see that certainly gas-fired plants, generally speaking, are going to be more on the margin so as you have a sharp and perhaps temporary decline in energy sales, they could be disproportionately hurt more at least in the short term. They're just simply not economic to run."

In some regions there won't be a need for much new power generation for five or more years, Given said. However, California and the Northeast are exceptions where reserve margins are thinner.

According to Wood Mackenzie, more than 27,000 MW of capacity under construction will have come online by the end of this year. About 8,700 MW of that is gas-fired combined-cycle capacity. Next year will see more than 19,000 MW added, but the majority, 7,444 MW, will be from coal-fired plants with gas-fired combined-cycle second at 6,345 MW. In 2011 more than 6,300 MW of capacity under construction is expected to come online, with 4,247 MW of that from coal plants and 1,740 MW from gas-fired combined-cycle.

"We see over the next several years a continuous decline in gas consumption, gas as a fuel for power generation," Given said. "This is quite a change of events. It's partly due to the economy, but it's also partly due to this increase in baseload coal, which can out compete a lot of these gas facilities. The decline in gas consumption is not evenly spread throughout the country because a lot of these new coal builds are concentrated in one or two areas. Competition for that marginal generation is changing with the addition of these coal facilities."

Further, more renewable energy is coming online, driven by funds from the American Recovery and Reinvestment Act and the enactment of RPS in 32 states, noted Barclays.

While gas-fired plants have been able to push coal-fired generation out of its traditional position in the dispatch stack in some markets due to exceptionally low gas prices, that situation can't go on forever, the Barclays analysts noted. And the power generation sector has been the gas industry's only opportunity for growth.

"This raises the prospect that output growth from the surge of renewable facilities could keep pace with muted power demand growth," the Barclays analysts wrote. "Should this occur, growth of gas-fired power output would likely stall. This would slow the speed of gas as the marginal, price-setting resource during many hours of the day and cool the natural gas industry's sole source of demand growth."

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