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Black & Veatch: Gas-Fired Generation Boom to Come

The power generation industry is lacing up its track shoes for "dash to gas" part two, according to analysts at Black & Veatch. Only this time around plant operators aren't likely to wind up hurdling gas price spikes like they did following the gas-fired buildout that took place around the turn of the decade.

"We've never seen this business like this before. Gas is going to be a bigger player than it ever has been in power generation," Rodger E. Smith, the firm's president of enterprise management solutions, told reporters in Houston last Wednesday. The bright outlook for gas is partly predicated on cloudy days ahead for coal- and nuclear-based power generation.

The majority of power generator/utility CEOs are likely to eschew coal and nuclear when they need new baseload capacity. Coal is complicated by the uncertain outlook for climate change legislation as well as competitive natural gas prices -- thanks to unconventional resource development -- which backed some coal generation out of dispatch earlier this year. Numerous coal projects have been canceled in recent months as well.

Nuclear power is difficult because of high plant costs and wobbly capital markets. Early movers will have a distinct advantage when it comes to securing federal loan guarantees, capital and nuclear-capable labor, noted Smith.

From a pure risk perspective, gas is going to be the best bet for new baseload capacity over the next four to five years, he said.

With relatively stagnant demand growth projected for industrial, residential and commercial gas demand, unconventional gas patch players need power plants to consume their product. Add to burgeoning shale gas supplies the potential for greater liquefied natural gas (LNG) imports and the possibility of an Alaska gas pipeline to serve Lower 48 markets, and there will be enough gas to meet whatever demand the power industry can muster.

"It doesn't look like the early '80s any more when folks didn't know where supply was going to come from," Smith said.

Whether they believe it or not, generators aren't likely to find their project economics whipsawed by wildly fluctuating gas prices anytime soon. "If you're in the generation side of the business, that's been the scary thing about gas," Smith said.

But as the Energy Information Administration and others have predicted, Black & Veatch is projecting an era of relatively tranquil gas markets, with prices ranging from about $6 to $9/MMBtu out to 2030. "I can't remember the last time we looked at price curves that far out and they've looked that stable," Smith said.

Add to that the fact that pipeline infrastructure in place and in development is going to be adequate to get the gas to where it is needed for power generation, Smith noted.

Looking at generating capacity additions as envisioned by Black & Veatch in more detail reveals boom times ahead for wind power, but these will wane fairly quickly as state renewable portfolio standards are met. The firm sees annual wind generation capacity additions spiking at about 20,000 MW around 2012 only to taper to more modest additions of less than 5,000 MW per year beyond 2021. Between about 2017 and 2021 nuclear power is expected to have its run, peaking at capacity additions of about 18,000 MW at around 2019.

Conventional coal-fired capacity additions are essentially history after 2012, according to Black & Veatch. But coal-fired capacity additions come back into play around 2019 with the advent of integrated gasification combined-cycle plants with carbon capture and sequestration (CCS). Still, additions are less than 5,000 MW per year from 2019 onward.

CCS is roughly 15 years away from commercial viability, according to Dean Oskvig, CEO of the firm's B&V Energy unit, while Smith said that beyond technology issues, permitting of sequestration facilities is going to be the biggest stumbling block to CCS.

Gasification technology could carve out a role for gas-fired power by making coal equivalent to "solid gas," which could serve as a foil to high natural gas prices, Oskvig noted.

One thing that could hinder gas on its way to a larger share of the power generation market would be restrictions on hydraulic fracturing in the completion of shale natural gas wells, Smith noted. It remains to be seen how stringently the practice could be regulated and what impact such regulation would have on gas shale play economics.

But according to Black & Veatch, simple combustion turbine capacity and combined-cycle plants will share by far the largest piece of the new capacity pie in the years ahead. Combined, the two will account for roughly 12,000-20,000 MW of new capacity per year from 2021 onward. More near term, gas-fired plants will see their role expand, until they are crimped by wind's peak around 2012, and then expand again to about 10,000 MW per year until about 2020.

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