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Calpine CEO Bullish on Shale Gas in Power Sector

Operating one of the youngest predominantly natural gas-fired electric generation plant fleets in the nation, California-based Calpine Corp. is tying its strategic future directly to the combination of the climate change-driven shift away from coal and the increasingly abundant domestic supplies of shale gas, CEO Jack Fusco said during a conference call last Thursday.

Calpine reported increased year-over-year profits and another loss, albeit smaller, for the fourth quarter.

While the wholesale energy sector generally was "bleak" and the electricity market "virtually petrified" in 2009, Fusco said Calpine sees significant opportunities going forward, driven by a U.S. generation fleet that is aging and in need of massive replacements in the years ahead. When this operational fact of life is mixed with the public policy shifts away from coal being the dominant electric generation fuel, Calpine's gas fleet has a decided edge, he said.

If Calpine were to get just 5% of the nation's generation plants that need to be replaced, it would double the size of its current fleet, which is nearly 25,000 MW, Fusco told financial analysts. He said virtually no new major power generation projects were started last year, further increasing future opportunities for Calpine.

"There were significant issues and opportunities that began to take shape last year that could change the landscape of the electricity sector," Fusco said. "A meaningful portion of the U.S. generation fleet will need to be replaced in the not-too-distant future. More than 40% of the fleet includes plants that are either at or well beyond their useful and economic lives. In addition to age, many of the plants of our competitors and others are technologically obsolete and have significant impacts on the environment."

For Calpine, Fusco said, this fact by itself presents the company with "significant opportunity to grow." But further brightening Calpine's future are two trends he thinks are going to create a "sea change" in the electricity sector.

The first is the shifting public policy regarding coal-fired generation. "It will either force or incentivize a shift away from coal as our nation's primary generation fuel source," Fusco said.

And the second trend is the recent discoveries of the abundant supplies of shale gas throughout North America. "With this trend, gas-fired generation has become a far more viable replacement as older and obsolete plants are retired," he said.

In regard to the new supplies of gas, Fusco said his 25 years of experience in the power utility sector tell him that generators will not react to this shift voluntarily, so it may take regulations and/or new laws from Congress to make the transformation. But he thinks the Obama administration is committed to reduce the power generation sector's "air, water and land environmental footprint" through either the U.S. Environmental Protection Agency or through Congress.

The Bush administration was banking on a strategy of new nuclear generation, energy efficiency and carbon capture and storage technology, but the developing of shale gas changes all that, Fusco said.

"Prognosticators are realizing that with this new-found, abundant domestic resource security and cost concerns have been mitigated, if not eliminated," said Fusco. That leaves the power sector with "natural gas as an obvious step in the right direction, requiring significantly less capital investment than competing technologies." He cited Calpine's Otay Mesa gas-fired combined-cycle plant that opened last year south of San Diego as an example.

Plants like Otay Mesa are flexible and take up "a fraction of the resources" in land and water and others that competing renewable and traditional generation technologies do. "The environmental advantages alone are compelling," he said.

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