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Trio of Factors Will Drive Power Generator Gas Demand, Says Bernstein

Those wondering about future natural gas burn by power utilities -- how much and when -- should look to three factors for insight: renewable generation growth, coal-fired plant retirements, and revisions to federal air emissions regulations, analysts at Bernstein Research said in a note.

The analysts wrote that "state-mandated growth of renewable generation" -- which saw the addition of 140 million megawatt hours of renewable capacity from 2007 to 2012 while total electric generation fell by 100 million megawatt hours over the same period -- will continue through 2020. This will suppress utility demand for coal and gas. Further growth in renewables will reduce utility use of gas for power generation by about 1.2 Bcf/d through 2015 and by another 1.9 Bcf/d between 2015 and 2020.

However, the analysts wrote, more than offsetting gas demand declines instigated by renewables will be growing demand due to the retirement of coal-fired generators, which will "surge through 2015" when the Environmental Protection Agency's (EPA) Mercury and Air Toxics Standards (MATS) (see Daily GPI,Aug. 20, 2012) take effect, the firm said. Coal-fired capacity will continue to decline through the end of the decade, but more gradually, as remaining coal-fired plants reach retirement age.

"Through 2015, we see coal plant retirements driving an increase in utility gas burn of 3.1 Bcf/d, followed by a further increase of 1.7 Bcf/d from 2015 through 2020," Bernstein said.

Further out, gas bulls have more to look forward to in the form of increasingly stringent air emissions standards from EPA.

"The second half of the decade could see a materially larger increase in utility gas burn if the EPA introduces regulations governing the CO2 [carbon dioxide] emissions of utilities' fossil fuel plants," the Bernstein analysts wrote.

If EPA, for instance, sets a reduction target in CO2 emissions of 5% from 2012 levels by 2020 through a cap-and-trade scheme, gas consumption would increase by 4 Bcf/d. "A CO2 reduction target of 10% by 2020 could double this figure, causing utility gas burn to increase by 8.1 Bcf/d," Bernstein said.

Overall, Bernstein analysts said, they expect that between 2011 and 2015 utility gas burn will increase by 1.9 Bcf/d, which takes into account 3.1 Bcf/d of increased demand due to coal plant retirements due to EPA's MATS emissions rules offset by a 1.2 Bcf/d decrease in demand due to the growth of renewable generation.

"Thereafter, we expect the growth of utility gas consumption to accelerate in response to EPA regulation of the CO2 emissions of the fossil fuel generating fleet," the analysts said.

 If the EPA sets a reduction target of 5% from 2012 levels by 2020, overall gas utility burn would likely increase by about 5.7 Bcf/d between 2011 and 2020. "If the EPA were to adopt a 10% CO2 reduction target scenario by 2020, we would expect utility gas burn to increase by 9.7 Bcf/d between 2011 and 2020," they said.

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