Massive Merchant Power Push Will Test Gas Infrastructure
If current bullish projections for adding another 5 Tcf of gas
demand nationally over the next 10 years is going to become a
reality, the pace of merchant power plant development will have to
accelerate and the gas business will have to catch up with it,
according to a panel of experts at GasMart/Power 2000 in Denver
Right now neither of those goals appears a sure thing. Brad
Porlier, vice president for business development at Duke Energy
North America, said he's unsure that the current gas industry can
meet the challenge, assuming merchant development can overcome a
growing list of hurdles from siting to political issues.
Actions on both coasts --- in California and New York --- have
cast doubts on whether sufficient incentives will fully develop to
support projected merchant power growth.
"In California right now energy prices are too low to justify
new generation," said John Stout, Reliant's Houston-based vice
president of asset commercialization. "To make a project work in
California you need to establish some of these extra values
California regulators over the past two years have changed the
rules and that "causes a distortion in price signals," Stout told a
packed session at the annual industry conference and trade fair.
Those changes, he noted, caused his company to pull back plans to
add about 500 MW of ancillary services into the California market.
Even though Cal-ISO recently raised its price cap for this summer
from $250/MWh to $750/MWh, the economic incentives are still
In the meantime, New York regulators have asked FERC to
eliminate ancillary services markets and penalize power plants that
made money offering these services recently in their state.
Joining his fellow panelists' assessment that price caps are
harmful to the orderly development of new merchant power plants,
Richard Carlson a consultant with Sacramento, CA-based Henwood
Energy Services, emphasized that the caps make it very difficult
for any economic model to work adequately as they complicate price
"Price caps in one market can be a de facto cap in other markets
through arbitrage," Carlson said. "It is hard to predict the level
and the timing of price caps." A counter to this hurdle is being
provided, he said, through various "rational buyer rules" that have
been adopted by the California independent system operator
(Cal-ISO) and replicated by others in the East Coast and Alberta,
Canada under other names.
Carlson recommended a new economic modeling approach to merchant
plants called "real options valuation" to replace the traditional
"discounted cash flow" (DCF) approach. In essence, unlike DCF which
Carlson sees as biased toward baseload generating units, the real
options model give value to an array of ancillary services and
other uncertainties of the developing restructured power industry.
The ultimate solution to an orderly market and adequate merchant
power goes beyond the current crop of proposed new plants, Stout
said. In the next five to ten years, he said, there needs to be
what he calls "an influx of demand elasticity technology," meaning
applications such as microturbines and fuel cells that will begin
to shave peaks in the demand curve. "Without a new shaping of the
loads," there will never be a downward pressure on pricing.
Aside from price, actual siting and permitting of new
powerplants is an increasing challenge, Duke's Porlier said. "It is
important to get 'down in the weeds' at the project level to
understand where a given merchant plant development is at any point
in time. Land is getting increasingly difficult to find for plant
development. I think we too often circle the crossings where major
electricity transmission lines and major gas transmission pipelines
meet. That's not the end of the story. It is only the beginning."
Among the increasingly complex siting/permitting issues affecting
both gas and electricity infrastructure additions are growing
shortages of private land, water and the political will to support
such development, particularly in the West and near load centers.
"We have to challenge zoning, challenge special use permits and
challenge people who will not vote for power plants or pipelines,"
Porlier said. "State legislatures are increasingly getting more
and more active in the siting process. It is a highly charged
political process now. Their constituents are saying they want
something to say about this [new energy infrastructure].
Gas demand is projected to increase by 5 Tcf/year and 210,000 MW
of new power plants are expected to be added to the grid. "About
60% of the projected new plants are combined-cycle plants, where we
have an opportunity to make margin over a good portion of the year.
And about 40% of the gas demand will come from combustion
turbines," Porlier said. "So all of the merchant power plants are
going to want big time gas supplies at the same time. We all know
what this means in terms of increased opportunities..... This kind
of gas demand is going to have major implications for all of us ---
from the wellhead, to processing, to the pipelines, marketers and
Where is all the new gas going to come from? There will be some
self-correction to both the discrepancy between power supplies and
new plants proposed as well as between projected gas demands and
projected future supplies, Porlier said.
"Press releases are not the same as actual plants being built,"
he added, referring to the continuing stream of new merchant power
plant proposals, each of which can cost up to $20 million just to
get to the permitting stage. "Many of the present projects proposed
will not be successful.
"We sort of take it for granted that there is enough fuel that
will be available, on time, in the right places to allow these
projects to be built. We're not so sure, and people here will have
a lot to do about it."
Richard Nemec, Denver