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Despite Fuel Costs, Gas-Fired Generation Keeps Growing

Despite Fuel Costs, Gas-Fired Generation Keeps Growing

The amount of new gas-fired power generation planned for the next two years reveals the rather alarming possibility that an additional 10 Bcf/d of gas demand could be added to the gas market before the end of 2002 from power demand alone, according to a report by Raymond James & Associates.

This should provide significant evidence that the current gas market imbalance won't be corrected anytime soon, Raymond James said in the report issued last week. The report claims that 136,000 MW of new gas-fired power generation could be added by the end of 2002. "Of course there probably will be project delays and cancellations, but it is reasonable to assume that at least 100,000 MW will be added before the end of 2002."

Raymond James calculates that every 10,000 MW addition of gas-fired power roughly equates to 1 Bcf/d of additional demand.

The Raymond James tally basically is even with what was released last November by the Energy Information Administration (EIA). EIA said a total of 108,374 MW of non-utility generation was planned to be added over the next two years. A total of 145,417 MW of non-utility generation is expected to be added to the U.S. power grid between 2000 and 2004, and 83% of that total should be gas-fired, EIA said (see NGI, Dec. 4, 2000).

Raymond James' latest tally of total proposed generation shows 253,000 MW of announced capacity additions through 2007, up from a previous total last year of 160,000 MW over the same period.

About 22,000 MW of gas-fired power was put in place last year, somewhat less than Raymond James' forecast of 30,000 MW and the record of 26,200 MW of capacity additions set in 1979. But that does not mean high gas prices are slowing down construction.

"Even though natural gas prices have tripled, industry expectations for 2001 are up slightly to 52,000+ MW of new capacity and... the real explosion in new gas fired power comes in 2002 and beyond..." Raymond James said at least 150,000 MW will be required through 2007 to balance supply and demand and maintain a 15% power reserve. About 109,000 MW should be running by 2003 and 156,000 new megawatts probably will be installed by 2007 (from 1999), Raymond James said.

In the near term, the strain on the gas market is going to be considerable. With between 35,000 and 40,000 MW of new gas-fired power expected to be in place next summer compared with summer of 2000, another 3-4 Bcf/d of demand will be created. "SOS is right! Where is this additional gas supply going to come from?" Raymond James asked. "Good question." The firm expects that much industrial demand will have to be eliminated by high prices to allow the new power to enter the market.

There is a common misconception that $9/MMBtu gas prices are deterring further gas-fired generation development. "The new combined cycle plants being built today are actually making on average over $60/MWh after fuel costs around the United States," Raymond James said. "In fact we have seen that margin explode up near $200/MWh during the peak summer months. We expect this trend to continue into 2001. Natural gas sets the price for electric power --- a relationship made in heaven (for now)."

Rocco Canonica

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