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Ohio's Freeze on Renewables Said Not Likely to Drive New Natural Gas Demand

Ohio's move last week to become the first state in the country to roll back its renewable energy standards by freezing for two years mandates that require utilities to sell more power from green sources isn't likely to increase natural gas demand in the state, sources say.

Yet the legislation comes at a time when an ever-increasing number of coal-fired power plants are scheduled for retirement (see related story and Daily GPI, March 20), undermined by federal regulations and a surplus of cheap gas. Ohio Republican Gov. John Kasich signed SB 310 on Friday, which freezes mandates passed in 2008 that required utilities to meet annual benchmarks, and sell 25% of their electricity from renewable sources, and eliminate energy waste among consumers by 22% by 2025.

While the legislation is not expected to drive more power sector demand for gas, sources said it factors into a broader set of circumstances that will likely find more generators switching to gas or ramping up capacity at combined-cycle plants. SB 310 became law just weeks after the U.S. Environmental Protection Agency proposed rules to cut carbon emissions from the power generation sector 30% below 2005 levels by 2030 (see Daily GPI, June 2).

"It's an interesting time because electricity demand has remained pretty flat," said FirstEnergy spokesman Doug Colafella. "I don't think we've seen load growth since before the recession. However, with some of these coal plant retirements and as we eventually begin to see demand pick back up, you'll likely see more natural gas generating plants being built, which has already been happening.

FirstEnergy owns three of Ohio's largest regulated electricity distribution companies and supported the senate bill. Colafella said FirstEnergy backed the bill mainly because of energy efficiency standards that were being subsidized by the company's customers and proving costly to implement. Power generation was not the issue and the company has no immediate plans to use more gas.

"We thought it was time for the state to reconsider the cost of the program. It required us to offer programs to customers that help them reduce electricity-use through things like rebates for the purchase of energy efficient appliances or lighting. It was all paid for through a charge to customers and industrial end-users," he said.

"We obviously have a great resource here in Ohio with these shale gas reserves, but when you have a mandate in place that artificially suppresses demand with additional costs, it makes it more difficult to build new plants such as those that use natural gas."

The state's leading oil and gas trade organizations were not involved in the two-year debate that unfolded over the renewable standards. Ohio American Petroleum Institute Executive Director Chris Zeigler said his organization took no position on the bill. A spokesman for the Ohio Oil and Gas Association said the same.

Zeigler said some refiners, such as Marathon Petroleum Corp., were interested in the bill. Marathon is a member of the Industrial Energy Users of Ohio (IEUO), which supported the legislation because of the costs that were being passed onto its members.

"The renewable standards came into effect in 2008 at a time when conventional wisdom held that we were running out of natural gas and we'd have to import liquefied natural gas (LNG)," said IEUO Executive Director Kevin Murray. "Prices were going up at the time and the mindset and expectation of what the world would look like in 2014 is dramatically different from the way it turned out with us sitting on what's been called a Saudi Arabia of natural gas. Cheap natural gas prices are keeping a lid on electricity prices and for all those reasons we didn't think a march up mandate mountain made a whole lot of sense."

For now, Murray said he didn't believe gas demand would receive a lift in the state with a reduction in renewable energy sources. SB 310 freezes generation standards at the current 2.5% level and it requires a 12-member legislative study committee be formed to consider further changes to the standards. If the General Assembly doesn't act in two years, the mandates resume.

"The way the bill is structured, it puts in place a two-year pause. The year-over-year increase in purchase requirements are held constant," he said. "If the legislature does nothing, it kicks back in. So, with only a two-year freeze, I don't see it doing a whole lot one way or another to natural gas demand. I think weather is a bigger driver and of course the EPA regulations."

If anything, sources agreed that the legislation would likely factor into the state's compliance plan when it is time to consider how to meet the EPA's proposed carbon reduction rules. Although gas has comprised the bulk of new capacity additions in Ohio, gas for power consumption remains underutilized (see Daily GPI, May 22).

The state still generates nearly 80% of its power from coal, while nuclear and natural gas account for about 11%, according to Energy Information Administration data. As of 2012, 43 coal generators in Ohio were slated for retirement.

The Ohio Environmental Council's Director of Energy and Clean Air programs Trish Demeter disagreed with SB 310 supporters. She said the renewable standards were saving consumers money on their electricity bills and said that by freezing the mandates, Ohio would likely find it more difficult to comply with the EPA's proposed regulations.

"The way we understand it, under the proposed EPA guidelines, the state will have the flexibility to include in its compliance plan an option to increase capacity at natural gas-fired power plants, which could put a premium on natural gas and increase demand if the plan incentivizes the fuel " she said. "I wouldn't think that SB 310 alone will increase demand for it, though. We don't have enough natural gas-fired power plants online right now and not every plant is operating at 100% capacity. There's also been nothing to stop the competitive market from developing new plants."

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