The cancellation of plans for eight pulverized coal-fired power plants by TXU Corp. means yet still greater reliance on gas-fired power generation in Texas, where 70% of active capacity in the state's Electric Reliability Council (ERCOT) is gas fired.
In the near-term, the plant cancellations -- which came as a concession to environmentalists by TXU and private equity firms that want to buy out the utility titan -- will mean little for generation reserve margins, Joe Sannicandro, Wood Mackenzie vice president, North American power service, told NGI. True, reserve margins have been shrinking fast, from a recent high of 35% in 2002 to an expected sub-12.5% (the minimum requirement) by 2009. But margin tallies kept by ERCOT don't include about 5,000 MW of older, less-efficient gas-fired steam turbine capacity that's currently mothballed, including about 1,600 MW held by TXU.
"Our view has always been that it was likely that that capacity could and would return when the need arose for it," Sannicandro said. "What you're seeing now is a clear need for some of this capacity. It won't run much. It will run in the summer months."
Bringing back that old capacity will preserve reserve margin at adequate levels for three or four years, Sannicandro said. Additionally, Calpine Corp. just proposed expanding its Deer Park Energy Center, 10 miles east of Houston, adding 400 MW to the 1,000 MW gas-fired combined-cycle plant. "With 7,500 MW of capacity in ERCOT, Calpine is uniquely positioned to expand several of our plants," said CEO Bob May. Additionally, NRG Energy Inc. CEO David Crane recently told financial analysts he is not worried about reserve margins, at least not for the near term. "Resource adequacy in the 2009-2011 time frame is absolutely no concern," he said, noting his company has 1,000 MW of mothballed capacity in Texas.
And for the near-term that's a good thing because adding coal-fired capacity has turned out to be easier said than done.
"The TXU original project timeline made it look easy," Sannicandro said. "You're going to add 8,600 MW in a four-year period and you were going to do it for a price substantially below what the next person could do it for. That argument certainly went out the window once they started running into all the opposition to their plants. They had been talking about a three- to four-year timeline versus the industry average of four to six, and they were a year behind schedule already just in trying to get their air permits. It's going to be difficult everywhere, I think."
But what about after 2011 in Texas? As TXU found out, it takes longer to permit and build a coal plant than it does to get a kid through college, and 2011 is only four years away. Nuclear is gaining traction quickly but still is an even longer wait than coal. And while Texas recently surpassed California as the country's windpower capital, wind generation is fickle. In fact, ERCOT only counts 2.5% of wind capacity toward reserves. "So even if you're building wind for energy, you're going to be building something else for reserves," Sannicandro said.
"We're running into the situation now where it may very well be gas by default," he said. "You just don't have time to build anything else. That has long-term implications for the gas market and power market."
Wood Mackenzie is currently running a sensitivity on its base case market scenario to divine what the recently revealed difficulty in building coal-fired plants means for natural gas demand and prices.
"Obviously, if you're pushing more demand in you're going to see a price response on the gas side, and that's going to go straight through to power prices, particularly in a market like ERCOT where gas is the price-setting fuel," Sannicandro said. "Not only is it the price-setting fuel, if you are relying on these steam plants for the summer months and the peak periods it's a lower-efficiency technology setting the price than the combined-cycle units. So none of this is good for wholesale power prices."
Or retail power prices, which are already high in the Lone Star state. "I can hardly go to church, hardly walk in the grocery store and somebody doesn't stop me in my small community and fuss at me about their electric bill. And their complaints are legitimate," State Rep. Phil King (R-Weatherford) told NGI last month.
Tightening reserve margins also will boost power price volatility, as was seen nationwide in 1999-2000, noted Sannicandro. But as power consumers are not expected to be significantly affected -- at least not in the near-term -- by the TXU plant cancellations, gas consumers will likely have some breathing room, too.
"I think over the next couple of years, the TXU announcement really doesn't change our view of what the [gas] market is going to be," said Sannicandro. "This is going according to plan in my mind, that these coal plants were not going to be built in the time frame we were talking about. If you're an industrial [gas] user and you're looking out long-term, it very well could mean higher prices."
Still longer term, if greater reliance of gas-fired power causes gas and power prices to skyrocket, coal-fired generation might not be such a dark horse, particularly if integrated-gasification combined-cycle and carbon sequestration technologies gain ground. "That's a definite possibility," said Sannicandro. "There is something negative about just about any generation technology you'd want to mention at this point."
And if the mothballed gas-fired plants don't buy the industry enough time to clean up coal -- for real or at least in the eyes of the public -- then perhaps the controversial generation will be built where it's close to fewer peoples' backyards.
"If you really look at the coal controversy it really has to do with trying to build coal plants within a nonattainment area close to the Dallas-Fort Worth area," State Rep. Troy Fraser (R-Horseshoe Bay), told NGI. "That's what the controversy is about. I believe if those companies had moved away from the nonattainment areas, moved out to West Texas, then those coal plants would have been readily accepted."
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