NGI The Weekly Gas Market Report / NGI All News Access

GRI Sees 44% Rise in Gas Use for Power Generation

August 24, 1998
/ Print
| Share More
/ Text Size+

GRI Sees 44% Rise in Gas Use for Power Generation

A study of the electric generation market issued by the Gas Research Institute (GRI) last week offered some good news and bad news for the natural gas industry. The good news was that it projected gas demand in the generation market will grow 44% from 5.5 quadrillion Btus (quads) in 1996 to 9.9 quads in 2015. At the same time, however, GRI predicted average real electricity prices will decline by 26% from 6.9 cents per kWh in 1996 to about 5.2 cents per kWh in 2015, setting the stage for increased competition between the two energy commodities in the years ahead..

The forecast offered a real mixed bag for the gas industry since power generation is both a competitor and a profitable market for gas. The study, titled Electric Generation Sector Summary, projected gas demand in power generation will grow "substantially" in the future. Specifically it estimated about 52% of the 264 gigawatts (GWs) of the new generation capacity added by 2015 will be gas fired (137 GWs), while only 43% will use coal (112 GWs). "Continued low gas prices, improving generating technology, more stringent emission limits and the expected aversion to high capital expenditures will make natural gas the favored fuel for new and repowered capacity, particularly in the near term."

But despite these new capacity additions, GRI said gas' share of the overall generation market will remain low as it will continue to be out-flanked by coal. It estimated gas will account for 21% of the total energy used to generate electricity by 2015, up from about 14% in 1996, but still it will pale when compared to about 56% for coal by then. Much of the anticipated growth in gas demand will come from new combined-cycle capacity, which is expected to account for 4.3 quads, or 44% of total gas use in generation, by 2015. Gas consumption in steam plants is likely to remain nearly constant at 3.5 quads (36%), while gas use in turbines and large reciprocating engines will grow to 1.8 quads, or 19% of the total, the study said. Gas demand by small power generators, including fuel cells, is expected to represent 0.1 quads, or 1%, by 2015.

The fact that coal prices are expected to decline in real terms will continue to give coal an advantage in the overall generation market relative to gas, whose prices are projected to remain relatively stable, GRI said. "Thus, gas-fired technologies need to achieve greater efficiency improvements and capital and operating cost reductions to maintain or improve their competitive position versus coal." At the same time, however, gas generation technologies will have an edge over coal in that they require lower initial capital costs, it noted. "Higher interest rates tend to make low capital cost options, such as gas generation, relatively more attractive" to electric utilities.

Moreover, the stringent environmental regulations that are due to take effect after 2000 are expected to make natural gas more attractive. "This may create a market for gas in cases where gas is burned as part of a low-cost hedge or bridge strategy...In general, more stringent limits are expected to make gas generation and emission-control technology more competitive." The study said the closure of older nuclear plants, utility divestitures of generating assets and the growth in unregulated subsidiaries also could favorably influence gas demand in the years ahead.

Btu Marketing More Challenging

However, it noted gas demand could suffer if utilities are permitted to renegotiate contracts that require them to buy power from qualifying facilities at above-cost rates under the Public Utilities Regulatory Policies Act of 1978. In addition, GRI believes the evolution in the market from electric utilities and gas LDCs that provide a limited menu of monopoly services to energy service companies, which would offer both commodities, could pose some complications for gas. "Markets will be defined by a Btu of energy service rather than by a kilowatt-hour of electricity or an Mcf of natural gas. This change together with falling electricity prices will make the marketing of natural gas end-use technologies more challenging."

The greatest increases will come in the East, where the New England, Middle Atlantic, South Atlantic and East North Central (Illinois, Michigan, Ohio} Census regions will account for 40% of generation gas demand by 2015, up from the current 29%. Gas demand in the West South Central region (Texas) also will grow in absolute terms, but its share of overall consumption will drop from 47% in 1996 to 30% by 2015, according to the GRI study.

Offsetting the effects of GRI's prediction of reduced electricity prices, the institute forecast demand for electricity will grow at just under 1.9% per year through 2015, which would parallel the growth in the gross domestic product. Specifically, it is projected to grow from about 3,000 billion kWh a year to more than 4,000 billion kWh by 2015. "Electricity demand growth will be moderated by a continued shift away from energy-intensive industries, market saturation of key appliances and greater energy efficiency by end-users," GRI noted.

GRI's projection that real average power prices will decline by 26% from 6.9 cents per kWh in 1996 to about 5.2 cents per kWh by 2015 was in sharp contrast to a recent American Gas Association (AGA) study, which put the price drop closer to 15%. The AGA report estimated that power prices wouldn't fall any further than 5.9 cents per kWh by 2015. In addition, while GRI said that much of the decrease in power prices would be driven by electricity restructuring, the AGA maintained otherwise. It noted any "moderate declines" for power prices would be owing to surplus coal-fired capacity, high-efficiency combined-cycle gas-fired capacity, time-of-use pricing, partial disallowance of stranded costs, and other technological and market factors.

Other implications of the study's results for the gas industry, according to GRI, include:

ISSN © 2577-9877 | ISSN © 1532-1266
Comments powered by Disqus