A recent report by the staff of the Federal Energy Regulatory Commission (FERC) mistakenly concludes that the West will see rapid gas demand growth over the next five years and that the region’s gas industry infrastructure is inadequate to handle the growth, according to energy consultant James Wilson, principal at LEGC LLC in Washington, DC.

Wilson said a closer look at the situation shows that more efficient gas-fired generation units will force older units out of the market, leading to less gas use initially followed by slow growth. Moreover, gas infrastructure improvements made since the extreme western market conditions of 2000-2001 are more than adequate to handle demand in the near future, he said.

FERC staff came up with its dire prediction that gas demand from new power plants could grow 30% to 140%, depending on the western subregion, by using what Wilson called a “simple back-of-the-envelope calculation.” FERC staff’s analysis “simply assume[s] new megawatts will consume new Btus without consideration of the impact of the additional power on the western markets,” Wilson said in his paper.

“The very high incremental gas demands for new electric generation cited in the FERC staff analysis (for instance, 1,345 MMcf/d in 2003) were calculated as the quantity of new generation that year times an assumed heat rate and utilization factor (7,000 Btu/kWh and a 58% utilization are consistent with the FERC staff results for all years) ignoring displacement of gas demand at other plants.”

Rand Science and Technology came to similar conclusion about demand an infrastructure using a slightly different, but just as flawed, method (see NGI, July 22 and July 22). The Rand study states that gas demand growth in California between 2000 and 2010 will range between 18% and 50% and claims gas demand from power generation could double. Both studies base their predictions on expectations that close to 30,000 MW of new mainly gas fired generation will be built in the West by 2005.

The paper notes that Rand used two sources for its demand predictions but made its own upward adjustments. It adjusted upward a high gas demand forecast of the Gas Research Institute based on the assumption that GRI failed to take into account additional gas-fired power plants being built. Rand’s lower growth forecast was based on an interpretation of a forecast for the entire Pacific region from the Energy Information Administration’s (EIA) 2001 Annual Energy Outlook. Rand also said its 18% low-growth outlook was consistent with the expectations of the California Energy Commission (CEC), but according to Wilson, the CEC’s outlook shows only 11% growth over the period.

“These very high figures for incremental gas demand for electric generation from the FERC staff analysis and Rand study are not supported by internally consistent analysis of [the Western Electricity Coordinating Council] electricity markets,” said Wilson. “Even a much larger rate of electricity demand growth would not support these conclusions and neither study makes a case for such an assumption.”

In contrast to the forecasts of Rand and FERC, Wilson found that the CEC and EIA both predict gas demand will decline this year. EIA’s 2002 Annual Energy Outlook forecasts that gas demand in California and the Western Electricity Coordinating Council (WECC) region won’t reach the high levels seen in 2000-2001 until 2006 and 2010. The CEC doesn’t expect demand in California to return to 2000-2001 levels until 2008 or 2009. Wilson notes that from June through December of last year, gas demand in California fell 11% from the same period a year earlier.

EIA expects demand to grow by an average of only 160 MMcf/d and 100 MMcf/d annually in the WECC and California, respectively, after the initial declines. The CEC’s 2002 forecast shows a 150 MMcf/d increase annually in gas demand for power generation in California after the initial drop. (And in light of slower economic growth and other factors, those forecasts may have to be decreased, according to recent analysis by the California utilities).

While Wilson noted there could be some larger gas demand increases in particular areas of the West depending on where the new generation is built and the availability of transmission and prices for power and gas, the overall impact on gas demand from new generation is likely to be moderate.

FERC made repeated references in a recent order on the California electricity market to the inadequacy of natural gas and electricity infrastructure in light of expected massive demand growth as cited in the staff report.

In addition, state regulators in Arizona and California also have expressed concerns about the adequacy of gas infrastructure in the West. They claim that the redesign of capacity contracts on El Paso Natural Gas, which is currently underway, could exacerbate the situation and deprive either state of much needed gas transportation at a time of rapid demand growth (see NGI, this issue, July 22, March 18).

“Are these dire predictions and rising concerns about western gas pipeline infrastructure justified?” Wilson asks. “As the remainder of this paper explains, the answer is a clear ‘No.'”

According to Wilson, FERC and Rand overlooked important facts about the impact of all the new gas-fired power generation. “What [FERC] didn’t look at is how [the new generation] fits into the broader market,” he said in an interview with NGI about the paper. “They didn’t look at the fact that as you put these new megawatts out there, they have to go somewhere. They can meet a certain amount of load growth, but after that they are just going to push these inefficient gas-fired plants out and those are mainly located in California and are consuming 30%, 50%, sometimes twice as much as the new plants,” he said. “So the explosion of gas demand to serve the new plants doesn’t occur because of the offsetting reductions in the inefficient plants.”

Furthermore, with the recent and anticipated pipeline and storage expansions, the contract reforms on El Paso and other changes, “infrastructure should be adequate, and a repeat of the constraints and high prices that occurred in 2000-2001 should not be expected even if similarly unfavorable conditions recur,” Wilson stated in his paper.

Wilson noted that 787 MMcf/d of interstate pipeline capacity serving California was added in 2001-2002 and an additional 986 MMcf/d is expected in 2003. SoCalGas and PG&E are expanding their intrastate pipelines and will have added 624 MMcf/d of capacity by later this year. New California independent storage with 500 MMcf/d of withdrawal capacity became operational in 2001 and an additional 500 MMcf/d is expected in 2003 or 2004.

“Interregional electricity market analysis shows that even with the large amount of anticipated new gas-fired generation, gas demand should not be expected to return to the high levels of 2000-2001 for years under normal conditions,” Wilson said. “And over the next few years, the faster the new generation is introduced, the lower overall gas demand for electric generation will be as displacement of inefficient gas-fired generation is accelerated.”

For a copy of the paper, contact Wilson at James_Wilson@LECG.com.

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