Recent reports from the Gas Research Institute (GRI), ElectricPower Supply Association (EPSA), and INGAA on new merchant powerplant generation indicate gas demand is on the verge of a majorboom. The EPSA said the potential generating capacity fromannounced merchant power plants has doubled since October of lastyear. In conjunction with this growth, GRI said half of the sizablegas demand increase expected over the next 15 years would come fromelectricity generation usage. INGAA’s study indicated thatgas-fired generation is in a “prime” position to succeed in afederally deregulated electric market, even with the inclusion of arenewable portfolio standard in the federal legislation. Thereports were published separately earlier this week.

“Natural gas is poised to be a big winner in this new market,with electricity generation becoming the gas industry’s fastestgrowing market,” said Paul Holtberg, group manager of GRI’sBaseline Center in Arlington, VA. “Non-utility generators have astrong preference for natural gas because of their interest inavoiding emissions problems and the flexibility of being able toinstall gas-fired units quickly and in a modular fashion, thusholding down capital investment and risk.”

Merchant plant capacity announcements reached 121,733 MW thismonth, the EPSA said, up from 56,500 MW from the same time lastyear. The association expects the growth to continue, with 25% ofthe nation’s capacity being operated by merchant plants in 2001.This projection does not include generating facilities operated byunregulated utility affiliates within the utility’s own serviceterritory.

Falling in line with the EPSA’s report, GRI estimated merchantcapacity would grow from 3% of the overall generation market in1997 to 27% by 2015. Gas demand for electric generation will doubleduring this time period, from 5.6 quads to 10.3 quads, and overallgas demand will make a big jump from 22.6 quads to 32.2 quads.

“Where competition is increasing, the markets are growing andbecoming more liquid. In the past year, eight states have passedretail competition legislation, paving the way for the announcementof significant new merchant capacity to meet increasing consumerdemand,” said Lynne Church, executive director of EPSA.

In Texas, the state government has mandated the simultaneousgrowth of generation capacity and gas use. The state’s deregulationlegislation, which passed last June (see Daily GPI, June 21),requires 50% of all generating capacity installed after Jan 1, 2000to use natural gas as fuel. So far, Texas is the only state torequire such a practice.

While electric deregulation may be the driver of increased gasdemand, it also poses a challenge to the industry because ofreduced electricity prices, the GRI said. The Institute sounded a”cautionary note” to the gas industry, warning that all gas marketplayers “must be ready to offer low-cost services and moreefficient, inexpensive end-use technologies to offset declines inelectricity prices.” The Institute also suggested that the gasindustry should look for ways to better take advantage of highpeak-time electricity prices and expand overall storage capacity inanticipation of the generation growth.

INGAA’s generation study was a part of a larger report on greenfuels called “Green/Clean Energy and the Role of Natural Gas.” Itwas performed by the Tellus Institute for INGAA. Studies in thereport suggest that even if the federal government passes federalelectric restructuring legislation with a renewable portfoliostandard (RPS), which would require more use of renewable fuels inelectric generation, gas-fired power would not be reducedsignificantly.

“An important question is which fuels will decrease (and perhapswhich will increase) and by how much?.. While natural gasgeneration decreases due to the RPS, coal is impacted moreseverely…[Because coal-fired generation would be reduced somuch,] natural gas would capture an increasingly larger fraction ofthe electricity market. Moreover, the percentage diminution ofnatural gas demand owing to the RPS policies is dwarfed by theunderlying increase over time.” After analyzing three federalelectric restructuring proposals, including the ClintonAdministration’s plan, the study found that the ratio of gas-firedpower plants to coal-fired power plants would increase fromone-to-four in 2000 to just under three-to-four in 2020.

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