Utility developers working on combined-cycle gas turbine (CCGT) projects in the Marcellus and Utica shales are looking for a “power price appreciation” that will come from the excess natural gas, according analysts with Tudor, Pickering, Holt & Co. Inc. (TPH).
However, it’s going to take more than a lot of shale gas to ensure that they succeed, said analysts Neel Mitra, Brad Olsen and Matt Portillo.
Several proposed combined-cycle gas turbine (CCGT) plant proposals now on the drawing board in the PJM Interconnection regional transmission grid (RTO) that includes Marcellus Shale-rich states Pennsylvania, Ohio and West Virginia. PJM currently is the largest competitive wholesale electricity market with more than 650 companies, 60 million customers and about 167 GW of generating capacity.
TPH analysts initially launched their review to see how the latest PJM capacity auction would tilt toward natural gas — and the auction, which concluded on Friday, went in a big way, with 95% of new generation represented, according to the RTO. New CCGT plants with 5,914.5 MW of capacity were bid, while 1,382.5 MW of combustion turbine capacity were bid. The auction saw a record amount of new generation procured 4,900 MW, out of 6,843.7 MW for 2015/2016. Only aggregated new installations were offered, not the identities of specific plants.
“PJM is effectively, efficiently and reliably handling a massive shift in generation from coal to natural gas,” said PJM Senior Vice President of Markets Andy Ott. Six Ohio coal plants, he said, are being shuttered in response to environmental regulations and “cheap natural gas.”
Besides the PJM auction, the TPH analysts delved into the Northeast’s gas supplies and midstream takeaway options, and how that might factor into utility development down the road. A total of 11 gigawatts (GW) of new CCGT capacity now is proposed for Pennsylvania (7 GW) and Ohio (4 GW). Pennsylvania also has about 1.5 GW in coal-fired power coming offline by 2015, versus 4 GW in Ohio.
On the face of it, the numbers don’t appear to add up to positives for the utility companies because the proposed generation, versus the planned retirements, the analysts said. Expected demand growth, it would appear, is “uneconomic, yet several private developers see reason to build.” The answer, they found, “has less to do with power markets than access to cheap Marcellus gas.” Even with coal plant retirements, PJM would appear to be moving to an oversupply, the analysts said.
However, the developers are banking on an “advantaged gas price, rather than power fundamentals,” because there’s too much gas and not enough takeaway from the region, which should keep gas prices low for a long time. Developers expect to procure gas at a 50-cent discount to Henry Hub and sell power into markets, where positive gas basis sets the price of power for at least five years,” said Mitra.
For instance, Marcellus power developers Moxie Energy LLC and EmberClear Corp. expect natural gas in the region to sell at a “substantial discount to Henry Hub for at the least the next five years,” primarily because of expanding output and limited near-term infrastructure solutions (see Daily GPI, May 20; Oct. 12, 2012). “At the same time, these plants are able to sell power into markets where premiums to Henry Hub set the price of power,” including Tetco M3, Transco Z6 and Algonquin City Gates.
The “gas procurement arbitrage” effectively would add 2% to a levered investment rate of return (IRR), or a $3.50/MWh spark spread advantage for every 50-cent discount to Henry Hub, according to TPH. “Assuming the discount to Henry Hub persists for five years and a $140 MW/d capacity price in PJM’s MACC area, developers can earn a 12-14% IRR without an improvement in forward power prices or capacity prices.” MACC includes most of Delaware, Maryland, New Jersey and eastern Pennsylvania. In last week’s capacity auction, MACC prices hit $167.46/MW/d.
There will be some power price appreciation in the PJM, but TPH analysts still remain a bit cautious on three issues:
The Northeast generally has commanded a premium relative to Henry Hub because it has been long-demand and supply-short. However, with Marcellus output increasing from 1 Bcf/d in 2009 to an estimated 7 Bcf/d today, the “dynamics have changed, with premiums all but evaporating.” The region is on its way to becoming “seasonally oversupplied.”
The Marcellus gas will be trapped and cheap for years, which provides the power investments with “access to lower-cost gas, not increasing demand…We expect prices to be lowest around major supply hubs,” such as Susquehanna County, PA; southwestern Pennsylvania and northern West Virginia, “where pipes struggle to keep up with supply for years to come until major southbound and westbound pipes are constructed or reversed.”
The pipeliners now are focused on penetrating further into the North and East. “Major hubs will begin to feel pressure from pipes expansions in late 2013, but even after buildout, we expect meaningful discounts to persist in areas of growing supply.” Even when premiums decline in these markets, the northeastern and southwestern supply hubs in the Marcellus “must maintain wide discounts for years to come to incentivise further pipe construction to accommodate future supply growth.”
Those PJM coal plant retirements? They’ll only have a minimal impact, according to analysts. Between 2012 and 2016, more than 16 GW of coal plant capacity is being shuttered, with 11 GW from this year to 2016, but there won’t be a lot of power lost from the system. “Given low capacity factors for these plants (25-30%), we expect that this will drive a maximum of 0.8 Bcf/d of incremental gas demand if the generation is replaced with 10-times heat rate peakers. Said another way, seven new gas plants with 800 MW capacity running at 60% capacity factors would need to be built to offset the lost generation from retiring coal plants.”
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